The Foreign Direct Investment Financial Life Cycle: Evidence of Macroeconomic Effects from Transition Economies

The imputation of reinvested earnings from foreign direct investment (FDI) as a debit in the balance of payments exaggerates the current account deficit. This phenomenon is of major importance for transition economies because they received massive inflows of FDI in the late 1990s. We model the FDI financial life cycle to describe the evolution of profits, reinvested earnings, and repatriated dividends for an FDI project to show that this inflow of investment to transition economies has caused large distortions in their current account deficits. We verify the workings of the FDI financial life cycle and estimate its duration using a sample of eight transition economies.