"This book, first published in 1988, is an attempt to explain the political sources and implications of the policies of one country toward an economic activity of critical importance in determining the nature and scope of the international financial system, the multinational corporation and economic interdependence: the flows of capital across national boundaries."--Provided by publisher.
If a state can choose between arming itself (by extracting resources from its domestic constituents) or seeking allies who will pledge military resources to that state, does there exist an optimal ratio of its own arms to its allies' arms? This question is pursued by analogy with a corporation's ratio of debt to equity in its capital structure. Classical finance theory suggests two propositions which, if applicable to alliances, imply that there is no optimal ratio, but allies will expect greater returns from the alliance if the ratio rises. Recent theories in finance imply that the arms to allies ratio does matter and should decrease in response to increases in either the domestic costs associated with arming or the riskiness of the state's military situation. These propositions are tested using Correlates of War (COW) data. The results do not support the classical arguments as to the irrelevance of the arms to allies ratio and suggest that this measure of military capital structure responds to risk.
The theory of finance demonstrates that diversified investment portfolios produce superior combinations of risk and return, and that investors may choose a portfolio reflecting their preferred mix of risk and return. These techniques may be applied to military alliances. The rate of return and risk of an ally follows a positive linear relationship, as predicted by capital asset pricing theory. Random diversification of allies will, as with investment portfolios, reduce the country-unique components of alliance risk toward that which is inherent in the system as a whole. Some alliances will be more efficient at producing greater return and lower risk. The most efficient alliances will be those in which variations in ally effort move in opposite directions. Development of the demand side of portfolio analysis may predict which alliances are optimal, and therefore most likely to form. These principles are applied to the Triple Entente and Triple Alliance between 1879 and 1914. It is suggested that the Entente had superior efficiency characteristics and that ally choices were consistent with demand patterns.