Conditions Under Which Investments Are Most Frequently Involved in Political Friction

UNDER what circumstances do private investments most often become involved in international political difficulties, and why? What are the basic conflicts back of the investment aspects of the so-called economic causes of war? Why do these conflicts sometimes take the form of clashes between organized national states? These are some of the theoretically interesting and tremendously practical questions with which it is proposed to deal in Part II. The present chapter will examine the circumstances under which private investments have been centers of political friction, with the object of ascertaining why certain situations and certain types of investment produce more such difficulties than others.

First, what have been the relative political dangers of the two processes analyzed in Part I? That is, has the use of private investments in the service of diplomacy tended to create more dangerous or less dangerous situations than the use of diplomacy in the service of private investments? A careful answer to this question cannot be made without the important qualification that the distinction between investments as tools of foreign policy and as determinants of foreign policy, when presented in sharp focus for the sake of clarity of analysis, inevitably departs more or less from reality. We know from the cases of Part I that these two political rôles of private investment are usually interwoven to some degree.

It would be a mistake, therefore, to imply that a clear-cut distinction can be made between investment friction(1) arising out of the use of private capital as a tool of diplomacy and investment friction connected with the use of diplomacy as a tool of private capital. The foreign policies of states and the foreign investments of their citizens mutually influence and condition one another. Nevertheless, there are certain observations about this mutual conditioning in relation to international political friction which are important, partly because, while based on concrete case studies, they are not altogether in line with what some theoretical writers on the "economic causes of war" have prepared us to expect.

There have been many more serious cases of investment friction between strong states where the predominant rôle of the investments has been that of tools than where private capital has played the part of instigator of a friction-causing policy. Recall the Franco-Italian clash over Tunis, the Turco-Italian war over Tripoli, the penetration of the Yalu by Russia before the Russo-Japanese War, the tensions between England and Russia in Persia, Japanese operations in Manchuria, and many similar cases mentioned in Part 1. Cases of the other type---that is, in which investors, for the sake of profits, have directly brought major powers into serious political friction---are much more rare. Samoa seems to offer one. The German private debts may be, to a limited extent, another. Perhaps the Boer War might be included here (with its preliminaries of the Jameson Raid, etc.), though we have noted that it would be very questionable to classify the leader of the South African financiers, Cecil Rhodes, as predominantly profit-seeker rather than political empire builder. Furthermore, the Boer War was not between two major powers, though it did have European repercussions, especially on Anglo-German relations. Should the political friction among Germany, France, England, and Russia which centered about the Bagdad railway be counted as instigated by the activities of profit-seeking investors? Certainly that was part of the complex of causes, but it can hardly be called the predominant one. The political fears, ambitions, and strategies of statesmen, which made the railway a pawn in the game of haute politique and the balance of power, were much more decisive in determining that it should become a friction center than were any interests or attitudes of the capitalists themselves. Indeed, these latter could have reached compromises among themselves several times had it not been for the political interests of their governments. The Mannesmann brothers with their mining claims in Morocco, and the Lynch brothers with their navigation monopoly in the Near East, were material factors in making it difficult for governments to settle certain disputes, but in both cases the political clashes stemmed from quite other roots than investment conflicts, while in one if not both the investments had begun as tools of diplomacy and later began to add their own aggravations to the situation. Numerous interventions, like those practiced by the United States in Nicaragua, Cuba, and the Caribbean generally, have had a mixed background of investment and strategic political interest, but these have usually not involved clashes between major powers. Where there has been really serious friction between major powers over investment matters, examination will disclose in most instances that the political opposition existed before the investment issues arose, and either expressed itself through them or crystallized around them.

Also, conflicts over private investment matters between strong states have rarely, almost never, reached a state of dangerous international tension except in cases where the states involved have been pursuing some political policy (extraneous to the investment affair itself) which has led them into conflict. Investments have become involved in dangerous international disputes mainly where political clashes existed already, and the investments offered a field of battle, or new weapons, for the further prosecution of the already existing conflict. In other words, private investments seeking purely business advantage (i.e., unmotivated by political expansionism, balance of power strategy, military considerations, or other reasons of state) have rarely of themselves brought great powers into serious political clashes. It is where an aura of political ambitions has attached to the investments, and especially where the investments have been pushed in for political reasons from the start, that most of the dangerous investment frictions between great states have occurred.

