How Important is Foreign Direct Investment?

The degree of multinationality of an economy's production is determined by the extent of production in other economies by domestically owned firms, and by production located in the economy in question by foreign-owned firms. In the absence of direct measures, international production (that is, production under foreign ownership) is normally measured at a national level by outward and inward foreign direct investment (FDI) stocks. Unfortunately, the existing practice of reporting FDI stocks on a historical cost basis (i.e. book values) is unsatisfactory, because it does not take into account the age distribution of stocks, thus making accurate international comparisons of FDI stocks almost impossible (see e.g. Cantwell 1984, 1992; Bellak and Cantwell 1996). The authors have reestimated the FDI stocks of Japan, Germany, the U.S., and the U.K. at replacement values using a perpetual inventory model (PIM). The results cast doubt on some of the conventional wisdoms about international production, derived from historic cost data.