Net Foreign Investment Research Articles

The forward exchange rate and macroeconomics

This paper discusses the conditions under which a risk premium is incorporated in the forward exchange rate. A new condition for the existence of a risk premium is proposed. We show that earlier models of the risk premium, which emphasize either the role of net foreign investment or of the relative supplies of ‘outside’ assets, are not suited for assessing the effects of changes in macroeconomic policy.

Intersectoral capital flows: Evidence from Kenya

Evidence is presented for a large net capital outflow from the agricultural sector in Kenya between 1964 and 1972, increasing over the period. The financial and structural shifts underlying this flow are examined and interpreted. Because of the fragmented financial system in Kenya, most of the funds were not mobilized in a form readily available for re-investment in agriculture or elsewhere in the economy.

Effects of interest rate policy on external balances

The interest rate plays an important but also controversial role in the analysis of economic policy concerning external balances. It is considered an important policy tool in maintaining external balance where exchange rates are fized. 1 R.A. Mundell (1962) in his classic paper on The appropriate use of monetary and fiscal policy for internal and external stability, J.H. Fleming (1962), H.G. Johnson (1967) and others all assumed that high interest rate policies would improve the balance of payments through an improvement in the capital account. The net capital outflow was assumed to be an inverse function of the domestic interest rate. As T.D. Willett and F. Forte (1969) pointed out, these models had three major deficiencies: the use of a flow theory of international capital movements and the failure to take into account the interest cost of capital inflows. A third deficiency of these models is that they overlooked the impact of growth of wealth (portfolios) both in domestic and foreign economies on capital flows. 2 An important consideration in determining the effect of an interest rate policy on external balances, is to account for the time value of money. This is because capital streams occur over a period of time. This point has been overlooked in all previous papers. The only exception is the paper by Lindert (1971) who discounts all payments effects over time. However he addresses himself to the analysis of the impact of foreign investment restriction on the balance of payments and does not consider growth of

SHORT‐RUN INVESTMENT AND FINANCIAL BEHAVIOR OF U.S. DIRECT INVESTORS IN MANUFACTURING*

THIS DISSERTATION examines the short-run relationships between domestic and foreign investment of U.S. manufacturing firms and the financing of such investment. A short-run framework provides results relevant to American balance-of-payments policy; in the long run, repatriated earnings, fees and royalties, and (possibly) increased exports offset some or all of the initial balance-of-payments cost of direct investment. Thus, if direct investment outlays are recouped in the U.S. balance-ofpayments, changes in such outlays affect primarily the timing of balance-of-payments deficits. To maximize a discounted stream of worldwide profits, management of a firm makes interrelated decisions concerning domestic and foreign investment. To the extent that foreign and domestic investment are related, foreign investment, and therefore balance-of-payments flows, will be related to the level of domestic economic activity as it impinges on the firm. In addition, the financing of direct investment may be related to domestic activities of the firm. The decision variables in the study are foreign and domestic plant and equipment expenditures, dividend payments to stockholders, and outflow, defined as net capital outflow less repatriated profits. The last variable represents the immediate effect of direct investment on the balance of payments. In general, foreign investment is a function of sales changes, foreign and domestic income, foreign depreciation allowances, dividends, domestic investment, and the leverage of the firm. Specifically, inducement to invest is represented by lagged sales changes and by expected sales changes, as proxied by the firm's stock price relative to the stock market. The domestic investment equation is specified analogously. The dividend equation follows a typical partial adjustment form but allows for separate reaction to a transitory component of current income. Dividend policy is also allowed to respond to investment and leverage. Net outflow is expected to be positively related to both domestic income and foreign investment and negatively related to foreign income, dividends, and domestic investment. It may be negatively related to domestic investment even if foreign and domestic investment are not substitutes. Separate firm intercepts are used to control long-run differences between firms, and thereby to isolate short-run behavior. Appropriate scaling is made to adjust for existing interfirm differences in foreign activity. The data are then normalized by previous-year capital stock of the appropriate sector (foreign, domestic, or total) of each firm. Two-stage least squares estimation is applied to annual data for 63 large U.S. manufacturing firms. Estimation is for the period 1961-1966, a period in which direct investment was relatively free from capital restrictions of host countries and the United States. A dummy variable represents the impact of firm-level targets in the 1966 U.S. voluntary balance-of-payments program. Its positive but insignificant coefficient suggests that firms, anticipating stricter controls, may have increased their foreign investment.