This is the factual situation, revealed by the investigation of concrete cases. If one seeks to account for these facts, the most useful explanation will run in terms of the way in which those in charge of foreign policies apply the principle of national advantage. Desires of investors in harmony with established lines of national foreign policy receive enthusiastic governmental support. Desires of investors which run counter to established lines of national foreign policy receive hesitant or grudging support, no support at all, or active opposition. This is an important general principle of wide application. Now, it is characteristic of modern international relations that those lines of foreign policy which the governors of national states at any particular time conceive to be in the highest national interest are almost certain to be based on considerations of power. National power is generally regarded not only as the sine qua non of prideful national existence, but as a sacred necessity in order to provide security against attack. Just as the military and naval expenditures of states comprise the largest items in their governmental budgets, so power ranks highest among the conscious or unconscious objectives of statesmen who determine foreign policy. This gives greatest weight to questions of military and naval strategy (including territorial bases, lines of communication, and the like), alliance politics, and "prestige" in general. This latter is an extremely important phase, not only of national pride, but of actual power, for it enables statesmen to win battles without fighting and is generally believed by them to constitute the best insurance against military attack or political pressure from without. Prestige is a compound of such various elements as military strength, past history, political alliances, colonial conquest, industrial productivity, and success of nationals in foreign commerce---those things which nationalists regard as essential to prevent their country from becoming a "second-rate" nation. Economic development, including economic expansion abroad, has been increasingly recognized by governments as a cardinal factor in a nation's prestige and hence in its power, not to speak of the direct relationship between certain aspects of economic development and military power itself. Economic expansion abroad, however, is only one phase of that complex called national prestige and power, and the interests of particular private investors abroad may be minor items in the whole. When the vigorous promotion and protection of private investment interests abroad seems to the governors of national states to offer an occasion for increasing the general power and prestige of the nation, they are ordinarily eager to assist. They are often more eager than the investors themselves, as we have seen in a great many cases. But when for any reason a clash arises between the particular investment interests of citizens abroad and some of the other constituents of national power enumerated above, the least "vital" will be sacrificed. Private investment interests have usually, in actual practice, been subordinated by governments to factors of general political or military strategy which have a more direct bearing on power. Thus it is that private investors have received strong, even outrageously exaggerated governmental backing where they have been tools and agents of power and prestige politics; while other investors, whose projects seemed to run counter to the government's line of political endeavor, have experienced official indifference or even active opposition. A few concrete examples follow:

The British government, for the sake of the political advantage of maintaining the goodwill of the United States, in 1913 influenced its oil magnate, Lord Cowdray, to drop projects on which he had embarked in Mexico, Colombia, and other Latin-American countries. At the same time the same government was encouraging its oil men in other parts of the world, and had previously been aiding Cowdray, also, who had a contract for supplying oil to the British navy. The pressure from the United States was bound up with general questions of Mexican policy, which then were acute due to the revolution, with the Panama Canal tolls question, and with President Wilson's doctrine enunciated in his Mobile speech (October 27, 1913) that economic concessions as well as territorial acquisitions might imperil a country's autonomy and would have to be considered by the United States in upholding its Monroe Doctrine. It was Ambassador Page in London through whom these views were pressed upon the British government, and he wrote to Wilson that "the real meaning of concessions" at last began to get into the heads of those in control, whereupon they "pulled Cowdray out of Colombia and Nicaragua---granting the application of the Monroe Doctrine to concessions that might imperil a country's autonomy." To Colonel House, Wilson's confidential adviser, Page reported: "Lord Cowdray has been to see me for four successive days. I have a suspicion (though I don't know) that, instead of his running the Government, the Government has now turned the tables and is running him.... He told me this morning that he (through Lord Murray) had withdrawn the request for any concession in Colombia." Later Page added that "Cowdray has, I am sure, lost (that is, failed to make) a hundred million dollars that he had within easy reach by this Wilson Doctrine, but he's game."(2)

It appears that the American government was ready to show a similar consideration toward the British when in 1927 the Kingdom of Abyssinia moved to extricate itself from the political domination of England, Italy, and France by drawing in "neutral" American capital for the construction of a dam at Lake Tana on the headwaters of the Blue Nile. Dr. Martin Workener, as a personal representative of the Abyssinian sovereign, Ras Raffari, journeyed to New York, where he interested the White Engineering Corporation. In Washington he talked with Secretary of State Kellogg and was told that the American government could regard the project favorably only if assurances were given that no slave labor would be employed and if it were agreeable to Great Britain. Britain had a special interest in the Tana Lake region as strong or stronger than that claimed by the United States in Latin America, for out of it flowed the waters that gave life to Egypt. The appeal to American capital probably did improve Abyssinia's bargaining position when final arrangements came to be made, but the United States showed no inclination to support its investors in any arrangements that would alarm Britain.(3)

In Persia the British government stood by after 1907 and abetted the Russian program of maintaining anarchy and financial chaos. High policy called for friendship with Russia, but Russia's procedure in Persia, calculated to maintain foreign political dominance, was certainly not helpful to British trade and investment in the country. When power diplomacy seeking strategic political advantage was believed to call for anarchy, while the interests of trade and investment called for stability, the dictates of political advantage took precedence.(4)

In France, "above and beyond all other considerations which induced French official intervention with the movement of French capital abroad was the wish to make the investment serve the political purposes of the state." The Minister of Foreign Affairs, announcing the rejection of an application by French bankers for official listing of bonds of the Crédit Foncier Cubain, explained, "When a request is addressed to the government, it is examined with an appreciation of the financial interest and French political interests ... in all requests the French interest should take precedence over the financial interest . . ." Likewise, in the protection of investments once made, heavy losses to investors caused by the action of certain Latin-American states where France had no pressing political concerns brought only mild measures, while much less serious interference with French private interests in Turkey were seized upon as the occasion for a naval demonstration and political demands. "Eager as it was to protect its investors, influential as these investors were in official circles, it was in a measuring of political advantage or disadvantages that the government found its primary guide."(5)

