Investor Nationality is Irrelevant

by Don Boudreaux on May 10, 2005

in Trade

No regular reader of Café Hayek can fail to note – indeed, can hardly fail to be bored stiff by – my repeated argument that the identity of those individuals who invest in dollar-denominated assets is economically irrelevant.

But it’s a difficult argument to accept. To most Americans, there’s just something comforting, reassuring, seemingly more natural, about knowing that the person who owns the factory across town or the T-Bills issued by Uncle Sam is American rather than foreign.

But what is this something? Why does it matter if the factory owner is an American rather than an Armenian or a Zimbabwean?

What’s important for us Americans is that growth-promoting investments take place in locations that yield benefits to we Americans. If a new factory across town provides job opportunities that make its workers more productive than they were previously, then this factory benefits these workers and it benefits all consumers of the products produced by the factory. Of course, it also benefits those investors who make the factory a reality.

How does the nationality of the investors matter? I just don’t see how it matters.

One source of difficulty, I venture to guess, is the loose habit of thinking of "the American economy" and "the French economy" and "the Malaysian economy" and on and on, as if each of these things is separate. In fact, the interconnectedness and integration of the economy across the globe is so extensive and intensive that greater wisdom is achieve by thinking and talking of "the world economy."

Our instincts properly tell us that "savings is necessary for investment, and investment is necessary for economic prosperity." But other of our instincts improperly tell us that "our economy is defined by, bounded by, limited by, pretty much confined to, the area and people with the political boundaries of our nation." This combination of the first set of instincts with the second set of instincts misleads us into unnecessary fretting about the savings rate of our fellow national citizens. Savings is good, and investment is good – but the goodness and effectiveness of savings and investment in no way are reduced if they come from people whose passports are issued by foreign governments.

In economic terms, the relevant unit today, increasingly, is the globe. And the freer is trade, the more surely is the globe, rather than the nation-state, the relevant economic unit. In this global economy, we Americans should be no more bothered if a disproportionate amount of savings and investment in this economy is supplied by the Chinese or the Dutch rather than by Americans, than we Virginians today are bothered if a disproportionate amount of investment in this economy is supplied by Minnesotans or Texans rather than by Virginians.

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