chapter  1
Corporate finance and US foreign policy
ByRONALD W . COX
Pages 20

The current global economic crisis has led to a prodigious body of scholarship examining the growing power of the financial sector within the US economy. Typically, this literature focuses on traditional measures of “financialization,” such as the rising share of profits accrued by financial firms as a percentage of US GDP (Dore 2008; Phillips 2008). Related approaches explore the role of the biggest investment and commercial banks in promoting deregulation of US financial markets, facilitated by the close political relationships between financial firms and policymakers (Ferguson and Johnson 2009; Kuttner 2007). Some scholars emphasize the shifting orientation of US-based financial corporations from traditional investment and commercial banking operations to a greater reliance on a “shadow banking system” and proprietary trading that has increased the propensity for the creation of new and risky investment assets (Blackburn 2008). While all of these approaches to the growing financialization of the US economy offer important insights about the growing power of the financial sector, there remains a need to conceptualize the depth of the financialization of the US economy. In particular, what is often under-theorized is the extent to which the US-based non-financial corporate sector has grown increasingly dependent on financial assets for a growing percentage of corporate profits (Epstein 2005). With that task in mind, I use this chapter to locate the process of financialization within the long-term structural shifts in US and global capitalism that have taken place from the 1970s to the present. The aim is to integrate an explanation of financialization to shifts in global production strategies and to shifts in US foreign policymaking. Using this approach, financialization is located both within structural changes in the global economy and within specific transition points in US foreign policy that have facilitated the “financialization of production.” This term, which is central to my overall approach, is defined by several co-existing and mutually dependent trends. The first is that non-financial corporations in the US have grown increasingly reliant, since the 1980s in particular, on financial assets as a percentage of corporate profits. Non-financial firms, in an effort to reverse the declining rates of profit that began in the mid-1960s and

continued through the mid-1980s, became increasingly reliant on stocks, bonds, dividend and interest income for new revenue streams (Orhangazi 2008). The second trend is a greater reliance by non-financial firms on large-scale institutional financial investors for purchases of corporate stock (Zey and Camp 1996: 337). Institutional financial investors holding disproportionate shares of corporate stock became more important players in corporate decision-making strategies, including the massive sell-off of corporate assets during the 1980s. The third trend involves non-financial firms restructuring their global operations around supply networks through the creation of subsidiaries, subcontracting, and outright purchasing of needed goods from independent producers located in foreign markets (Milberg 2010). The intermediaries within this restructuring process are institutional financial investors who are often involved in financing the various links of these global supply chains. The US state, often working with particular business groups and associations, has played an important role in making the financialization of production possible. In order to grasp the relationship between the US state and the financialization of production, the first place to start is with a recognition that US foreign policymaking from the 1970s to the present did not exist in isolation from structural economic changes, but has to be seen in relation to particular shifts in the US and global economies. Specifically, transnational corporations, both financial and non-financial, have relied increasingly on the financialization of profits, and on policies pursued by the US state in promoting financialization, to reverse the falling rates of profit experienced by the most globally competitive transnational corporations from the mid-1960s to the mid-1980s (Fligstein 2001; Arrighi 1994). Non-financial transnational corporations, facing declining profit rates, sought to tie future profitability to a reorientation of production on a global scale that was closely linked to an increased financialization of corporate assets (Milberg and Winkler 2010). At the same time, the largest transnational commercial and investment banks, faced with rising global competition alongside competition from newly emerging institutional investors in the US market, started to look for ways to reverse declining rates of profit in the financial sector. This involved increased consolidation through mergers and acquisitions and restructuring of financial activities toward risky proprietary trading, which was pursued to varying degrees by both investment and commercial banks beginning in the mid-1980s (Gowan 2009: 8-13). Both non-financial and financial firms were increasingly interlinked economically and politically as they attempted to respond to the exigencies of the crisis of profitability. Non-financial firms, aided by weakened antitrust laws in the 1980s, used mergers and acquisitions financed with borrowed money and underwritten by investment banks to restructure their operations. The most prevalent form of consolidation involved horizontal mergers and acquisitions in which corporations acquired or merged with competitors in the same industry. This was typically followed by a downsizing strategy that involved a massive selling off of non-core business assets in favor of a focus on core business activities (Nolan et al. 2007: 18). The restructuring strategy was accompanied by a much greater