The German government in 1911 prevented the issue of American railway paper in the Berlin market, on the ground that the outflow of capital was producing a scarcity which was having bad effects on the home economy. At the same time, it was encouraging the investment of capital in Turkey. The difference was that in the first case purely economic attractions were producing the outflow of private capital, while in the second, political as well as economic advantages were expected to follow. As usual, the government was willing to sacrifice economic interests, if need be, for political advantage. It was in this connection that Secretary of the Interior Delbrück said in the Reichstag: "Considerations involving our political world importance could make the investment of German capital in foreign securities necessary, even under conditions in which from the purely economic standpoint we should perhaps prefer to keep the money at home."(6) The German government made it a point to demonstrate vigorous support of its investors' interests in Venezuela, Bulgaria, and elsewhere (particularly when naval appropriation bills were coming up), but when it seemed politically best to moderate its support of the Mannesmanns in Morocco and other investors in Persia it did so. In the decisive moment the government even showed itself ready to subordinate the economic interests in Turkey, impregnated as they were with political ambitions, to the more vital political demands of its military alliance with Austria-Hungary. When the Vienna cabinet provoked a European crisis and the ill-will of Turkey by its determination to annex Bosnia and Herzegovinia, the German ambassador at Constantinople urged Berlin to restrain Austria in favor of the Porte,(7) not to set at risk the fruits of decades of German work in Turkey. But Berlin proceeded on the principle which Chancellor Bülow had already formulated as follows: "For our attitude in the (Near) East and particularly in the Balkan peninsula, where we pursue only economic interests, the wishes, needs, and interests of Austria-Hungary, which is so close a friend of ours, are and remain the primary determinants."(8) Karl Helfferich, head of the Deutsche Bank's Turkish enterprises and an intimate of the foreign office put the matter succinctly: "In that serious crisis, German policy was thus resolved to subordinate the entire German interests in Turkey, without reserve, to the alliance with Austria-Hungary."(9) We may conclude, therefore, with the author of "German Governmental Influence on Foreign Investments,"(10) that "the investor was assured of governmental support when his interests were endangered provided that these coincided with the political plans of the government."(11) Mr. Herbert Feis, in his study of European investments before the war, reaches substantially the same conclusion. The policy and action of the German government, he says, "like those of Great Britain and France, were guided by judgment of how national interest was in each instance best served rather than by any outright acceptance of a duty toward the bondholders or any abstract law or right."(12)

The same conclusion holds with regard to the United States. Parts of the illuminating article on "The Relation of Government to Foreign Investment" by a former Assistant Secretary of State have been quoted earlier.(13) This article expounds frankly the doctrine which has been followed in practice by most governments. Subtle calculation of national advantage, which depends, of course, upon the political objectives of the government, "is the first measure, as the citizens' right is the second measure of the government's support. The government's obligation is its duty to the citizen, but the coefficient of that duty is its duty to the nation." Thus, an American who jumps into a pet preserve of Great Britain or France and engages in enterprises subversive of some policy of theirs would not be abandoned entirely to his fate if his enterprise suffered, but the United States would merely seek equitable damages for him, not specific performance. When American financial advisers were forced out of Persia by Russia and England, a case of this kind arose, and since American influence in Persia was not an important national interest the proper policy was to secure an equitable adjustment doing justice in a general way to the American citizens. "If, on the other hand, those advisers had been in a country where American influence was of national importance, the American government must have resisted their dismissal and insisted upon specific performance, although the contracts were no more binding in the one case than in the other."(14) This explains why the difficulties of American investors in the region of the Panama Canal are much more likely to bring strong action from Washington than exactly similar difficulties elsewhere. "In the encouragement of American enterprises abroad," writes E. M. Borchard, "the government lends its support to such as are legitimate and nationally beneficial, the degree of support being measured by the national advantage to be expected."(15)

Thus far the discussion has concerned international investment friction among the major powers, that is, usually, between capital-exporting countries. The situation is not exactly the same with respect to the relationship between a capital-importing and a capital-exporting country, particularly where that relationship has been, in practice, one between a relatively weak and a relatively strong country. The political relations of capital-importer with capital-exporter seem to have been more subject to disturbance by the direct influence of investment difficulties than have the relations between rival capital-exporters. That is, the relations between the United States and Mexico, for example, have been influenced much more powerfully and directly by the interests of private investors than have the relations between the United States and Great Britain. Thus, private investments have been important as instigators (as distinguished from tools) of diplomatic action mainly in connection with the relations of relatively weak capital-importing countries with relatively strong capital-exporting countries.

