International Investment Between 1850 And 1914 History Essay

Foreign investment played a vital role in the formation of a global economy. It provided long-term links between countries all around the world, through the establishment of international capital flows. It facilitated the growth of world trade by incorporating less developed countries in the chain of trading networks, also- leading to the specialization of markets e.g. Argentina specialized in beef, while, Australia in wool. International investment exposed the less developed countries to new technologies like the telegraph and the railway.

The great boom in international investment occurred at the latter part of the nineteenth century between 1850 and 1914. The rate at which investment was coming about accelerated tremendously to unprecedented levels from the 1870s onwards.

“But the great era of international lending occurred after 1870, with the capital outflows becoming a flood during the decade before World War I” [1] .

The flow of overseas capital moved from those countries who had an abundance of capital surplus; the core, to those who were less developed or were modernising themselves and so were in need of money; the periphery. This movement of capital did not only involve the movement of bullion, but even more so the movement of people, skilled labourers, and machinery; which, in many occasions was even more important than money, to get the economy going.

The origins of these overseas investments takes us way back to the Industrial Revolution, when Britain became the first industrial nation. The surplus of capital accumulated by industrialization was financed into overseas projects and loans. The middle class,willing to invest such savings, thought it was more proftible for them to invest internationally them domestically. In turn, the income generated by these loans through interest rates etc. was re-financed into other foreign investments.

Another factor that gave rise to the increase in investments was the demand for capital in less developed countries, on the periphery, who wanted to modernise and industrialise e.g. Russia. This brought about the need for machinery, skilled labour, money and entrapreneurial talent, where it was lacking. This also gave rise to mass-migrations for example the Italians who left to Argentina.

Thirdly, the financial facilities needed for the transfer of these investments had improved and developed tremendously by the second half of the century e.g. commercial banks, brokers, foreign exchange markets etc. So that, investing abroad became less of a risky business. London, the world’s capital market, was open to all foreigners. Anyone could go to the London exchange market and invest money. “At the same time, the growth of capital exports was accompanied by the development of sophisticated capital and money markets based in London.” [2] There was total freedom of manoeuvre, this was due to the laissez-faire attitude and free trade the British government adopted. “Before 1909, or 1912 certainly, the London Exchange was a liberal institution, admitting most people who applied for membership and quoting the securities of most companies and governments that requested it.” [3] This was even true to France “There was virtually no control on the movement of capital, and foreign investment, although increasingly directed and channelled though banking institutions,” [4] The introduction of the gold standard also facilitated foreign investments. “A stable rate of exchange removed one element of uncertainty from international trade and in, particular, it encouraged long-term movements of capital across national frontiers.” [5] On the other hand, as, protectionism, through out the period became more enforced especially in the United States and Russia, international investments in the form of foreign direct investments increased. Investors preferred to open-up industries abroad to avoid the exorbitant costs of tariffs imposed on imported goods.

Throughout, this period in question, especially around the 1870s, we see the emergence of new comers in the network of capital exports. Even though, their contribution, to a certain extent, was of a minor dimension it was still very significant. These were Switzerland, the Low Countries (the Netherlands and Belgium), USA and Germany.

Germany soon came in the forefront as a major capital investor. Not long after unifying itself and becoming a state, it underwent industrialization, and it soon became one of the greatest exporters of steel and iron in the world.

” [1899 and 1913] Between these two dates Germany not only overtook Britain’s share in world production of manufactured goods but her ratio of exports to production rose while that of Britain and of France fell.” [6] 

Most of Germany’s flow of capital was directed towards Eastern Europe focusing mainly on Austria-Hungary. Germany was responsible for the building up of electrical industries in Austria-Hungary and Italy together with the supplement of current electricity. “A high proportion of German investment seems to have been in industry or direct investment by firms rather than participation in state loans.” [7] 

Belgium was quite ahead when it comes to capital and financial activity, there was much capital circulating awaiting the right opportunities to be invested in. The Société Générale bank had early as the 1860s joined other companies who together financed the building of railways in Italy, Central and South-Eastern Europe and Turkey. [8] However, it was only during the 1870s that international investment gained magnitude in Belgium, focusing on the construction of tramways abroad. “It became a Belgian speciality and led to heavy exports of equipment.” [9] Moreover, one of Belgium’s major debtors was Russia. The high tax imposed on imports in 1877, stimulated Belgian investors to open up enterprises in Russia. And up to 1900 Belgium was the major creditor to Russia superseding France and Germany. But that was just for a short period of time, for the latter soon re-gained track, and Belgium lost its predominance.

An important destination of overseas investment was the United States. The United States was one of those countries that in the beginning of the century received huge and huge amounts of capital, but through wise use and distribution soon surfaced up as one of the greatest creditors. The United States focused mainly its investments in Canada and South America and then to Europe.

