Research Discussion Papers, Bank of Finland
No 12/2014:
How well does foreign direct investment measure real investment by foreign-owned companies? – Firm-level analysis
Topias Leino ()
and Jyrki Ali-Yrkkö
Abstract: We study Foreign Direct Investment (FDI) as a measure of
real investment (gross fixed capital formation) in foreign-owned companies.
Our data include firm-level information on FDI in-flows and real investment
of foreign-owned companies located in Finland. Our results suggest that the
recorded annual inflows of FDI do not constitute an accurate measure of
annual real investments in foreign-owned companies. Since the beginning of
the global recession in 2008, FDI inflows have significantly underestimated
real investments in foreign companies in Finland. We seek to explain these
findings by describing Finnish FDI target enterprises and subgroups and the
nature of their FDI flows from several perspectives. We show how FDI target
enterprises use other sources of funding, in addition to FDI, and how a few
large transactions, often related to cross-border mergers and acquisitions,
can explain a great deal of the recorded annual FDI flows. We also describe
how Finland’s FDI stock and flow data increasingly consist of funds that
merely pass through the FDI enterprises and subgroups, arguably with little
or no real economic linkage to the Finnish economy, and we present a method
for estimating such pass-through funding.
Keywords: foreign direct investment; gross fixed capital formation; investment; measurement; pass-through investments; (follow links to similar papers)
JEL-Codes: E22; F21; F23; (follow links to similar papers)
32 pages, May 15, 2014
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