measuring foreign direct investment robert e lipsey

Measuring Foreign Direct Investment

Robert E Lipsey

Four main themes

• Foreign Direct Investment (FDI) – changing perception of its significance

• FDI – is it good proxy for other, more interesting variables such as production, employment, capital investment?

• Tax havens and holding companies – effect on statistics

• Intangible and financial assets – defining their location

Foreign Direct Investment (FDI) – changing perception of its significance

• Traditional view of FDI as a financial flow “one of the ways in which source countries use surplus saving and for the recipients one of the ways in which their capital formation …can be financed”

• Modern view sees “FDI as a vehicle for the transmission of ideas, technological, organisational and business knowledge … through FDI operations, production, employment, investment and R&D”

Share of total employment in manufacturing accounted for by foreign-owned affiliates - 2003

0

10

20

30

40

50

60

Share of R&D in manufacturing accounted for by foreign-owned affiliates - 2003

0

10

20

30

40

50

60

70

80

90

FDI – is it a good proxy for other, more interesting variables such as production,

employment, capital investment?

• “In general, it appears that the US outward investment stock in 1994 and 1999 was fairly well correlated across countries with the aggregate [GFCF] and aggregate employment of US multinationals, but poorly correlated across industries

• “On the inward side, the country distribution of the inward investment stock is closely correlated with the source country distribution of employment and [GFCF]”

US affiliate employment and GFCF as functions of US outward FDI stocks.

Adjusted R² across countries

1994 1999 1994-1999

Employment (total)

.724 .699 .310

Employment (non-bank)

.727 .593 .233

GFCF (non-bank)

.786 .783 .433

Tax havens and holding companies – effect on statistics

• Tax havens– “movable” assets and profits are diverted to tax

havens– Tax havens reported as having massive inward and

outward FDI but little impact on the host country economy (Refco Capital Markets)

• Holding companies– distort both industry and geographical distribution– in 2004 one third of US outward FDI was attributed to

holding companies

Ratio of profit-type return to compensation of employees by non-bank foreign affiliates of US parents

All countries 0.568

Canada 0.489

Netherlands 0.590

United Kingdom 0.238

Hong Kong 0.898

UK Caribbean 2.074

Ireland 5.720

Bermuda 12.889

Barbados 51.781

Intangible and financial assets – defining their location (1)

• “The ability of firms to shift the reported location of intangible assets, sales and profits by paper transactions internal to the firm makes the location of the firm’s production ambiguous”

Intangible and financial assets – defining their location (2)

• “When you buy a pair of sneakers for $250, it’s the swoosh symbol, not the rubber, you pay for”.

• “Most of the assets that are going to be relocated as part of a global repositioning are intellectual assets … that is where most of the profit is”

• Microsoft and Ireland

Intangible and financial assets – defining their location (3)

• Ownership principle may not be applicable to assets that are not location specific.

• “One could suggest that intangible assets should be attributed to the home or main, location of a multinational firm … but that would upset long traditions of both corporate and national accounting. In the meantime, tax planning is eating away at the meaning of our standard measurements.”

Comments

• MNCs, PP&E, RSQs,

• FDI 10%; Foreign-owned affiliates 50%

• Are tax havens disappearing?

• Allocate holding companies to the main industry of the parent enterprise?