The Impact of International Relations on Foreign Investing & Investments
The International Network
Since the end of World War II, countries around the globe have transformed extensively. We’ve been hit with a continuing tide of globalization and industrialization that has greatly increased international trade and established a global network. This massive worldwide integration holds many impacts for investors, including greater interconnectedness with world markets and increased access to communication and investment opportunities.
But what precisely does an international network mean for investors? With globalization changing the structure of markets by making them more prone to economic and political developments, becoming more globally minded is becoming increasingly crucial for successful long-term investing – foreign or domestic. While it is difficult to determine precisely how international developments will play out, investors can secure a reliable advantage through having a basic understanding of international relations (IR), allowing investment decisions to be made more accurately.
Investing in International Relations: Different Policies, Different Growth
The future trajectory of a country is heavily dependent on their system of government and their policies. The best example of this is China. Prior to 1979, China was a poor and rural country whose economic expansion was neglected in favor of state expansion. Yet after Deng Xiaoping took power in 1979, he focused on enacting policies favoring economic growth, including opening China to trade, allowing foreign investment, and approving privatization. Even after his retirement, China’s economic growth continued to improve, taking off considerably after being approved to join the WTO in 2001. To attract foreign direct investment, China established Special Economic Zones like Shenzhen and implemented favorable policies like “Two Year Free and Three Year Half,” which exempted foreign-funded enterprises from all taxes for two years and from half taxes for the next three. These policies, coupled with China’s massive workforce, large rural-to-urban migration, and strong government ability to implement reforms, have helped skyrocket China’s development. While it may be late for investors to significantly capitalize on China’s economic rise, they can still look to profit from another country’s growth: India.
China’s economic boom may be slowing, but India’s appears to be beginning. The factors behind India’s growth boast many similarities to China’s: a large workforce, structural reforms, increases in rural-to-urban migration, and growing productivity. E-commerce giants Amazon and Alibaba have recognized India’s potential as they compete for a higher share of India’s e-commerce market. Investors should pay close attention to this development: which firm will win? While it’s difficult to tell right now, the end result will undoubtedly rest on the differences in Amazon’s and Alibaba’s market integration policies, cultural integration practices, and perhaps, even US-China-India relations. But for investors who can bet correctly on the “winning” firm, they’ll certainly be in for tremendous gains.
Another great example is Argentina. While unknown to many today, in the early 1900s, Argentina once showed considerable parallels in economic growth with its then-economic rival, the United States. With both the U.S. and Argentina expected to become major world economic powers, investors were unsure which country to invest in. Here, differing governing policies at play contributed to the downfall of Argentina’s economic prospects: while the U.S. distributed land to new individuals and squatters, Argentina delivered them into the hands of existing rich landowners. This created a land-owning aristocracy that many Argentinian immigrants had hoped to escape, leading to ineffectuality in which industrialization and competition was curbed by the land-owning elite in favor of their status quo. While other factors such as inflation were also important factors to the Argentinian downfall, this example clearly highlights the importance of even a single land-distribution policy in affecting the health of the future. If those who had invested in Argentina had gone a step further to examine its policies, they would’ve clearly found the U.S. to be the better investment and easily turn their losses into gains.
From this, we can see that having a basic yet well-rounded understanding of other countries will be crucial for successful foreign investing. To do so, it is beneficial to grasp a leader’s (or country’s) main goals, any influential government policies being enacted, and the capability of the government at enforcing these policies. Keeping these factors in mind will provide a solid foothold to predicting where a country – and an investment – will head in the future.
Investing in International Relations: Keeping Up with Relevant Developments
While understanding foreign countries and their main objectives is a large part of IR, it is also important to stay up-to-date with domestic and international developments. For those who don’t have much time to read or watch the news, many news outlets offer quick, 5-minute “daily briefings” via email to catch you up on the latest developments (personally, I’m subscribed to The New York Times’ morning briefing, which is great but can be very left-leaning at times).
In the past few months, large stories like the U.S-China trade war, COVID-19, nationwide protests, and prospects for the 2020 Presidential election have taken front page. While these have large market implications, it’s also imperative to track other developments that aren’t mentioned as frequently – particularly those between countries. For example, take into consideration the ongoing Yemeni Civil War: while the Saudis have used U.S. arms to launch various attacks in Yemen, the U.S. continues to be Saudi Arabia’s largest arms supplier. Though unseen in the headlines, these developments have clear effects on the market: Raytheon’s net sales have increased by 26% since the war’s start.
International developments are particularly relevant in IR because they can severely impact relationships between countries that, in turn, affect markets. Another great example is the U.S.-China trade war; before the Phase One deal was signed in January, continued escalations in tensions and tariffs on both sides have chipped at investor confidence and caused all three major U.S. stock indexes to drop significantly. While new developments such as China's attempts at reacquiring Hong Kong and Taiwan are masked by COVID-19 and nationwide protests, the U.S.-China relationship should be closely monitored as it will greatly impact both countries’ trade balance, tariff levels, and accessibility to international goods and labor, all of which affect domestic prices, consumer and investor confidence, and the U.S. market. From both Saudi Arabia and China, it is clear that IR has a pertinent influence on markets.
Conclusion
The world is constantly changing, but even in light of recent developments caused by the COVID-19 pandemic, one thing will remain constant: the growth in interconnectedness between nations, whether politically, economically, or culturally. As countries become more reactive to international developments, so too must investors. Having a working understanding of foreign countries and of international news is critical for investors to have greater certainty in future developments and in their investment decisions.