The reason for this is twofold. In the first place, governments apply the test of political expediency in their decisions as to the extent and manner of the support which shall be given to investors abroad, and political expediency is much more likely to approve strong measures where the resistance will come only from a relatively weak, capital-importing country, than where strong support of the investor would mean a clash with another major power (another capital-exporting country). Secondly, the potential sources of investment conflict between capital-investing and capital-receiving regions or groups are themselves more numerous, intense, direct, and lasting than those between rival capital-investing regions or groups. The reference here is to basic economic conflicts. Rival lending regions may find themselves in conflict over opportunities for the profitable investment of their capital or over priority of repayment, but the process of international investment establishes between a capital-importing and a capital-exporting country a relatively permanent capital-labor conflict, a creditor-debtor conflict, a conflict of vested interests with groups interested in social reform or revolution, not to speak of cultural conflicts unleashed by the industrialization which accompanies capital investment. These conflicts will be treated in more detail in the next two chapters.

It is also true that those cases of international investment friction involving mainly diplomacy in the service of private investment (as distinguished from private investment in the service of diplomacy) have as a rule tended toward less serious disturbances of the peace than have cases of the other type. This follows simply from the fact that the powers of resistance of the relatively undeveloped capital-importing countries have not been great enough to produce wars of major magnitude, while foreign policy has been most subject to investment influence in connection with conflicts involving just such countries. Interventions to protect lives and property; imposition of laws and governmental policies favorable to alien investors, arbitrary settlement of investment conflicts by ultimatum, outright conquest, colonization, or political subjection, have often taken place in the past without resulting in disturbances called by the name of war, because one party was too weak to put up a noteworthy resistance against the other.

The relative importance of the two processes by which international private investments become involved in political frictions---that is, as tools of diplomacy and as instigators of diplomacy---may be different in the future. In the first place, the momentum of political expansionism by the great powers, leading to the acquisition of colonies and spheres of influence, achieved by methods of penetration which involve private investments, may be running down. Most of the politically "vacant" territory which Western national states have been engaged in appropriating for themselves during the last half-century is now occupied. Secondly, the capital-importing countries are growing stronger, and as their powers of defense and attack increase with increasing industrialization the disputes which arise between them and the capital-exporting countries will cease to be petty. Since political expansionism by the great powers typically involves private investments as tools of policy, while the instigation of political friction by private investments is relatively more frequent between capital-exporting countries and those that receive capital, the two, developments mentioned above may magnify the rôle of private investments as determinants rather than tools of policy.

Thus far we have been asking, What processes have brought private investments into international political friction? Now we turn to a second question, to which the remainder of this chapter is devoted: What types of private investment have been most frequently and characteristically associated with international political friction?

First of all, it is well to make explicit the easily observable fact that the mere size of the foreign investments in a particular country has no direct relationship to the political significance of the investments or to the political friction which may develop around them. In fact, if the coefficient of correlation could be calculated between the intensity of international investment friction in different regions and the amounts of foreign investment in those regions, the coefficient would certainly be negative. That is, the countries with the largest amounts of foreign capital within their borders have, on the whole, the least political trouble over that capital. Turn to Chart VI in Chapter I and note that the largest total sums of foreign capital are found in Canada, the United States, and Australia. Then recall some of those areas which have figured most strikingly in the investment friction cases of Part I: Morocco, Tunis, Egypt, Haiti, China, Persia, Nicaragua, Turkey, Samoa, Mexico, Albania. In most of these countries the total amount of foreign investment has been relatively small, in some quite insignificant compared with world totals. It should not be implied, however, that the connection between relatively small amounts of foreign capital and political friction over investments, or between larger amounts and the absence of such friction, is a causal one. Rather, some of the same circumstances which set the stage for political friction over investments also operate to keep the total amount of investment small. The point is that the political significance of international investments in any particular country does not depend upon the amounts invested, but upon the conditions which surround the investments.

As an aid to the discovery of significant surrounding conditions which determine whether investments are likely to be involved in political friction or not, an analysis of some thirty friction cases, most of which have been described in this volume, is tabulated in Table I and summarized in Table II. The method for the selection of these cases was simple and free from conscious bias. It consisted, as described in the Preface, of listing for examination as nearly as possible all the cases in recent times-roughly, within a half-century or so-in which anyone has alleged that international private investments played a significant part in international political friction. Those cases on which enough information was available and which seemed on examination to be rather serious instances of investment friction (involving private investments as defined in Chapter I) found their way into this tabulation. The result is presented here in full consciousness of the unavoidable defects in such an attempt at quantitative analysis---the problem of weighting, for example, and the necessary reliance upon personal judgment in deciding how a given case should be classified. Yet what are the alternatives to the conscious compilation and open presentation of such an analysis? Either no attempt at all to decide(16) what types of private investment have been most characteristically involved in political friction, or the presentation of conclusions arrived at by some unconscious process not clear to the reader (or to the author) and probably more dogmatically asserted because less carefully scrutinized.

Table I lists thirty-four instances of international investment friction from all parts of the world, some of them single episodes, others long-continued tensions, and shows what types of private investment were mainly involved in each instance. The classification of private investments used here is drawn from Chapter I,(17) where detailed explanations appear. The summary in connection with Table II, below, will serve as a key to the symbols at the head of the columns in Table I.

