At its height in the early 20th century, the British Empire comprised almost one-quarter of the world’s land surface and population. In fact, “the empire on which the sun never sets”, as it was known, had a significant presence in at least 94 present-day countries (almost half the world total).
However, it was in the previous century that Great Britain grew indomitable, commanding control over global trade and economics, even in regions that were outside its formal boundaries.
The sheer military, political, economic and cultural influence of 19th-century Britain (Pax Britannica), made it quite possibly the most hegemonic superpower the world has ever known. Out of its global system emerged multinational companies (private and public) that undertook the earliest forms of what one would now call foreign investment.
Britannia rules the seas of investment
Foreign investment is one of the key parts of modern day globalisation, but its roots go way back to British colonial era.
Although many of the economic activities under Britain's former empire may not meet current definitions of foreign direct investment (FDI) or foreign portfolio investment (FPI), foreign investment in the wider sense was very much alive and well.
Loans and stock markets aside, many 19th-century British companies were involved in sophisticated forms of FDI that included “direct investment; joint ventures; licensing; strategic alliances; subcontracting; triangle manufacture; agency management; systematic buying; branch and agency business; joint purse and leasing arrangements; cartel arrangements; facilitated control; and coordination in transnational webs of enterprise”, wrote professor of economic geography, Gordon M Winder, in a paper from the University of Auckland.
In particular, the 19th and early 20th centuries saw vast sums of capital invested by the British in overseas enterprises. Precise estimates vary, but there is general agreement that by 1914 the country was, by far, the world’s leading creditor and bank.
Between 1865 and 1914, as much British investment went to Africa, Asia and Latin America as to the UK itself, according to an academic paper from the University of Cornell. While in the years between 1871 and 1913, some 4–8% of gross national product was being sent out of the country by British investors, a number that was significantly higher than that for other developed countries at the time.
Between 1860 and 1912, British firms operating in the empire had higher returns than domestic enterprises, and also outperformed British companies operating overseas outside the empire. William N Goetzmann, Yale University
Investing in colonised countries was a particularly lucrative exercise. “Between 1860 and 1912, British firms operating in the empire had higher returns than domestic enterprises, and also outperformed British companies operating overseas outside the empire,” wrote William N Goetzmann from Yale University.
Within the empire, ease of doing business was very high for British companies, and therefore profits too, since the resources and workforce of subject countries were largely at the mercy of the British authorities. For lenders, however, foreign loans to poorer countries (in or out of the empire) came with high rewards, but high risks too.
“By 1843, British citizens were believed to hold more than ₤120m of foreign bonds, including those of the American states, but at least ₤50m were in default with dividends anything from five to 25 years overdue,” wrote Goetzmann.
Nonetheless, the 1800s was the belle époque for the empire and its investors, but the origin of this success began long before that era, back in the 16th century when Britain began establishing overseas colonies.
The world’s first foreign investors
Foreign investment was born out of the earliest days of international trade and finance.
Britain’s first known joint-stock company in its domestic base was the Russia Company, formed in 1553 by a group of London merchants on an expedition to seek a north-east passage to China and the Indies. The ships landed in Archangel, and the company made a charter giving it a monopoly of trade in Russia.
“Investors in the Russia Company were not making an international investment in the strictest sense, because their capital was not all deployed abroad," according to Goetzmann. "Nonetheless, the risks that the company faced were international in nature.”
The most famous chartered company (and one of the earliest) was the East India Company, which was also an international trade enterprise. Joint-stock companies were formed for the colonisation of Virginia (1606), Bermuda (1611), Guiana (1619), New England (1620) and Nova Scotia (1621), according to Goetzmann. By 1620, the East India Company had nearly 1,000 shareholders and a subscribed stock of ₤1.63m.
These multinational enterprises were the precursors to the British Empire, laying the framework for the more sophisticated practices of FDI or FPI in the centuries to come —most of which involved the construction or funding of infrastructure abroad (such as railways), or the extraction of natural resources in colonial nations.
The first foreign government loan was issued in London in 1706 (for ₤500,000) on behalf of the Emperor of Germany, but Britain was lending much further afield by the 19th century, both in and out of the empire.
Of the different types of securities quoted on the London Stock Exchange in 1843, loans to foreign governments represented 11% of the securities, as well as private international enterprises such as the East India Company, the South Sea Company, and 24 foreign mining companies.
In fact, by 1875, foreign investment was so popular that the government appointed a committee to investigate why so many foreign loans were defaulting, with a special focus on Honduras, San Domingo, Costa Rica and Paraguay.
The inventions that forged foreign investment
Of course, none of the above would have been possible without Britain’s impressive naval prowess.
In fact, there were many innovations that underlay the empire’s success and the FDI spending spree of the 1800s. Of these, the telegraph was key.
By 1870, with the development of the electric telegraph network, British investors could receive news concerning political events worldwide, economic and trade news, and even news regarding the weather and the storms affecting the crops in the colonies. William N Goetzmann
“The English were the first to lay submarine cables, and are now far in advance of the rest of the world in their manufacture, and in machinery for laying them,” wrote George B Prescott in his 1860 book, History, Theory, and Practice of the Electric Telegraph.
By that year, nearly 100 submarine cables totalling more than 40,000km had been laid around the world to connect Britain with the US, Europe, India, Africa, Asia and Russia. In the 1860s, it took eight-and-a-half hours for a telegraphic message to go from London to India, and transmission speeds improved exponentially in the decades to come.
The telegraph changed the nature of international business, and was quickly adopted by the financial community. London was connected to all European financial centres – New York (1866), Melbourne (1872) and Buenos Aires (1874) – as well as more remote locations. Goetzmann writes that by 1871 the annual volume of telegrams between London and New York reached 42,000. After the telegram, it was the telephone service that revolutionised foreign investment.
“These technological developments changed the informational environment of British investors," wrote Goetzmann. "By 1870, with the development of the electric telegraph network, British investors could receive news concerning political events worldwide, economic and trade news, and even news regarding the weather and the storms affecting the crops in the colonies.”
Upheld by its technological dominance, the British Empire provided individuals and companies with a highly attractive (albeit sometimes risky) market for international trade, investment and finance. However, given the colonial dynamic of ruler and ruled, such activity was often nothing more than the legal pillaging of foreign lands and people. It is from this dark heritage that globalisation was born, something that has sustained the UK's mighty powers of foreign investment to this day.