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Reinvested Earnings Bias, The ???Five Percent??? Rule and the Interpretation of the Balance of Payments ??? With an Application to Transition Economies

Author

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  • Josef C. Brada

    ()

  • Vladim??r Tom????k

    ()

Abstract

We show that the imputation of reinvested profits of the subsidiaries of foreign firms as a debit item on a host country's balance of payments account tends to overstate the current account deficit. We also show that, because of the workings of the FDI financial life cycle, this phenomenon is most evident for countries that have recently received large inflows of capital. The transition economies of East Europe certainly fall among such countries, and we show that, for the Czech Republic and Hungary, this imputation has a large effect on their reported current account balance. We verify the working of the FDI financial life cycle using two different panels of developed, developing and transition economies.

Suggested Citation

  • Josef C. Brada & Vladim??r Tom????k, 2003. "Reinvested Earnings Bias, The ???Five Percent??? Rule and the Interpretation of the Balance of Payments ??? With an Application to Transition Economies," William Davidson Institute Working Papers Series 543, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:2003-543
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    Cited by:

    1. Tetiana Rodionova, 2013. "Structural Risks of Foreign Liabilities: Impact of Investment Income Repatriation in Emerging Economies," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 20(2), pages 119-129, October.
    2. Özlem Onaran, 2007. "International financial markets and fragility in the Eastern Europe: "can it happen" here?," Department of Economics Working Papers wuwp108, Vienna University of Economics and Business, Department of Economics.
    3. Eva Zamrazilová & Václav Žďárek, 2014. "Two Czech crises revisited: pantarhei," Chapters,in: Financial Cycles and the Real Economy, chapter 8, pages 114-144 Edward Elgar Publishing.
    4. W. Altzinger, 2008. "The Profitability of Austrian Foreign Direct Investment - Reinvestment or Repatriation?," FIW Research Reports series I-010, FIW.
    5. Wilfried Altzinger & Leon Podkaminer & Robert Stehrer, 2006. "Monthly Report No. 3/2006," wiiw Monthly Reports 2006-03, The Vienna Institute for International Economic Studies, wiiw.
    6. Gábor Oblath & Andrzej Slawinski & Arno Tausch, 2006. "Monthly Report 7/2006," wiiw Monthly Reports 2006-07, The Vienna Institute for International Economic Studies, wiiw.
    7. Václav Žďárek, 2009. "Moderní způsoby produkce a přímé zahraniční investice
      [Modern methods of production and foreign direct investment]
      ," Politická ekonomie, University of Economics, Prague, vol. 2009(4), pages 509-543.

    More about this item

    Keywords

    balance of payments; financial crisis; foreign direct investment; transition economies;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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