The cases of Tables I and 11 designated by the letter "A" are those in which the political friction existed mainly between two or more capital-exporting countries interested in one and the same investment area, while the letter "B" designates cases of trouble between a capital-import area and the country or countries from which it has received capital. Of course, in some cases (marked "AB" in Table I) both kinds of political friction appeared in connection with private investments from abroad. The cases containing "A" friction (22 in number), and the cases containing " B " friction (also, as it happens, 22 in number) are summarized separately in Table II, which follows.

Certain striking facts emerge from an inspection of these tabulations. In the first place, all the cases of international investment friction included in this analysis, with two exceptions, center about the holdings of citizens of the major powers.(18) The cases were not intentionally so selected. Such a result follows, no doubt, from the fact that the major powers have been the chief capital exporters, but it is still noteworthy that the rather considerable investments of citizens of Switzerland, Holland, Denmark, Sweden, and other countries not major political and military powers have hardly ever been centers of serious international political friction.(19)

Secondly, international investment friction has occurred almost exclusively in connection with investments in non-industrialized areas of weak, unstable government--the so-called "backward" countries. This has been true of the "B" cases and still more true of the "A" cases. Only four cases out of the thirty-four here studied, in fact, have involved private investments in "advanced" countries.

Third, the tabulations under heading I of Table II show that those private investments in which management and entrepreneurship, as well as capital itself, crossed national boundaries (direct investments) have been much more prolific of political disputes than have loans to foreign corporations or foreign entrepreneurs. This finding is associated with the previous observation that investment friction characteristically develops in "backward" countries, for management and entrepreneurship always accompanies private capital exports to such regions, while the purchase of foreign corporation bonds or of less than controlling interests in foreign enterprises is typical only of capital exports to relatively "advanced" countries. Of the direct investments themselves, those made under special concessions or franchises are found more frequently in our friction cases than those which operate under the general laws of the capital-receiving country applicable to all business enterprises. Operation under special concession, again, represents another characteristic difference between investments in "backward" and "advanced" countries. It is also associated particularly with public utility enterprises of high strategic value, such as transportation and communication developments. It will be noted that those direct investments which operate under general laws are more important as centers of friction between capital-importing and capital-exporting countries than between rival capital-exporting countries.

Fourth, investments employed in all of the five uses tabulated under heading III have been involved, at least occasionally, in political friction. Transportation and communications investments appear most frequently in our cases where friction between rival capital-exporting powers is in question; extractive operations (oil, plantations, minerals, all considered together) come second. The same two types of investment have also provided the most occasions for contention between capital-importing and capital-exporting nations, but with extractive investments leading slightly in order of frequency. Trading investments have not been far behind as centers of trouble; banking and loan operations follow; while manufacturing investments have as yet provided relatively infrequent occasions for international friction. This ranking according to political involvement corresponds closely with the probable ranking according to amounts of international capital invested in these various employments. The conclusion seems to be that the particular employment of an investment has less to do with its potentiality as a friction center than other conditions surrounding it, though the strategic nature of transportation and communication investments as well as the large share of international capital invested in these forms may be thought to account for their frequency in friction cases.

The fifth and final observation relates to heading V of the tabulations. The motives behind particular private investments cannot, of course, be determined objectively, nor is reliable information on which to base a judgment easy to obtain. Therefore, a high degree of accuracy cannot be claimed for the classification of individual cases,(20) but the general situation is undoubtedly depicted with fair accuracy by the totals of Table II, heading V, which show that "purely business" investments were involved 14 and 18 times in "A" and "B" types of friction, respectively, while "patriotic" investments were involved 20 and 15 times. When one considers that without doubt purely business investments predominate greatly over patriotic investments in the capital exports of the world as a whole, it is evident that private investments in which patriotic motives play a significant rôle are many times more likely to become involved in political friction than investments made for private profit only. All but two of the 22 "A" cases here studied involved patriotic investments in some form---either under governmental subsidy, governmental stimulation, or the stimulation of patriotic political visions such as are entertained by colonial societies. The conclusion suggested is essentially sound, and accords with the observations and the reasoning presented earlier in this chapter: Private investments made for purely profit-seeking ends rarely become subjects of dispute between strong, capital-exporting powers, except where they are associated in time and place with "patriotic" investments which indicate a political ambition on the part of the capital-exporting country's government or an influential group within it. Purely profit-seeking private investments, on the other hand, even when not associated with "patriotic" investments, are more frequent centers of trouble between capital-importing and capital-exporting countries.

