Working Paper: NBER ID: w13983
Authors: Ellen R. McGrattan; Edward C. Prescott
Abstract: The U.S. Bureau of Economic Analysis (BEA) estimates the return on investments of foreign subsidiaries of U.S. multinational companies over the period 1982--2006 averaged 9.4 percent annually after taxes; U.S. subsidiaries of foreign multinationals averaged only 3.2 percent. Two factors distort BEA returns: technology capital and plant-specific intangible capital. Technology capital is accumulated know-how from intangible investments in R&D, brands, and organizations that can be used in foreign and domestic locations. Used abroad, it generates profits for foreign subsidiaries with no foreign direct investment (FDI). Plant-specific intangible capital in foreign subsidiaries is expensed abroad, lowering current profits on FDI and increasing future profits. We develop a multicountry general equilibrium model with an essential role for FDI and apply the BEA's methodology to construct economic statistics for the model economy. We estimate that mismeasurement of intangible investments accounts for over 60 percent of the difference in BEA returns.
Keywords: Technology Capital; Current Account; Foreign Direct Investment
JEL Codes: F32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| mismeasurement of intangible investments (E22) | measured returns on foreign direct investment (FDI) (F21) |
| technology capital (E22) | profits for foreign subsidiaries (F23) |
| plant-specific intangible capital (O34) | profits for foreign subsidiaries (F23) |
| expensing of plant-specific intangible capital (D25) | lower current profits for foreign subsidiaries (F23) |
| modeling of intangible investments (E22) | observed return differentials (G11) |
| initial investments in intangible capital (E22) | lower reported profits relative to domestic companies (F23) |