However, it is not within these new comers that we find the pedestals of international investment. The old established creditors, Britain and France, were still leading the markets. France, was more biased towards Europe in fact up to approximately the 1880s most of the French foreign funds ended up in railway projects in Spain, Italy, Central Europe and Russia. “Russia was the main target for French financial interest over the period as a whole.” [10] Nonetheless, there after occurred a shift away from the European countries directing her capital in investments in Russia and the Balkans especially Turkey, this was especially incentivised after the Franco-Russian alliance. However, France did not invest in her colonies for she considered them not to be a reliable investment. “The only great lender was Britain and British capital flowed mostly to countries outside Europe. As far as the continent was concerned the Paris money market was the main source of funds.” [11] 

By 1914, British overseas investments totalled up to 43 percent of all world investments. British investments abroad changed their direction quite a few times during the century, concentrating huge amounts of capital in one area but, sooner than later, shifting to other regions. [12] In the mid-1800s an important amount of British funds were absorbed in Europe. However, because of the wave of the 1848 Revolutions for liberalism and nationalism, that started in France and spread all over in Europe, Britain changed its attention outwards to her empire. “In 1914 the self-governing dominions accounted for 37 percent of British foreign investments and India for another 9 percent”. [13] Like wise, the interest initially garnered for Latin America also decreased because of the impact of the Civil War. However, the attention of British investors never shifted away from North America. The interest fell mainly on investing in American state government securities, railways, ranches and mines “The United States continued to receive a high proportion of British capital outflow, chiefly in the form of portfolio investment in railroad companies,” [14] The USA absorbed more foreign investment than any other country. Moreover, the colonies were attracting more and more investments especially during the 1870s boom mentioned above. By the beginning of the nineteenth century places like Australia and New Zealand were receiving important amounts of funding. In fact, “Between 1877 and 1886 Australia was the leading target for British capital, accounting for 22.2% of all overseas issues in the early 1880s.” [15] 

However, a renewed interest was noticed, as well, in Latin America especially in Argentina and Brazil. ” countries comprising the ‘regions of recent settlement’-the United States, Canada, Argentina, Uruguay, South Africa, Australia, and New Zealand-are taken together, they absorbed about 40 percent of the capital invested abroad by 1914.” [16] 

According to Kenwood and Lougheed by 1914, Europe received the greatest amounts of overseas investments, and right behind it laid North America with a percentage of 24.

There were to major factions at whom capital investments were directed, during this period of 65 years from 1850-1914. The first faction consisted of: North America (USA and Canada); Latin America predominantly Argentina, Brazil and Mexico; and lastly Oceania basically consisting mainly of Australia and New Zealand. The other faction, on the other hand, consisted of: Eastern and Central Europe, Scandinavia, the Middle East, and Africa.

As, we have seen France and Germany’s foreign investment concentrated in Europe-the main aim was to open-up markets for French and German products. “Investment outside Europe brought returns to the home economies by opening new channels of supply for foodstuffs and raw materials. Directly and indirectly it encouraged exports” [17] 

This was also a great motive driving British overseas investments. Britain invested a lot in these periphery countries not just because of the prospect of high income returns, but, because of the great demand Britian had for primary products for her industries and growing population. British imports, at the end of the day , were more costly than the retuns she got for her manufactured exported goods. So, financing the construction of railways, mines and ports enabled the movement of these primary products to Britian at a higher speed and at lower costs. “[The English cotton industry] Such industries, together with the employment and profits they generated, would have been inconceivable without an assured supply of raw materials from Asia and the Americas.” [18] Moreover, these developing countries were also markets , where to sell her manufactured goods. Primary products such as wool from Australia, cotton from India, rubber from Brazil, timber from Canada.

“In addition to providing many countries with more unified domestic markets, this railway investment accelerated their integration into the international economy by allowing cheap and rapid transport, of commodities produced in the interior of each country, to the seaboard for shipment abroad.” [19] 

Foreign direct investments were less popular throughout this period. Portfolio investments in the form of dividends, shares, bonds and government securities, were on the other hand, frequent. “A high proportion of investment by European countries consisted of portfolio investment-the buying of shares in foreign enterprises.” [20] Overseas capital, during the 1800s was mainly directed towards: issuing government loans; construction of industries; and in transportation and communication. Specifically they were employed in the construction of railways and industries. However, funds were also important in the completion of social communal works, such as: drainage systems; building of schools, houses, hospitals; building of ports and canals (especially in the USA); the provision of telephone, gas and current supplies.

“The 1913 breakdown revealed about 30 percent of total British capital abroad in central and local government stocks, over 40 percent in railway companies and about 5 percent in other public utilities.” [21] 

Government securities were one of the most diffused ways of transferring capital. French investors had financed many Russian securities; they opted for government loans that were secured with a fixed rate of interest. “By 1914…(57 per cent) of the total United states foreign debt of $7,000m.was in the form of railway securities held abroad, more than half of them held in Britain.” [22] the rest by France and Germany.

On the other hand, as mentioned above because of protectionism, FDIs increased, for example, in Russia by the first quarter of the 20th century almost half of the joint-stock companies belonged to foreign investors. “the opening of branch companies, often to exploit a new process or to reduce the effect of a protective tariff: Renault opened two factories in Russia on the eve of the war…” [23] Foreign direct investment, took two forms. There were those national established companies who opened up a branch abroad like the great multinational enterprises. Or the free standing companies that acted independently from their home countries. [24] The free standing companies were a traditional way of investment in Britain. “German firms attempted to beat tariffs by opening subsidiaries in other countries and the search for raw materials led German capital into mines all over the world”. [25] And, again the greatest percentage of foreign direct investment was British.

“At its best, foreign investment was a means of transmitting resources and knowledge to the mutual benefit of both sides”. [26] Capital exports enabled countries to develop, repopulate and modernize themselves rapidly a clear example is the United States, who soon became the world’s greatest creditor surpassing both France and England. The transfer of capital and population from the core to those regions where it was insufficient was a crucial prerequisite for the development of the global economy. In conclusion, this boom in foreign investments was a temporal one. And the fruits reaped were not long-lived, for, as we all know; the First World War broke out and brought to a halt the economy all around the globe.

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