Auslandsvermögen und Kapitalertragsbilanz der Bundesrepublik

Foreign Assets and Balance of Investment Income of the Federal Republic of Germany The article begins with a surprising statement: Since 1950, the Federal Republic has had a growing surplus of foreign investments over foreign liabilities; but in the same period, up to 1965, the balance of investment income has deteriorated more and more. In comparison, over the same length of time the United States have recorded a mostly parallel development of net foreign investment and the balance of investment income. There is a variety of reasons for this unusual trend in the German balance of payments: 1. There are several defects in the balance-of-payments statistics which result in exaggeration of the deficit on the balance of investment income. 2. After the war, Germany lost her entire foreign assets, while the foreign capital in Germany was still in existence at the end of World War II. 3. Payments by Germany under the London Convention of 1953 reduced interest payments only to a slight extent. 4. The most important item is the foreign investments of the German Bundesbank, which make a high percentage of total foreign investment since 1950. 5. Germany was mainly a net-debtor of long-term private capital, and a netcreditor of capital only to the extent of the transactions of the central government. Germany’s adverse position is shown by the comparison with the U.S. A. 6. The same unfavourable development can be observed ın the case of direct investments. 7. The long-term trend was influenced above all by the undervaluation of the Deutsche Mark by the official exchange rate. 8. The appendix contains several computations of the low investment income from official foreign exchange reserves.

Recent Flows of United States Funds to Underdeveloped Countries

The purpose of this paper is to examine certain aspects of the flow of United States funds to underdeveloped countries during a large part of the past decade. The 1952-58 period is one in which both general interest in, and United States concern with, the problems of raising living standards in underdeveloped countries became more pronounced than ever. The likelihood of large, and probably expanded, levels of economic aid underscores the importance of broadening our understanding of past patterns of international flows to the underdeveloped countries. In order to provide a frame of reference the analysis in the second section of the distribution of United States flows to underdeveloped countries the aggregate trends in levels of both net private investment and net public nonmilitary assistance are summarized first. Next the degree of concentration in private and public flows to underdeveloped countries is examined. The central question asked here is, from the standpoint of the recipient countries how broadly or narrowly have United States funds been distributed during the 1952-58 period? Have U. S. outflows been fairly evenly spread among the recipients, or very concentrated among a relatively small number of people? The concentration of public flows is then examined in detail and the separate contributions of private and public flows to the concentration in total flows are analyzed. The final section attempts to determine the extent to which the concentration in various United States flows has tended to compensate for differences in living standards among countries. I orde to obtain as much consistency as possible in he coverage of private and public outflows the data examined relate to net flows. In the case of private flows the data cover direct inves ments abroad and include net capital outflows and u istributed subsidiary earnings, as reported in the Survey of Current Business of the Commerce Department. Although portfolio investments are excluded, the effect of this omission on the results is undoubtedly a minor one because of the relatively small magnitude of such flows. The United States government flows comprise et nonmilitary grants and long term credits as reported in the Commerce Department's quarterly Foreign Grants and Credits of the United States Government.

Des problèmes économiques que pose la stabilisation de l'activité économique

Economic problems confronted in the stabilisation of business activity Activities capable of generating business prosperity must operate through gross domestic investment, consumer buying, government purchases and net foreign investment. For the United Stales of America, the last is smalt enough to be ignored. The first two both depend upon the decisions of private persons as to future prospects, and all are closely inter-related. To avoid wide fluctuations in a period of increasing productivity requires a constantly growing demand, and the pattern of private demand does not meet this requirement. Government demand is consequently of importance, since it is technically free from economic restraint. The use of credit may also be of importance, for example in increasing demand if there are willing borrowers. At present two-thirds of the United Stales’ labour force produces personal consumption goods ; the rest must be employed in personal investment or by the government. It is variations in employment in this latter group which is the primary cause of most fluctuations. Consequently, private investment needs not only to be maintained, but must actually be increased to ensure full employment, as 1958 has demonstrated. Thus, the government must act to increase demand in recession, since it is the only economic organism with the necessary latitude. Arguments are given for public works being less satisfactory as a stimulus than lax reduction or government purchases of current goods and services, and the author presents statistics which evaluate the practicability and scope of government activities of these kinds. - In conclusion, the author utilises the above arguments in an examination of recent developments in the United Slates.

