Back Matter


Appendix: Methodology and Data Sources

The returns on foreign direct investment (ROIC) presented in Figure 1 have been calculated as follows. For the estimates that are based on IFS data:


where the FDI stock FDIS has been calculated in two ways: (i) at book values


with the depreciation rate δ set at 7.5 percent (δ would be 0 for stocks at historical costs); and (ii) at current costs:


Investment stocks have been computed as cumulative FDI flows from 1970.16

For the estimates based on BEA data for U.S. foreign affiliates INC as referenced below has been used for direct investment income; STK are stocks at historical costs, and stocks at book at current cost have been computed in an equivalent way based on the flow data (FDI), using STK of 1982 as the initial data point (hence understating returns at book and current values).

Return on equity presented in Figure 1 and the other variables used in the regressions are based on U.S. majority-owned affiliates only and are computed as follows:

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Published figures for net income (NIN) include indirectly owned foreign affiliates. As sales (SLS) are for directly owned affiliates only, income had to be corrected to NIND to compute ROS.

Data Sources

All U.S. data have been downloaded from http://www.bea.doc.goV/bea/uguide.htm#_l_24.

1. Capital Account Flows

All data are from the file “Balance of Payments and Direct Investment Position Estimates.” Data are by country of immediate destination/origin of flows and refer to all U.S. foreign direct investment enterprises, adjusted for the share of U.S. ownership.

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2. Financial and Operating Data

Affiliate data refer only to the majority-owned non-bank affiliates of non-bank U.S. parents and all data items refer to the entire affiliate, i.e. including assets held by and income accruing to host country residents or third parties. All flow data are reported in current U.S. dollars, converted at the average exchange rate.

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3. Other variables were obtained from the following sources:
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  • Krugman, P., 1998, Fire Sale FDI, mimeo, available at:

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  • Sarno, L. and M. Taylor, 1999, “Hot Money, Accounting Labels and the Permanence of Capital Flows to Developing Countries: An Empirical Investigation,” Journal of Development Economics, (Vol. 59) pp. 337-364.

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  • UNCTAD, 2000, World Investment Report: Cross Border Mergers and Acquisitions and Development (Geneva: United Nations).

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I am indebted to Christian Mulder for many stimulating discussions that defined the outline of this project. Comments from Monty Graham, Hans-Peter Lankes, Rodolfo Luzio, Anne McGuirk, Marie Montanjees, Krishna Srinivasan, Jarek Wieczorek, Yongzheng Yang, Jeromin Zettelmeyer and from participants in a departmental seminar are gratefully acknowledged. Ray Mataloni assisted with BEA data, Nesse Erbil with other data work, and Mary Jo Marquez with editorial work. The usual disclaimer applies.


UNCTAD (2000) estimates that the share is at least 60 percent.


See Claessens and others (1995) and Sarno and Taylor (1999) for the time series properties of individual components of capital flows


“Net income is calculated by deducting from gross income all costs incurred by the enterprise in connection with operations. Deductions include taxes owed by the enterprise and due for payments, other current transfers payments, and depreciation costs for fixed capital assets.” (IMF, 1996) See also the IMF and OECD publications on the relevant balance of payments categories: IMF (2000b) and OECD (1996).


The estimations assume that the entire capital stock is subject to depreciation and appreciation, which is questionable, given that the U.S. majority-owned affiliates have highly liquid balance sheets.


Eurostat is the only statistical agency that prepares data for a comparable range of countries, though for a much more limited number of data series. Data for the outward investment of U.K. companies yield profitability estimates that are comparable to those computed for U.S. companies. Based on investment stocks at historical costs (hence underestimating returns at book values), averages for the years 1995 to 98 were 11.9 percent for Mexico, 17.1 for Brazil, 13.9 for Malaysia and 20.4 for India.


Emerging markets are the countries listed in Table 2, excluding China, Costa Rica, and the Dominican Republic, for which time series covered only a part of the sample period. High- income countries are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, New Zealand, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.


In addition, country risk may be assumed to raise the cost of capital for funds that are internal to the firm


Though there is no consensus on this issue in the empirical literature: Claessens and others, (1995) and Taylor and Sarno (1999).


See Lane and Milesi-Ferretti (1999) for the methodology.

Foreign Direct Investment in Emerging Markets: Income, Repatriations and Financial Vulnerabillities
Author: Mr. Alexander Lehmann