Is This Really a Global Economy?

Let me start this post with a lesson about water.  The Romans knew, before they built the aqueducts, how water finds it own level.  So, through this knowledge and the use of gravity, they built what is considered one of the marvels of ancient engineering.  The Aqueducts provided enough water to support Rome's growing population and it status as a major power base in ancient times.

There is another axiom about water that is relevant to this conversation.  Water, as plumbers know, runs to its point of least resistance.

So does capital.

The resistance to water are things like walls and hills and other impediments.  But water will eventually find its way around these objects as gravity takes over.  Ever see a meandering river?  The Grand Canyon?  All show the impact of the flow of water over time.

Impediments to Capital flow are things like economic policies, tax rates, interest rates and government policies, at the Federal, State and Local level.  If those responsible for maximizing the return on invested capital feel these impediments are too prohibitive, they will seek alternatives with less restrictions and better returns.

Need a few examples?

Exhibit A is GE's attempt to purchase Alstrom.  The French government intervened in the conversations and threatened to disallow the acquisition for fear of losing jobs and the closing of duplicative activities that would provide economies of scale for the combined companies.  One can understand their concern, but in GE they have a company willing to invest capital in a struggling corporation that may otherwise shrink on its own due to loss of market share and competitiveness.  The French Government even tried to entice other bidders to enter the fray, bidders who would be less resistant to their terms.  It looks like they may finally have what they wanted in a mutual bid by Siemens and Mitsubishi Heavy, but at what cost in lost future investment by other companies.

Exhibit B is Coca Cola in Spain.  The local bottling company gave notice of the need to lay off over 800 workers due to dwindling demand for its products.  The main reason for this is the state of the Spanish economy.  High unemployment.  High taxes.  Low incomes.  What say the Spanish Government?  No can do!  The Spanish National Court voided the layoffs and is requiring the employees to be rehired and paid back wages.  If a government can tell a company that has acted within its legal rights what to do, why invest capital in that country?

Exhibit C is Medtronic's deal to buy Covidien for close to $43.0B, and to relocate its HQ to Ireland.  Why?  Lower corporate tax rate than the USA.  You see, much of Medtronic's $14.0B in cash lies outside of the USA.  Repatriating that cash at a 35% tax rate - Ireland's corporate tax rate is around 12.5% - when investment alternatives exist internationally with fewer impediments is a better decision for shareholders, the owners of the company.  Pfizer recently tried a similar move to acquire Astra Zeneca, a UK based company, but the deal fell through, partly because the UK government started to question if the rationale for the combination was to avoid tax repatriation to the UK and the USA.

In a truly global economy capital would flow freely as water did through the Roman Aqeducts.  And where capital runs into policies and taxes that are restrictive it would continue to search for a more favorable path to higher returns, or less taxes, and more investment.  Without investment there is no economic expansion.

International organizations and governments like to talk a big game about free trade and global economies and growth, until it hits them in the wallet.  Heck, wasn't the EU formed to create a large economic zone with a common currency, most of which helped Germany sell more products since its the largest manufacturer in the "zone"?  How's that working out for Greece, Spain, Italy and Portugal?

So, is this truly a global economy?  Is capital flowing freely to global investments that maximize returns?  Or are government policies, taxes and national politics prohibiting truly global markets?