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

47 Pages Posted: 17 Jul 2015 Last revised: 3 Feb 2018

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: January 27, 2018

Abstract

On average, foreign corporations save a third of their local profits in the host country. While this is recorded as "Retained Earnings Foreign Direct Investment" (REFDI), macroeconomics has so far overlooked its particularities. This paper explores the aggregate economic properties of REFDI. It also introduces cash-based measures of saving and current account, which correct for REFDI. Using international capital flows (1980-2014), we show REFDI behaves like national saving in its cyclicality. Moreover REFDI deepens the saving-to-investment correlation (Feldstein-Horioka puzzle), unlike the rest of FDI. Importantly, adjusting for REFDI has real effects. In particular the cash-based Sudden Stops – which partial out the REFDI - are tougher than the traditional accrual-based sudden stops. They have slower GDP recovery. Also, we show REFDI lowers the probability of macroeconomic crises, both as flow and as stock. Overall, REFDI is stronger in countries receiving more FDI, and also during the recent commodity boom. Our results have policy implications for macro monitoring of external imbalances. Among others, repatriation tax holidays may trigger sudden outflows of accumulated REFDI.

Note: First version December 2014.

Keywords: External Balance, Macroprudential Regulation, Corporate Saving, Global Imbalance, Repatriation Tax

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 (January 27, 2018). 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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