The Value Of A Company
To A Nation
In the West we currently live in a world where more and more of our industrial activity is driven offshore. The United States in particular, once a power house of industrial activity now can barely support the very automotive industry that it created.
Companies continually justify off shoring their manufacturing as being good for the economy. It is worth a thought to see if this is actually true. For that you need to have to be able to answer the question of “What is the value of a company to an economy?”
The more or less abstract view I currently have of an economy is of a pool of circulating tokens called money and counter circulating items called product. In simple terms you exchange money for product. Money moves one way and product moves the other. You could in fact hide the view of one or the other and see either flowing tokens, or flowing value added raw materials. Imagine for a second raw iron coming out of the ground, being shaped into steel, further shaped into components, coming together to form a car and ending up in your driveway.
Without loss of generality we will discuss token flow here – while keeping in mind that we could equivalently look at the flow of value added materials. In this view the value of a company to an economy is its value as a pump of sorts. Money (tokens) flow into a company and then are pumped out to other parties who in turn distribute money to other parties.
With this view in mind, the value of a company can be considered to be the gross amount of money that flows into the company. Forget taxes, forget profits, forget everything except the flow of tokens into the company’s coffers.
These tokens then get distributed to various parties. Shareholders, Suppliers and Government. Here staff are classed as suppliers and retained profits as he company distributing profits to itself as a shareholder. As companies tend to collect taxes for employees the government component will include all taxes, tariffs etc that the company as an entity pays to the government. Denote each of these quantities as; 
, 
,
respectively.
This allows us to say the gross value 
of a company is
Where a company does business in several different economies, we can split this up and sum it over each of the N different economies to give
Where the 
is simply a shorthand way to write “sum up all the terms”.
With that you have a picture of a company being a pump of sorts, that sucks money in and then pushes it out to various parties. The value of a company to a single economy is the amount that is distributed to shareholders, government and suppliers within a single country.
So What Is Happening
The issue we have at the moment is that Western companies are reducing the amount they are paying out to suppliers and government in the economies they are based in so that they can increase the amount being paid to shareholders. The total gross is the same in the sense that the amount of money coming in is unchanged, but how it is distributed does change.
With that concept in mind I have to argue that while the value of a company to shareholders may increase the value of a the company to an economy decreases unless the payments to shareholders within an economy meets or exceeds the lost payments to suppliers and associated tax revenue – which includes income tax paid to employees that is lost to an economy when labor is off shored.
In a sense I am repeating earlier posts where I have argued that in a welfare state where people are protected the government also has to protect the revenue streams that pay for the medicine, pensions, roads, defense of the modern state.
The shortfall is debt as the developed world is finding out in no uncertain terms.
As I have argued before you can not have a welfare state and low cost goods and services. If you wish to have the benefits of a welfare state, you have to accept that product produced within that economy will have a higher tax burden associated with it. Worse you not only have to accept that local products will cost more, but you have to be prepared to pay for them. No money, no welfare as simple as that.
The counter argument does exist that off shoring manufacturing results in companies within other economies spending their wealth within your economy. In a nation like Australia which is resource based that may hold to an extent, although you need to be careful with profits distributed to offshore shareholders and taxes paid by companies based in foreign economies. But with a nation like the United States which has more of an industrial rather than resource profile then this loss of economic value as their industries collapse is a total disaster. For reference General Motors and Chrysler have both gone into bankruptcy in the last couple of weeks.
To get back to the point. The value of a company to an economy is a different kettle of fish entirely to the value of a company to shareholders. While off shoring actions by companies may increase shareholder value, they decrease the value of a company to the economy in which they are based. These companies do have a legitimate argument that they simply can not compete against companies that manufacture in non welfare state economies. This is an issue for government.
We have a couple of choices. We do away with the welfare state to reduce our cost of business to levels that are competitive with the third world. This means reducing social infrastructure to third world levels. or we protect our economies by burdening up third world products with the delta between the welfare state burden they are carrying and the amount we are carrying. In simple terms it means that we penalize economies that do not provide social support for their populations by imposing a burden equivalent to the one they would be carrying if they did. At the moment we are in a reverse protection situation where the social costs we carry ourselves act as a tariff on our own product which tends to protect countries that do not protect their own people.
It might also help stem the flow of economic refugees who are seeking the social benefits of the West that are not provided within their own economies. Why would they want to come to the West if they could get equivalent levels of social support, education, medicine and opportunity in their own lands?
In any case I see no other choices. The West either loses everything it has worked for since Napoleon ended the Holy Roman Empire of the Ostragothi and bought the enlightenment and humanist law to Europe or we impose the values, principles and cost burden of the modern liberal humanist state upon our less burdened competitors.
June 04 2009 | Economics | 1 Comment »
