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Technology capital and the U.S. current account

  • Ellen R. McGrattan
  • Edward C. Prescott

The rate of return on capital of U.S. foreign subsidiaries has been much higher than the rate of return on capital of U.S. affiliates of foreign companies. Over the period 1982-2005, the U.S. Bureau of Economic Analysis (BEA) estimates that the difference in returns, after subtracting taxes, averaged 6.3 percent per year. One explanation explored in this paper is the fact that multinationals make large intangible investments that affect profits but are excluded from BEA capital stock measures. Differences in reported returns on foreign direct investment (FDI) could exist if there were differences in the timing and magnitude of these foreign intangible investments. We explore this possibility using a growth model with two types of intangible capital: plant-specific intangible capital and technology capital. Technology capital is accumulated know-how from investments in research and development (R&D), brands, and organizations that can be used in as many available locations as firms choose. As countries open up, there are gains to foreign direct investment with more locations available in which to put technology capital. We choose parameters of our model to mimic the U.S. current accounts and find that the mismeasurement of incomes and capital stocks accounts for a little over half of the difference in reported returns.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 646.

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Date of creation: 2007
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Handle: RePEc:fip:fedmwp:646
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