The Reinvestment of Multinationals as a Capital Flow: Crises, Imbalances and the Cash-Based Current Account

35 Pages Posted: 17 Jul 2015 Last revised: 18 Nov 2021

See all articles by Erwin Hansen

Erwin Hansen

University of Chile - Department of Business Administration

Rodrigo Andres Wagner

UAI Business School ; Growth Lab - Harvard University (Center for Int. Development)

Date Written: October 12, 2021

Abstract

When the affiliate of a foreign corporation saves a dollar of its profits, the host country records
it as an inflow of retained earnings foreign direct investment (REFDI). If invested, this dollar
arithmetically generates a current account deficit, even though cash does not cross borders.
This study explores the empirical macroeconomic of REFDI, which globally comprises half of
FDI inflows. Using international capital flows (1980–2018), we show that REFDI behaves like
national savings in its procyclicality. Unpacking FDI in the analysis also makes a difference in
the investment cycle. Moreover, we decompose the long-run saving-to-investment correlation,
finding a role for REFDI in the Feldstein-Horioka puzzle. Adjusting the current account for
REFDI matters since REFDI lowers the probability of macroeconomic crises and sudden stops.
Overall, REFDI is stronger in countries receiving more FDI and it was also strong during the
recent commodity boom. We are not challenging that the balance of payments works on nationality
and accrual bases. However, our results suggest that the external balance assessment of
countries should adjust for REFDI because it tends to have a different propensity to be invested
and to build up vulnerabilities.

Note: First version December 2014.

Keywords: Foreign Direct Investment, External Balance, Corporate Saving, Global Imbalance, Repatriation Tax, TCJA

JEL Classification: F32, F21, F38, F41, G3

Suggested Citation

Hansen, Erwin and Wagner, Rodrigo Andres, The Reinvestment of Multinationals as a Capital Flow: Crises, Imbalances and the Cash-Based Current Account (October 12, 2021). Available at SSRN: https://ssrn.com/abstract=2631246 or http://dx.doi.org/10.2139/ssrn.2631246

Erwin Hansen

University of Chile - Department of Business Administration ( email )

Diagonal Paraguay 257
Santiago, 8330015
Chile

Rodrigo Andres Wagner (Contact Author)

UAI Business School

Diagonal Las Torres 2700
Penalolen
Santiago
Chile

HOME PAGE: http://https://sites.google.com/site/rodrigoawagner

Growth Lab - Harvard University (Center for Int. Development) ( email )

79 John F. Kennedy Street
Cambridge, MA MA 02138
United States

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