One might summarize the results of our tabulation in the form of a recipe or formula for the preparation of international private investment difficulties. The ideal case would seem to involve investments:

(1) By citizens of a great power;

(2) In a non-industrialized country with a weak and unstable government, or in a partly industrialized or even an advanced country about to experience a social revolution (e.g., pre-revolutionary Russia), or in a region of disputed sovereignty (e.g., the. Saar District just after the World War);

(3) Under conditions which bring migration of management and entrepreneurship as well as migration of capital, especially in connection with special concessions or franchises rather than under the general laws of the capital-receiving country;

(4) With the object, in addition to profit-making, of serving the strategic political and military purposes of the investing country, as expressed by its government in the form of subsidies or some less direct stimulus to investments deemed of national value;

(5) In projects connected with the development of transportation and communication routes, especially those having great strategic value from both the political and economic standpoint, or in the extractive industries associated with the early stages of industrial exploitation in non-industrialized countries.

The observations above attempt to portray the factual situation as our analysis of concrete cases of international friction has revealed it. If a satisfactory explanation of these facts is to be evolved it will consist in part, of course, of the line of reasoning advanced earlier in this chapter. That is, political expediency, reasons of high policy extraneous to the investment affair as such, play a major rôle in determining whether a given investment will become involved in political friction or not. This goes far to explain the striking immunity of investments by citizens of the lesser political and military powers to serious international friction. It is not expedient for such states to press investment conflicts to the point of political crises. The same principle of political expediency helps to explain the particular susceptibility to political friction of investments in areas of weak government, of transportation and communication investments, of certain extractive investments, and of investments involving special concessions or franchises, and of "patriotic" investments, for these characteristics often mean that the investments having them are especially serviceable to foreign policy. Two other principles will be introduced at this point, and, together with what has gone before, they provide the best theoretical explanation of the factual situation revealed by our tabular analysis of investment friction cases. These two principles are, first, that the likelihood of investment friction varies inversely with the assimilability of the capital to the institutions of the capital-receiving country, and, second, that the likelihood of investment friction also varies inversely with the political determinateness of the investment area. It will first be shown how these factors usually operate to render investments between "advanced" countries peaceful, and then how the relative absence of assimilability and political determinateness in "backward" countries makes such countries likely centers of investment friction. Finally, it will be shown how exceptions to the general rule---that investments between "advanced" countries are not likely to produce political friction while those in "backward" countries are likely to do so---may be accounted for on the basis of these two principles.

Two examples will serve to emphasize the generalization that investments between "advanced" countries do not usually give rise to political friction and will afford a concrete basis for the application of our explanatory principles. First, consider the large investments built up abroad by German electrical firms, particularly the German General Electric and Siemens and Halske, in the decades following 1890.(21) These firms controlled street railway companies, power plants, and related enterprises in Russia, Italy, South Africa, Austria, Poland, Argentina, Brazil, and elsewhere. They cooperated with French, English, and Russian banks. Yet their enterprises in the countries named never gave rise to any serious diplomatic controversy, so far as one is able to learn(22) though they had characteristics which we have found peculiarly subject to political friction, being direct investments, often under special franchises, in the public utility field. Compare the lack of friction over such investments in these relatively stable, westernized countries with the situation in countries like Morocco and Persia, where, as a German diplomat of wide experience remarked "as soon as a man sets up a shoe shop it becomes involved in international politics."(23) Or consider, as the second example, the very large capital imports of Canada.(24) Since 1900 Canada has been one of the great borrowers of the world. It has been estimated that by 1928 there were, roughly, five and one-half billion dollars of outside capital invested in the country. Of this more than two billion was British, more than three billion American, and the rest came from other countries. The total foreign investment in Canada was at that time about one-fifth of the estimated Canadian national wealth. American capital has entered in large amounts in the form of direct investments---branch plants, enterprises under American management---while that from other countries has been mainly in the form of loans. No political issues have arisen from outside investments in Canada, and none of any great importance are likely to arise. Canada has a stable, reliable government, an orderly judicial system, and the same methods of doing business as has the United States. The American business man and other investors in Canada do not require the political support of their own governments to make sure that their investments will be protected. They receive the same treatment in Canadian courts as Canadian business men and never think of invoking diplomatic pressure.

The fundamental reasons for the absence of investment friction in cases typified by these examples are the high degree of assimilability for foreign capital and the political determinateness of the receiving area. The countries of the world which have been important exporters of capital in the modern era, up to the present time, have shared broadly the same culture, insofar as that culture impinges directly upon investment enterprise. This culture has been characterized by certain legal principles and practices for the interpretation of obligations and the enforcement of contracts, certain principles of private property and public order, and other fundamental modes of thinking and acting with respect to economic enterprise which we associate with modern industrialized, capitalistic, western civilization. The countries in which we have found capital imports rarely involved in political friction---those countries that we, with a good deal of ethnocentrism, call "advanced" countries---have substantially the same cultural characteristics as those just described for the capital-exporting countries. Their modes of governmental supervision over business do not differ radically from those of the capital-export regions, they follow roughly similar rules in the organization and control of their courts, they do not entertain any great prejudice against the industrial and other practices of the investors from abroad, which are not too unlike their own. They take roughly the same things for granted as do the capital exporters themselves, live on similar fundamental assumptions, have comparable value scales, regard roughly the same actions as fair or unfair. These circumstances give to private private investments that come in from abroad what is here termed a high degree of assimilability, which implies relatively infrequent clashes with the people or the government of the capital-receiving area.

