For years, development economists have suggested that, when companies from the developed world invest in poor countries, it helps to mitigate international inequality. Early in his book “Capital in the Twenty-First Century,” the economist Thomas Piketty expresses skepticism about this idea. The owners of corporate assets tend to pocket most of the income generated by those assets, he points out, so a foreign company operating in a poor country levels the field about as much as a rich person opening a sweatshop in a slum. He writes:
None of the Asian countries that have moved closer to the developed countries of the West in recent years has benefited from large foreign investments, whether it be Japan, South Korea, or Taiwan and more recently China. In essence, all of these countries themselves financed the necessary investments in physical capital and, even more, in human capital, which the latest research holds to be the key to long-term growth.
It’s clear that Piketty admires governments that encourage domestic companies to produce products and provide services. Typically, these governments also educate an élite group of potential managers and scientists, acquire (or ignore) licenses and patents, and organize capital to fund domestic firms. And they insist that foreign companies looking to do business enter into joint ventures with domestic partners.
Those who advocate for this method as a better alternative to foreign investment seem to assume that a company’s assets are made up primarily of physical stuff; Piketty, for his part, defines corporate capital as “land, dwellings, commercial inventory, other buildings, machinery, infrastructure, patents, and other direct owned professional assets.” But there’s a problem with this assumption. Capitalism isn’t really about physical property—not anymore.
In fact, in the twenty-first century, intangible assets, such as the knowledge shared by employees, dwarf physical holdings. (Elsewhere in the book, Piketty acknowledges that a company’s value is also determined by the knowledge contained within the corporation, not just its patents but “its information systems and modes of organization.”) “Capital in the Twenty-First Century” is studded with charts illustrating changes in commercial life over the past century. (On Friday, Chris Giles, in the Financial Times, questioned some of the data regarding how inequality has changed over time.) But Piketty doesn’t include any charts showing the growth of intangible assets in major global corporations over the past several decades. The trend can be seen, vividly, in this chart. It shows, over time, how much of the combined market cap of companies on the S.&P. 500 could be attributed to intangible assets rather than tangible ones:
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