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Technology capital and the U.S. current account

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Author Info
Ellen R. McGrattan
Edward C. Prescott

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Abstract

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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Keywords: Econometric models;

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Ellen R. McGrattan & Edward C. Prescott, 2005. "Taxes, regulations, and the value of U.S. and U.K. corporations," Staff Report 309, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  2. Stephanie E. Curcuru & Tomas Dvorak & Francis E. Warnock, 2008. "Cross-Border Returns Differentials," NBER Working Papers 13768, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2006. "An Equilibrium Model of Global Imbalances and Low Interest Rates," 2006 Meeting Papers 894, Society for Economic Dynamics. [Downloadable!]
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  4. Fogli, Alessandra & Perri, Fabrizio, 2006. "The 'Great Moderation' and the US External Imbalance," CEPR Discussion Papers 6010, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Ellen R. McGrattan & Edward C. Prescott, 2003. "Average Debt and Equity Returns: Puzzling?," American Economic Review, American Economic Association, vol. 93(2), pages 392-397, May. [Downloadable!]
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  6. David Backus & Espen Henricksen & Frederic Lambert & Chris Telmer, 2005. "Current Account Fact and Fiction," 2005 Meeting Papers 115, Society for Economic Dynamics.
  7. Enrique G. Mendoza & Vincenzo Quadrini & Jose-Victor Rios-Rull, 2007. "Financial Integration, Financial Deepness and Global Imbalances," NBER Working Papers 12909, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Andrew B. Bernard & J. Bradford Jensen & Peter K. Schott, 2006. "Transfer Pricing by U.S.-Based Multinational Firms," NBER Working Papers 12493, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Carol Corrado & Charles Hulten & Daniel Sichel, 2005. "Measuring Capital and Technology: An Expanded Framework," NBER Chapters, in: Measuring Capital in the New Economy, pages 11-46 National Bureau of Economic Research, Inc. [Downloadable!]
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  10. Ellen McGrattan & Edward C. Prescott, 2007. "Openness, Technology Capital, and Development," NBER Working Papers 13515, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Ricardo Hausmann and Federico Sturzenegger, 2006. "Global imbalances or bad accounting? The missing dark matter in the wealth of nations," Business School Working Papers globalimbal, Universidad Torcuato Di Tella. [Downloadable!]
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  12. Pierre-Olivier Gourinchas & Hélène Rey, 2007. "From World Banker to World Venture Capitalist: U.S. External Adjustment and the Exorbitant Privilege," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 11-66 National Bureau of Economic Research, Inc. [Downloadable!]
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  13. Maurice Obstfeld & Kenneth Rogoff, 2005. "The Unsustainable US Current Account Position Revisited," Center for International and Development Economics Research, Working Paper Series 1063, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
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  1. Ellen McGrattan & Edward C. Prescott, 2007. "Openness, Technology Capital, and Development," NBER Working Papers 13515, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Barry Bosworth & Susan M. Collins & Gabriel Chodorow-Reich, 2007. "Returns on FDI: Does the U.S. Really Do Better?," NBER Working Papers 13313, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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