Furthermore, these "advanced" countries where foreign investments seldom get into political trouble are characterized, even when small, by relatively stable, established, and respected governments; while the potential capacity of the population to offer military resistance against an invader or to bring world public opinion and perhaps a political ally to its aid is not insignificant. In other words, there is no political vacancy, no political vacuum, in such countries.(25) The question of sovereignty is not an open question, and therefore the governments of foreign investors are not tempted to turn the investments of their citizens to account as devices of political penetration. This is the "political determinateness" which is here suggested as the second factor in explanation of the rarity of investment friction in industrialized, politically stable countries.

These two factors, the capacity to assimilate investment capital, and political determinateness, combine in "advanced" countries to produce a situation in which foreign investors never think of relying for the security of their undertakings upon diplomatic pressure from their home governments, while the governments of the great capital-exporting nations, on their part, entertain no ideas of achieving territorial expansion or political domination by means of the investments of their citizens. In other words, investments from abroad under such circumstances lose their political earmarks; they are, for most purposes, de-nationalized. The governments of the capital-importing countries do not anticipate, nor need they seriously fear, efforts of outside powers to dictate changes in their laws and customs or to influence the granting of economic privileges; hence, they can contemplate the entrance of foreign capital with some degree of complacency or even hospitality, rather than with the antagonism inspired by apprehension. All these statements are untrue, in fact their opposites are usually true, when we turn to the consideration of capital investments and political friction in "backward" countries.

The institutional arrangements which prevail in those countries that, from the modern western viewpoint, are industrially and commercially retarded and politically unstable or insecure, are such as to provide a low degree of assimilability for capital which comes from the institutional background of England, France, Germany, America, and the other capital-exporting regions. The legal traditions and the courts of such countries are not well adapted to the defense of contractual obligations and private property rights, at least not in the sense essential to the smooth functioning of western business methods. There may be "law and order" of a kind, but the kind of public order which appeals to a folk society of the South Seas or to such radically un-western civilizations as those which confronted the first modern investors in Morocco, Persia, or China is not "law and order" at all from the standpoint of a western business man. He finds frequent occasion to desire the aid and protection of his home government, which may be accorded through extraterritoriality, interventions, diplomatic interposition, and other political means. Not only the absence of the institutional foundations necessary to profitable foreign investment leads to political implications in such countries, but the absence of certain essential technical services---considered public services and ordinarily supplied by government in western countries---has the same tendency. This has been one factor leading, for example, to the construction of railway and telegraph lines in "backward" territories under subsidies from foreign states, with attendant political complications. The migration of capital to regions unaccustomed to the institutional basis of modern western capitalism, in other words, almost inevitably implies a concomitant migration of government---" law and order" and public services---of the type familiar to the industrialized west. At least, governmental ideas adapted to the functioning of capital investments must go with the capital, and the situation is obviously one suited to the development of political friction. Concrete examples to illustrate the relative unassimilability of private capital in "backward" countries, with resulting political difficulties, are hardly necessary here, since most of the descriptive matter in this volume bears on the point. The aids which governments may give to private investors abroad, detailed with numerous illustrations in Chapter 6, are almost without exception applicable to investments in politically weak and industrially undeveloped countries rather than in "advanced" ones. Chapter 14 will also develop further the line of thought suggested in this paragraph.

As for the factor of political determinateness, it is almost too obvious to need stating that in non-industrialized, politically weak countries the temptation for strong, capital exporting powers to indulge in imperial expansion is at its maximum. Some "backward" areas are true political vacuums when the first investor arrives; they are politically vacant, in the sense that they have no government whatever of the European type, but perhaps only a loose and local tribal organization. Others have a government, but one too feeble to offer serious resistance to a modern western power. Still others are in a state of chronic revolution. In all these cases, quite contrary to the situation in "advanced " countries, the question of sovereignty is an open question, and the political significance of foreign investments tends to become very great.

We have already observed that the factors of assimilability and political determinateness which characterize "advanced" countries tend to de-nationalize foreign investments made in such countries. Just the opposite is true in the "backward" regions of the world. This was strikingly illustrated when the French Foreign Office in 1902 undertook through its consular officers to arrive at an estimate of the amount of French capital invested abroad. "In the poorly policed countries where our nationals have daily need for recourse to consular protection," read the resulting report, "the constant manifestation of French interests continues to make it possible to estimate their value. But where liberal institutions assure public security, the same interests avoid, rather than seek, official attention, and an inquiry like this finds itself deprived of its best source of information."(26) The assimilability or non-assimilability of private capital to the institutions of a country in which it is invested, and the political stability or instability of government in that country, thus determine very largely the degree to which it remains national, and therefore the degree to which any conflicts in which it becomes involved are likely to take an international, political form.