Major Developments Affecting the United States Balance of International Payments

THE main purpose of this article is to examine those cyclical and structural developments which affect the United States balance of payments developments such as changes in trade and investment patterns and the rising role of government transactions. Some of the problems and pitfalls encountered in the interpretation of balance of payments data are discussed in the course of the argument. The balance of payments of the United States has been of more interest in recent years to those concerned with foreign economies than to those interested in our own. The direct effects of foreign transactions upon United States business activity have been frequently neglected,' as were indirect effects through changes in gold reserves since these could be offset by the Federal Reserve System, because the reserves exceeded the requirements by a sufficient margin. The lack of concern with our balance of payments is also due to the fact that a substantial part of our foreign expenditures, particularly those on government grants and loans and for military purposes, are sometimes considered of marginal importance and subject to reduction in case a deficit in our foreign transactions should have a serious effect on our reserves. Moreover, the possibility that our foreign expenditures may have to be curtailed for balance of payments purposes is usually dismissed because during most years, since the I930's at least, the foreign demand for dollars seems to have exceeded our expenditures abroad and an increase in our foreign expenditures would merely have made it possible to meet a larger portion of the current foreign dollar demand. On the other hand, for the development and stability of foreign economies the United States balance of payments is usually regarded as one of the most importantif not the decisivefactors. Dollar receipts may limit dollar expenditures and thus the purchases from the United States of raw materials and equipment which are required in the operation of foreign economies. Perhaps even more important, dollar receipts by foreign countries affect their monetary reserves, and thus may permit an expansion or force a contraction of international trade, including trade between foreign countries themselves. Because the dollar is used as an international monetary reserve and as a means of settling international accounts, the indirect effects of changes in foreign dollar holdings on foreign economies can be considerably greater than the changes in trade with the United States alone. Because of the multiplier effect of changes in the United States balance of payments, fluctuations in United States business activity are followed with considerable apprehension abroad. Experience in I954 has not borne out these apprehensions. Foreign economies continued to * The opinions expressed in this article are those of the author and do not reflect the official position of the Department of Commerce. 'The relatively minor role in the domestic economy attributed to foreign transactions is to some extent due to the inclusion of net figures in the Gross National Product presentations. It is obvious that net exports or imports, or net foreign investments generally, have to be rather small figures, since the net movement of capital and of reserves is relatively limited. This applies not only to the United States which exports and imports 4 to 5 per cent of its output, but also to countries such as Canada or the Netherlands which sell and buy abroad 30 to 40 per cent of their production. The mere fact that, ex post, exports and imports have to be more or less in balance does not indicate that the ex ante effect of foreign transactions upon the economy also has to be minimal. Changes in exports may have affected output and consumption which in turn result in a corresponding movement in imports. If only net trade is entered in the GNP data and the rise in GNP is shown as a rise in consumption, the usefulness of the GNP data for the interpretation of economic developments is considerably reduced. On the other hand, if gross sales to the rest of the world are shown together with sales to the domestic sectors of the economy, and purchases from the rest of the world are deducted from total sales, the importance of exports becomes more obvious. In the case of the United States for instance, exports of goods and services, excluding military goods and services supplied under grant-in-aid programs, of $I7.8 billion in I954 substantially exceeded consumer purchases of automobiles and parts ($I2.5 billion) or residential nonfarm construction ($I3.5 billion). Furthermore, the rise in exports of goods and services from the third to the fourth quarter of I954 at an annual rate and after seasonal adjustments of $i billion provided as much impetus to the upswing of the economy at that time as the rise in consumer purchases of all durable goods, or the rise in total new construction.

Forecasting Net Foreign Investment

t-MHE first step in forecasting a given statistical magnitude is to know i what it is. In a well-ordered world foreign and would be quantitatively identical, being merely two aspects of same set of transactions. This is not so in world of today. We must therefore note difference. Net exports of United States represent excess of value of all sales of goods and services to foreigners over all purchases from foreigners. The figures for purchases and sales include not only merchandise transactions but also shipping, insurance, tourist travel, interest, dividends, and other service items. The net figure, commonly called the balance of trade, can conveniently be thought of as exports of gross national product, or foreign expenditure on gross national product.' It is an outflow of part of our production. Net foreign investment, in a wellordered world, would represent corresponding net inflow of financial obligations and cash (IOU's) from foreign countries to United States. That is, foreigners would pay for their net purchases from us by (a) selling us either their own stocks and bonds or some of their previously acquired American security holdings; or (b) selling us firms and properties; or (c) giving us claims in form of short-term commercial paper or bank deposits; or (d) selling us gold (a potential claim on foreign countries in general). The first two of these categories constitute what is usually called longterm investment, portfolio and direct. The third constitutes short-term investment, and fourth represents investment by United States in monetary gold. Together these four categories constitute net foreign investment. However varied composition of investment package might be, and however great volume of international transactions in aggregate, net flow of claims would, in our well-ordered world, be precisely equal in numerical magnitude and opposite in direction to net flow of gross national product. On balance, United States would have purchased IOU's with goods and services; foreigners would have acquired goods and services by relinquishing IOU's. The beautiful simplicity of this relationship has been spoiled by war and its aftermath. For well-known reasons, foreign countries have been permitted, since 1940, to acquire large amounts of United States goods and services without relinquishing IOU's. A sizable portion of our net exports has been financed by gifts instead of by loans. Before war, international giving * Associate professor, Cornell University. 1 The practice of treating net investment (and wage) income as if they were receipts from sale of products soils purity of notion that balance of trade represents a net international transfer of gross national product. But statistical convenience of treating net sales of productive services to foreigners as if they were sales of products, together with relatively small magnitude of figure, has been deemed to outweigh advantages of conceptual rectitude.