“SENDING PROFITS ABROAD IS A GOOD THING”

Here is a nice little piece by Oliver Hartwich, a highly talented researcher at the Centre for Independent Studies in Australia.

As he notes, it’s amazing how easily Australians are persuaded by the claim that every time someone buys products of a foreign-owned company, the profits will somehow disappear and harm Australia’s prosperity.

In New Zealand, we also hear the ‘sending profits abroad’ argument in the context of the privatisation debate.

Leaving aside the likelihood that some significant part of the profits of a multinational may be reinvested in the host country, the article notes:

If the parent company however decided to transfer the profits from its Australian branch to America, it would soon find out that Australian dollars are pretty useless outside Australia and change them into US dollars.

And then it gets to the nub of the issue:

But what happens to the Australian dollars? Since Australian dollars don’t buy anything abroad, they will return to Australia to buy Australian goods and services. Maybe a US company will use them to buy Australian minerals. Perhaps US tourists will come here to spend their holidays. Or the US might import Australian-made cars.

In any case, Australian dollar profits transferred abroad return to Australia sooner rather than later because outside Australia, our dollars are just printed paper that will not get you a cup of coffee.

So the conclusion is:

This is where the ‘Australian-owned’ argument falls to pieces. For Australia’s wealth and prosperity, it does not matter where the profits from Australian businesses end up. All that matters for the Australian economy is that Australia remains a place where business transactions take place – irrespective of who owns the business.

Would that more New Zealand journalists and commentators exposed the fallacy of the ‘sending profits abroad’ argument.

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2 thoughts on ““SENDING PROFITS ABROAD IS A GOOD THING”

  1. Thank you! I have been trying to get clarification on this very issue and now you have done so.Saved for future reference.However is there any question over the difference, if any, between the Dollar itself and the value its supposed to represent.Could a left winger say “Well yes but its the essence of the value that dollar contains that’s important”….?

  2. Roger, I need to think about this some more, but is this not only a massive simplification but conceptually wrong? The need to convert currency is surely a red-herring? Sure the domestic spending and production of a company (ignoring its potential exports of goods and services) stay within the country, but the return on the capital deployed if foreign owed may not. This then raises the question of where the capital came from, so if we took the sale of a NZ owned business to a foreign entity the capital could be sourced within New Zealand or externally. I will ignore the internal sourcing to start with as I think this is just a timing effect. So the foreign entity sells foreign dollars to buy NZ dollars to purchase the asset. Assuming fair value is paid we have now simply transferred the claim on the economic return on the capital invested from a NZ entity to a foreign entity, nothing else at this point. But, If the foreign entity now starts to transfer the economic profits out of NZ, then sure it sell NZ dollars and buys foreign dollars, but this is not the same as saying the profits are recycled in NZ, however the supply of NZ money does stays the same. The question is whether NZ’s total value is the same? Assuming the asset is still worth the original amount (less profit distributed between purchase and the current point in time) what does this series of flows look like?
    At time t the purchase price is NZ$1bn representing the future value of the cashflows to equity.
    NZ entity realises future value of $1bn all other cashflows (salaries taxes etc) stay in NZ.
    Foreign entity sells $foreign and buys NZ$1bn
    Annual distributions to owners = NZ$100m
    At time t+1
    NZ entity that sold still has NZ$1bn (I will assume it is not earning any interest etc)
    Foreign owned asset value is NZ$1bn- NZ$100m profit distribution = NZ$900m plus NZ$100m cash
    So at time t (just prior to the sale) value of NZ assuming only the one asset = NZ$1bn
    At time t+1 value of NZ equals NZ$1bn cash plus NZ$900m asset plus NZ$100m cash (distribution), less foreign claim on capital of NZ$1bn = NZ$2bn-NZ$1bn=NZ$1bn – no change.
    If the distribution is moved overseas the value at time t+1 is:
    At time t+1 value of NZ equals NZ$1bn cash plus NZ$900m asset, less foreign claim on capital of NZ$900m = NZ$1.9bn-NZ$900m=NZ$1bn. The foreign entity has NZ$900m asset and NZ$100m cash.
    The NZ$100m of cash could be in NZ$ or have been converted to foreign $. The later part has nothing to do with the effect of foreign ownership of profits. The real part is that the future NZ entity profits were realised at time t instead of through time and the foreign entity pays for the future value of the NZ entity profits at time t and realises the cash profits through time.

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