What of the exceptions to the general rule that private investments in "backward" countries do, and in "advanced" countries do not, become involved in international political friction? It will be recalled that among the cases of Table I there were four such exceptions: investments in Russia, in the Saar District, in Italy at the time rival alliances were building, and recent difficulties over German private debts.(27) It is an important validation of the principles of assimilability and political determinateness that they not only explain the general rule but also account rather neatly for these exceptions. In Russia, friction over private investments arose as a result of the social revolution which took place there in 1917. Russian institutions suddenly came to have almost nothing in common with those of the capital-exporting nations, insofar as the treatment of private investments is concerned. Russia, in other words, passed from a condition which represented a fairly high degree of assimilability for private foreign capital, to extreme unassimilability, and political friction arose over foreign investments which were in Russia and could not be withdrawn. In the Saar District it was not the factor of assimilability, but political determinateness which was involved. The Treaty of Versailles left the ultimate sovereignty over the Saar District an open question, to be settled by a plebiscite in 1935. It was under such conditions of political indeterminateness that some of the characteristic phenomena of politico-economic "penetration" developed. In the Italian case the open question was not one of sovereignty, but which of the two rival alliances then forming in Europe should count Italy in its membership-political indeterminateness in another form. German investments went to Italy to strengthen the Triple Alliance; French investments were withdrawn as an expression of political tension over Italy's desertion of her former friends. In the German private debt case it is again a sudden decrease in assimilability, due this time to the national socialist revolution, which is responsible for the friction. Not merely default as such, but an apparent determination to redefine property and contract rights of non-Germans in ways that subordinate them to "national" purposes, has particularly aroused outside powers.

There are also exceptions of another sort to the general rule that private investments in "backward" countries do, and in "advanced" countries do not, become involved in international political friction. Certain "backward" countries, that is, show relatively little tendency to become centers of investment friction. That is true, for example, of the less developed Latin-American countries with respect to the investments of European nationals. Friction has developed between these capital-receiving countries and European capital-exporters (the "B" type of friction) on many occasions, to be sure, but political difficulties among the European capital-exporting nations themselves over investments in this region (the "A" type) have been almost entirely absent. Neither type of friction has compared in intensity, furthermore, to the political difficulties that have developed around European investments in northern Africa, the Near East, and China. The explanation turns on the principle of political determinateness. By reason of the Monroe Doctrine of the United States this particular region, though its governments were often weak, could never be considered politically vacant by European nations, and as a result relatively little political friction developed over their investments in the region.(28) Similarly, once a "backward" country has been incorporated into the colonial empire of a great power and the accomplished fact has been accepted by the other powers this country usually ceases to be the seat of serious investment friction. This result is partly due to the installation of political and economic institutions by the imperial power which increase the assimilability of private capital from abroad, partly to the fact that the entry of capital from other sources than the imperial nation may be discouraged in various ways, but mainly, perhaps, to the fact that the political fate of this particular "backward" area has definitely been determined. Let the question of sovereignty be reopened, as by the development of a strong independence movement, and foreign private investments may once more become centers of political friction.

There are other ways by which the assimilability of an area for capital from abroad may be increased, or its political status rendered more definite. Thus, certain countries which not so long ago were "backward" are rapidly adapting themselves to the industrial culture of the West and at the same time are losing their political weakness. Persia might be mentioned as an example. If the analysis in this chapter is correct, such developments should tend to decrease the likelihood of investment friction arising in these countries.(29) The political determinateness of capital-importing countries Is also increased by every development which tends toward the building up of a strong world federation which can effectively guarantee the territorial integrity and political independence of its members.



The conclusions of this chapter may now be surveyed: In actual cases of investment friction the two rôles of private investment in diplomacy are usually intertwined; that is, the investments serve both as tools and as determiners of policy. Nevertheless, in serious disputes between strong states the rôle of private investments as tools has been the predominant one. Conflicts between great powers over private investment matters have rarely, almost never, reached a state of dangerous international tension except in cases where the powers have been led into conflict by the pursuit of political policies extraneous to the investment affair itself. The best explanation for these facts runs in terms of the way in which those in charge of foreign policies interpret national advantage. Where investments can be regarded as economic aids to established lines of foreign policy, they are supported most vigorously; investments receive least vigorous political backing where they are not in any sense tools of national policy or where they run counter to national policy.

When we turn to the consideration of political friction between strong, capital-exporting states and weak, capital-importing states, on the other hand, difficulties directly incited by investment conflicts are relatively more important. There are more potential economic conflicts between capital-receiving and capital-lending regions than between rival lending regions, and political expediency more readily permits conflicts with weak opponents to develop into acute forms than similar conflicts with strong opponents. Up to the present day, investments have been involved in more serious friction as tools than as instigators of diplomatic policy, but there are reasons for thinking that the situation may be changing.

As for the types of private investment most frequently involved in political friction, our tabulation points to investments (1) by citizens of great powers, (2) in non-industrialized, politically weak countries, (3) under special concessions or other forms of foreign entrepreneurship, (4) for political purposes, (5) in transportation and communication projects. The institutional characteristics of the capital-receiving area, which determine the assimilability of capital from the western, capitalistic world, and the political determinateness of the capital-receiving area, go far to determine whether or not private foreign investments will bring political friction.

Chapter Fourteen

Table of Contents