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Foreign Direct Investment and the External Wealth of Nations: How Important Is Valuation?

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  • Jannick Damgaard
  • Thomas Elkjaer

Abstract

type="main"> While the balance sheet approach has increased the focus on position data, differences in valuation practices for foreign direct investment (FDI) make cross-country comparisons difficult. To enhance comparability, the IMF's Balance of Payments and International Investment Position Manual, sixth edition, which some countries have already implemented and others will implement in the coming years, recommends seven methods for valuation of unlisted FDI. This paper demonstrates that both the valuation method and simple differences in estimation techniques can fundamentally change a country's financial balance sheet. Using Denmark as an illustration, unlisted FDI equity liabilities vary from 22 to 156 percent of GDP when applying different estimation techniques, but just one valuation method, price to earnings. These measurement uncertainties can lead to important misunderstandings and affect policy recommendations, thus pointing to the need for further international harmonization. While the results are presented in an FDI context, the uncertainties also apply to other macroeconomic datasets, including national accounts statistics.

Suggested Citation

  • Jannick Damgaard & Thomas Elkjaer, 2014. "Foreign Direct Investment and the External Wealth of Nations: How Important Is Valuation?," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 60(2), pages 245-260, June.
  • Handle: RePEc:bla:revinw:v:60:y:2014:i:2:p:245-260
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    File URL: http://hdl.handle.net/10.1111/roiw.12098
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    References listed on IDEAS

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    1. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2001. "The external wealth of nations: measures of foreign assets and liabilities for industrial and developing countries," Journal of International Economics, Elsevier, vol. 55(2), pages 263-294, December.
    2. Thomas Elkjaer & Jannick Damgaard & Emmanuel O. Kumah, 2009. "Valuation of Unlisted Direct Investment Equity," IMF Working Papers 2009/242, International Monetary Fund.
    3. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
    4. Mr. Brad Setser & Nouriel Roubini & Mr. Christian Keller & Mr. Mark Allen & Mr. Christoph B. Rosenberg, 2002. "A Balance Sheet Approach to Financial Crisis," IMF Working Papers 2002/210, International Monetary Fund.
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    Cited by:

    1. Konrad Sobanski, 2015. "Valuation Effect As A Determinant Of The International Investment Position In Central And Eastern European Economies," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 10(3), pages 151-164, September.
    2. Damgaard, Jannick & Elkjaer, Thomas & Johannesen, Niels, 2024. "What is real and what is not in the global FDI network?," Journal of International Money and Finance, Elsevier, vol. 140(C).
    3. Paul Allin & David J. Hand, 2017. "From a System of National Accounts to a Process of National Wellbeing Accounting," International Statistical Review, International Statistical Institute, vol. 85(2), pages 355-370, August.
    4. Ergen, Timur & Kohl, Sebastian & Braun, Benjamin, 2021. "Firm foundations: The statistical footprint of multinational corporations as a problem for political economy," MPIfG Discussion Paper 21/5, Max Planck Institute for the Study of Societies.

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