How Does Foreign Direct Investment Measure Real Investment by Foreign-owned Companies? Firm-level Analysis

Topias Leino and Jyrki Ali-Yrkkö

No 27, ETLA Reports from The Research Institute of the Finnish Economy

Abstract: Abstract We study how Foreign Direct Investment (FDI) measures gross fixed capital formation in foreign-owned companies. Our data include firm-level information on FDI inflows and real investment (Gross Fixed Capital Formation) by foreign-owned companies located in Finland. Our results suggest that the recorded annual inflows of FDI poorly measure annual real investments in foreign-owned companies. Since the beginning of the global recession in 2008, FDI has significantly underestimated real investments by 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 figures 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 present a calculation method for estimating such pass-through funding.

Keywords: Foreign direct investment; Fixed investment; GFCF; Measure; Measurement; Passthrough; Inward; Firm-level (search for similar items in EconPapers)
JEL-codes: E22 F21 F23 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2014-05-15
New Economics Papers: this item is included in nep-cse and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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