Competing for Capital

Competing for Capital

September 18, 2006 0 Comments

Last thing I remember
I was running for the door.
I had to find the passage back to the place I was before.
Relax said the night man
We are programmed to receive.
You can check out any time you like
But you can never leave.

(The Eagles, Hotel California.)

(Beijing, 9/16/06) Some governments get it. Some don’t. Countries are not competing for jobs today; they are competing for capital. Access to capital—modern tools, education and training, technology, and working capital— is what makes workers productive.

Capital makes paychecks possible.

Not so long ago national governments were able to count the capital within their borders as national assets to do with as they pleased. Capital was expensive to move from one country to another. Moving capital was slow, at the speed of cargo ships, easy for governments to see, tax, and regulate.

No longer. Modern communications networks and efficient capital markets have changed the rules of the game. Today, global investors can move capital from any country in the world, to any country in the world, whenever they please. These capital movements occur at the speed of light over fiber-optic networks at virtually no cost to investors. They are virtually invisible to governments.

Governments who ignore these changes in the mobility of capital do so at the peril of their workers’ paychecks.

I have spent the past 2 weeks in Beijing with a group of government officials who definitely get it. They are taking steps to make China a destination resort for capital. China’s leaders realize the only way to deliver continued high economic growth without further fouling the air and water and without running out of energy is to focus on IT, communications, and financial services. They are adopting policies to convince foreign investors to relocate their R&D operations in China with tax breaks, development funds, and other policies. China’s new policy mantra in China is innovation and entrepreneurship. They are doing the things to deliver on the promise.


In Beijing I spoke at 1) a venture capital forum in Haidian (Beijing’s silicon valley) to announce a new government fund to attract foreign capital, 2) the opening of a new finance school in the Xicheng, Beijing’s financial district, to train people to be employed by the foreign banks, insurance companies, investment banks, and investment managers who will open up shop after China completes its obligation to open its capital markets by the end of this year, 3) the International Financial Forum, which included talks by top Chinese officials on the importance of attracting foreign capital and a discussion of a new special enterprise zone in Tiantsin to conduct an experiment on currency convertibility, a crucial issue for investors.

Last Friday the government announced major revisions to its tax rebate system for exports. These changes reduce rebates (discourage investment) in coal, gas, steel, non-ferrous metals, wooden products and other natural resources, glass, cement, textiles, cigarette lighters, but they increase rebates (encourage investment) in biotech, pharmaceuticals, and telecommunications. And I had dinner with the executive producer of China’s hit TV show named Win in China, where 120,000 young entrepreneurs across China are competing to win 10 million RMB ($1.2M) in venture capital financing for their business plan.

I have also spent time recently with leaders who definitely do not get it. Unfortunately, they are our leaders. In a world where countries are scrambling to attract capital—especially high-tech capital—Congress is too concerned with lobby groups, earmarked expenditures, and mid-term elections to worry about attracting and holding capital. Like Nero, they are fiddling while Rome burns, wasting their time fighting over non-issues like so-called network neutrality and deciding which snouts will enjoy the $7.3 billion Universal Service Fund trough instead of passing the communications legislation overhaul we need to drive investment and productivity higher.


Meanwhile, company after company is moving R&D facilities offshore–the share of US companies in the global telecom equipment market has fallen from 40% to 20% in the past 5 years.

Dominican Republic
Of course, it could be worse. We could be citizens of the Dominican Republic. There, Government leaders are erasing any chance their citizens have for economic growth and rising paychecks by erecting a giant sign for global investors which reads “Foreign Capital Keep Out”. Just 2 years after signing a free trade agreement with the US (DR-CAFTA), their tax authorities are attempting to gouge a $523 million payment from an American telecom company (Verizon) in violation of their own laws and international treaties.


This Hotel California tax (“You can check out any time you like. But you can never leave.”) and other investor-hostile policies (the Heritage Foundation ranks the Dominican Republic in 116th place in their Economic Freedom List) are certain to drive future would-be investors away from the Dominican Republic, a tragedy for the 9 million people who live there and who earn just $2080 per year, less than 91 other countries and only 5% of US per capita income.

Ironically, this is “Dominican Week” in New York, complete with parades and a visit from the DR President Fernandez who will give a speech about the Dominican Republic’s “business-friendly” climate. He could have saved the plane fare to New York–Investors will not be fooled. The language of global capital markets is actions, not words.

Of course, in global capital markets, one country’s loss is another country’s gain. They are cheering in the streets of Beijing.


John Rutledge


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