reliance on institutional financial investors for purchases of corporate shares, which were increasingly used to raise capital for firms engaged in a global race toward the top of the supply chain. The so-called “shareholder revolution” of the 1980s coincides with a disproportionate rise of stock investments by institutional financial corporations in the shares of non-financial corporations. This gave institutional financial investors holding pension and mutual funds a much greater say in the internal affairs of corporate governance (Soederberg 2009). At the same time, non-financial corporations, beginning in the 1970s but especially during the late 1980s and 1990s to the present, expanded their dependence on foreign production networks to compensate for a decline in profitability in the US market. This included a greater reliance on foreign intermediaries as a percentage of intrafirm trade, meaning that more US-based non-financial firms were importing goods produced in foreign locations in lieu of producing those goods at home. These relationships included each of the following strategies: (1) traditional subcontracting relationships; (2) foreign direct investment in which the parent firm owned the foreign supply firm; and (3) outright purchases of finished products from independent firms based in a handful of emerging market economies in the developing world that were starting to increase their production of manufacturing goods. In order to make this transition to a greater reliance on global production networks, non-financial corporations turned to the stock market in an effort to appeal to institutional financial investors who would help finance the restructuring of corporate operations that has led to more complex and diffuse global production networks. They also turned to the US state to enact trade and investment agreements that provided legal, institutional, and political support for the expansion of global supply networks. US corporations, alongside their transnational competitors based in foreign markets, have used all of these strategies of increased global integration to help reverse a falling rate of profit trend that the largest and most competitive global capitalist firms experienced from the mid-1960s to the mid-1980s. The intensification of cross-border mergers and acquisitions, accelerating greatly from 1999 to the present, has further increased concentration of corporate ownership at the top of the global supply chain, while at the same time creating a much more dispersed and diffuse network of global suppliers who produce a range of products that end up being integrated and branded by large-scale global corporations. The largest global corporations, both financial and non-financial, have increased their global market share across a range of industries from the 1980s to the present, a trend which is closely linked to the growing importance of global value chains (Catteneo et al. 2010). Such chains link a highly competitive world of small and medium-sized business entrepreneurs at the bottom of the chain with corporations at the top who are increasingly able to act as “systems integrators” that set the terms for increasingly complex global production networks. The term “systems integrators” derives from its origins in military planning during the Cold War, when “the US military learned and helped its contractors to learn systems integration skills – the art of conceiving, designing and managing the development of large complex systems involving multiple disciplines and many

participating organizations” (Nolan et al. 2007: 28). In the contemporary global supply chains, most large-scale global corporations no longer produce a product from start to finish, but instead use their position at the top of the global supply chain to set the terms for doing business with thousands of potential suppliers, who are engaged in fierce competition to be included in these global production networks (Cowling and Tomlinson 2005). The linkage between the emergence of global supply chains and the financialization of production will be the central focus of this chapter. The next section establishes the historical background necessary to link the falling rate of profit to shifting accumulation strategies pursued by financial and non-financial corporations alike. There I argue that non-financial firms, faced with a long-term decline in profit rates, turned to financial markets in pursuing a mergers and acquisitions strategy of restructuring and downsizing, which was aided and facilitated by a US government that relaxed antitrust laws during the 1980s. As part of this political and economic process, transnational corporations based in the US established new business organizations that sought to enlist US state policy to promote deregulation at home and greater trade and investment opportunities in foreign markets. The embedded relationship between transnational capital and the US state resulted in a range of trade and investment agreements that helped make possible the expansion and financing of global supply chains that characterized a newly emerging production system. The linkage between a transnational political bloc of capitalist firms and the US state is evident within the US-led structural adjustment programs implemented in Latin America during the 1980s and 1990s, which were connected to the opening of financial markets and an expansion of opportunities for foreign investors. During the 1990s, the Clinton Administration aggressively pursued a foreign economic policy that prioritized the opening of financial markets in several newly emerging markets to foreign investors. At the same time, USbacked trade and investment agreements, including the Caribbean Basin Initiative in 1983 and NAFTA in 1994, as well as CAFTA-DR in 2005, emphasized a range of investment provisions that facilitated the expansion of outsourcing and the consolidation of regional supply networks for US-based transnational capital (Cox 2008). Financial firms, including US-based investment and commercial banks as well as institutional investors holding pension and mutual funds, looked to the US state to promote the opening of foreign financial markets. Most recently, the contemporary crisis of financialization has led to the greatest bailout of “too-big-to-fail” financial firms in US history. Rather than heralding an end of financial ascendancy and a period of more robust regulation, this only signals a more deep-seated and institutionalized relationship between financial capital and the US state that is the product of a long-term transformation in global capitalism. That transformation, as other chapters in this volume will document, has been responsible for a widening gap between rich and poor – in the US and globally. The shifting market strategies of global capitalist firms toward greater reliance on financial asset accumulation has provided the most important

structural circumstance responsible for rising profits accruing to US-based corporations while workers receive lower wages despite higher productivity. The failure of US-based financial institutions and non-financial corporations to reinvest their profits in job creation in the US is not just a product of the most recent economic crisis. It is also symptomatic of structural shifts in global capitalism that have disconnected the profit margins of transnational corporations from the improved health and welfare of their domestic working class. This is reflected in statistics related to the current crisis, in which US-based Fortune 500 firms have seen a growth in profits of $572 billion from the last quarter of 2008 to the first quarter of 2010, while US workers have lost $122 billion in salaries and wages (Herbert, NYT, July 30 2010). After more than two years of this current global capitalist crisis, US-based Fortune 500 corporations are reporting profit rates of 8.9 percent, and cash reserves that are “unprecedented,” according to recent reports in the Wall Street Journal, the New York Times, and The Economist (Murray, WSJ, March 27, 2010; Rampell, NYT, Nov. 23, 2010; Economist, February 3, 2011). For transnational capital, working class immiseration is just another way to reduce cost margins as firms expand their cross-border investments.