The Not so Rise of the Corporations

Adrian Ip
foxconn trump China

This is not investment advice. The author has no position in any of the stocks mentioned. has a disclosure and ethics policy.

I remember as a fresh faced youth (ok, a spotty teenager!) playing Bullfrog’s incomparable masterpiece game Syndicate on the Amiga in the early 90’s. Set in a dystopian future where corporations have replaced world governments it was all good fun at the time and I never imagined I may one day be writing about the advancement of corporations and the geopolitical landscape surrounding them but here we are.

In recent years, the advancement of corporations has been a hot topic, probably more so than at any point in history. The digital world has led to the ability of corporations to command vast resources and capital as the making of money becomes a more global enterprise than ever before and the ability of corporations to squirrel their money away in offshore tax havens has somewhat damaged the capitalistic ideals of money finding the most efficient way to allocate itself.

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Chief amongst these issues has been the ability of governments to attract investment and given the global nature of business in the modern age, the discussion inevitably turned towards one of subsidisation. Whether it’s Boeing and Airbus duking it out in at the WTO over government subsidies, the US offering billions in incentives to Foxconn (TPE:2317) or Amazon’s (NASDAQ:AMZN) now failed pursuit of HQ2 in New York, this piece of capitalism (kind of) works in that business will look for the most profitable place to locate itself which fulfils its other requirement criteria.

Amazon – The New York State of Mind

Amazon had a significant courtship with multiple cities in its pursuit of the location for its vaunted HQ2. Ultimately the parade resulted in a somewhat ridiculous bid from the Empire State to effectively subsidise the creation of 25,000 jobs with over $1.5 billion in incentives. Basically enough to pay its employees $61,000/year. Amazon had estimated it would have an average salary of $150,000 at the HQ2 location so in some ways the situation kind of makes sense, but not really. Over the long term, the jobs brought to the area should result in higher tax receipts for the state, lower unemployment and better overall state financial health.

Jeff Bezos, Amazon CEO

The long held premise that government spending is inefficient is probably generally accurate and private enterprise is for the most part more efficient than government allocation of resources, but the subsidisation of business to such an extent is probably overall economically inefficient given that it effectively results in a race to the bottom by cities and regions desperate to attract big business and the investment and high paying jobs they bring.

Amazon, among numerous others has a history of storing profits in offshore tax havens as it looked to legally avoid as much tax as it could (the premise that all companies say they need to do to ensure maximum shareholder value). The global taxation regime is changing but this is inevitably a slow process as the closing of loopholes has to go through governments and there are frequently entrenched interests who want to continue to attract business.

Foxconn – Wisconsin Plans Changing

Even more heavily criticised has been the much touted deal to bring Foxconn to Wisconsin. $4bn worth of incentives for just a 13,000 blue collar job commitment (over $300k/job with incentives scaling up to as much as $1m per job!) attempting to bring electronics manufacturing back to US shores, plans have been significantly scaled back since President Trump and Terry Gou broke ground at the site and company insiders are now expecting approximately 1,000 jobs at the site by the end of 2020 with most of the jobs no longer being planned for manufacturing.

Foxconn stated recently that it couldn’t compete with Chinese manufacturing from Wisconsin, saying it would continue to manufacture LCD panels in China, ship them to Mexico for assembly before importing them to the US. If a $4 billion subsidy isn’t enough to make the business competitive, it seems unlikely that manufacturing will ever genuinely return in any significant numbers to the US and those who have paid over the odds to try to secure such seem to have been chasing unicorns.

Where Now?

This ultimately leaves us asking the question of what next? What is interesting to note is that the power of people does seem to be starting to reign back the rise of the corporations. Amazon’s withdrawal from New York was prompted by public backlash against the heavy subsidies given over to job creation as well as the perceived arrogance with which it pursued the “inviting bids” process from cities all over the US. The governor of Wisconsin who negotiated the Foxconn deal was ignominiously dumped from office with the Foxconn issue apparently being central to the campaign.

The race to the bottom then was begun, but seems to have stalled and quite rightly too. Corporations do a lot for the world, they provide huge amounts of employment in the private sector, tax receipts in the shape of corporation tax (although there are plenty of loopholes for them there), tax receipts in terms of employees paying income tax and not getting benefits as well as a better form of capital allocation than governments can typically manage. It would seem (for now) that they’ve gone for a bridge too far with their attempts to get in bed with politicians and administrators in their pursuit of ever greater profits.

It’s worth noting however that although the subsidisation of private enterprise on one side of the pond is being pushed back against, here in the UK there are different issues as the Labour party which is supposed to be opposing the government doesn’t do a very good job of doing so on the issue of Brexit as it views the EU as anathema in some respects due to its rules prohibiting state aid of business. Rules which are likely to impede the party’s bid to (if it gets in power) re-nationalise certain industries.

These rules were effectively part of what was used to pursue the EU’s subsidisation of Apple (NASDAQ:AAPL) and ultimately concluded that Ireland gave Apple what amounted to effectively illegal state aid via subsidies of approximately €13 billion. It will be interesting to see what avenue corporations pursue next.

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