How profit flows from FDI deepen the North-South divide
By Christof Parnreiter, Laszlo Steinwärder and Klara Kolhoff
Foreign Direct Investment (FDI) is usually portrayed by international financial institutions as purely positive, a private-sector ‘saviour’ for left-behind countries. What is virtually ignored in this story, however, is that multinational corporations (MNCs) repatriate a majority of the profits they generate abroad and thereby potentially stimulate economic growth at home.
This substantial transfer of surplus often runs from poor to rich countries (at least in net terms), given the high concentration of MNCs in the Global North. This fits into a long tradition of wealth extraction from the peripheries: labour and nature are exploited at a distance, the profits are drained off and long-term prosperity fails to materialise in the exploited countries.
Geographies of global profit flows
An analysis of International Monetary Fund data on FDI dividends (see original paper for details) shows that MNCs repatriated an annual average of one trillion US dollars in dividends between 2005 and 2020, roughly two-thirds of the profits they generated abroad.
Although this is a staggering figure, it underestimates the overall phenomenon, mainly because MNCs often use “tax-friendly” mechanisms such as transfer pricing to shift profits around the globe in forms other than dividends.
While part of these flows take place within the Global North, our analysis shows that there is a substantial net transfer of profits from the periphery to the core of the world economy.
A breakdown of net profit flows - inflows of profits, minus outflows - clearly reveals the winners and losers. Net inflows are highly concentrated in a handful of rich countries led by the US and followed by the Netherlands, UK, Germany and France. These five countries account for 80 per cent of all net profit inflows or an average of US$335 billion a year.
(Some of these profits may be owned by MNCs from other countries, as in the case of the Netherlands which has long been a tax haven.)
At the other end, it is primarily poorer countries (often so-called Middle-Income Countries) such as Russia, Brazil, Nigeria, Kazakhstan or Thailand that are experiencing a substantial net outflow of profits.
Figure 1: Net profit flows in billion USD, 2005-2022 (grey = no data); own illustration based on IMF Balance of Payments data.
The geographical concentration of net profit inflows reflects the high FDI outward stock of the major profit receivers and points to the global economic hierarchy. Firstly, all five countries are former colonial powers that shaped the Global South through forceful exploitation. The legal and economic framework that continues to exist even after political independence serves as a foundation for today’s patterns of dependency.
Secondly, since FDI implies a lasting interest in a foreign enterprise, it involves economic control relationships, meaning that labour and natural resources are commanded at a distance. Consequently, a high FDI outward stock stems from and reflects economic strength and gaining from profit repatriation is, quite unsurprisingly, one of its outcomes.
As to the thirty most important net profit exporters, which account for 80 per cent of all net inflows, the data reveal clear-cut patterns, geographically and in terms of economic specialization.
The prevalence of former COMECON states is striking: 24.3 per cent of global net profit outflows are recorded from successor states of the Soviet Union and its former Eastern European allies.
Latin America is the second most important profit-exporting region and accounts for 16.3 per cent of total net outflows, followed by Africa with 11.7 per cent.
Cheap labour, cheap nature, cheap money
Regarding their primary link to the global economy, the most important net profit exporters can broadly be categorized as:
· providers of cheap nature, which account for 44.3 per cent of all net profit outflows. This includes natural resources such as oil and gas (e.g. Russia, Nigeria or Kazakhstan), agricultural raw materials (e.g. Brazil) or ores and metals (e.g. Chile or Peru).
· providers of cheap labour (17.5 per cent): that is, extended workbenches integrated into the world economy through the manufacture of products within global commodity chains. This category includes both European former COMECON countries such as Czechia or Poland and so-called “newly industrialized countries” such as Thailand, Mexico or India.
· providers of cheap money (17.4 per cent): tax havens such as Ireland, Malta or Hong Kong, through which profits are diverted from other places to reduce taxes.
We argue that many of the profits repatriated from the countries of the first two categories are not "normal" but "excess" profits which are generated through the over-exploitation of labour and nature.
As an indication, the Global Rights Index of the International Trade Union Conference shows that working conditions in most of these countries are poor or very poor and an analysis of productivity-adjusted wage data shows large disparities between net senders and net recipients of profits. This difference is 18 per cent between Germany and Czechia, for example.
Moreover, the OECD's Environmental Policy Stringency Index and the Environmental Performance Index show that the providers of cheap nature are characterised by loose regulation and poor standards, allowing MNCs to extract resources more easily and at lower cost.
In the tax-haven countries, money is “made cheaper” in the sense of “made more available”, since less of the profit is being taxed away. MNCs commonly use special purpose entities and build holding constructions to divert FDI and the resulting profits through tax-friendly jurisdictions.
Impact on investment
These substantial profit flows have a direct impact on capital accumulation at both ends. While the withdrawal of profits reduces the funds available for the reproduction of capital in the sending countries, the profits brought home can be used to finance investments in the receiving countries.
The outflow of profits means that in concrete terms, the countries which provide natural resources lost 4.5 per cent of their overall surplus which might otherwise have been available for reinvestment at home, while the equivalent loss in labour-providing countries was 2.3 per cent. (These figures are based on data for Gross Operating Surplus, a proxy for profit).
However, this picture is somewhat deceptive as some large economies like India and Australia record a high Gross Operating Surplus and, thus, relatively smaller outflows of profit, which significantly drags down the average. For most profit-exporting countries, the reduction in surplus was much higher: 6.6 per cent for Russia, 15.7 per cent for Azerbaijan and for Kazakhstan, a staggering 21.1 per cent.
Amongst the “cheap labour” countries, Hungary (16.9 per cent) and Czechia (10.3 per cent) lost the most.
Another way of considering the cost of profit outflows is to look at the investments which are actually made, as captured by data on Gross Fixed Capital Formation. This shows that the resource- and labour-providing countries lost, on average, the equivalent of 6.7 per cent of total investment in those countries through repatriation of profits to other countries.
Here too, differences between the countries are immense: Azerbaijan and Kazakhstan lost a sum amounting to more than a quarter of their total investments, while Nigeria, Czechia, Thailand, Chile or Algeria lost between 10 and 20 per cent.
Conversely, the inflow of profits expanded the pool of capital potentially available for investment in the five biggest beneficiary countries. Taken together, the US, the Netherlands, UK, Germany, and France, on average, gained a sum equivalent to 6.1 per cent of their Gross Operating Surplus and 11.2 per cent of their Gross Fixed Capital Formation through the repatriation of profits.
Capitalism’s two dimensions of exploitation
All of this underlines that capitalism not only produces inequalities between classes, but also between countries. MNCs from rich countries invest in the Global South to exploit labour and resources there and then withdraw a majority of the appropriated surplus back to their home countries, where it can be used to finance further growth. In that sense, profit repatriation connects the vertical dimension of capitalist relations of exploitation (capitalist/worker) with a horizontal one (core/periphery).
Christof Parnreiter is Professor of Geography at the University of Hamburg. Laszlo Steinwaerder and Klara Kolhoff are Research Associates at the university’s Department of Geography.
This post is based on the article Uneven Development: How Capitalism’s Class and Geographical Antagonisms Intertwine, published in Antipode – A Radical Journal of Geography (12th August 2024).