Global FDI-Stock Accumulation: A Question Of Causation

In 2006 and 2007 I worked on my graduation project. The subject of my thesis focused on the integrating world economy by specifically looking at foreign operations in the Netherlands. In this context I gathered data on foreign operations in the Netherlands for the period 1980 to 2005.

Curiously, the United Nations Conference on Trade and Development (UNCTAD) says it has similar data for three countries but they never published these. In that regard, my study explored uncharted waters.  And unfortunately, I could not make any statistical comparison.

It was a time-consuming exercise of finding and indexing data. Though there is plenty of information to be found on foreign firms operational characteristics, there is no information out there to shed light on their individual economic contribution in terms of turnover or profits.

The only usable sources of information are aggregate figures (provided by UNCTAD) on flows of foreign direct investments (FDI). FDI consists of greenfield investments (establishing new operations), brownfield investments (investing in existing operations) and capital investments (mergers and acquisitions, equity stakes, etc.). Since most of FDI is carried out through internationalizing firms, these sets of data correspond to a very high degree. But, there is a discrepancy between FDI-statistics and figures on foreign operations. Minority stakes in equity are capital investments and part of FDI statistics, but do not show up in statistics on foreign operations.

Still, in order to put the economic impact of foreign firms in the Netherlands into perspective I gathered these statistics on FDI-flows and FDI-accumulation. FDI-stock figures are shown in table 1 and can be characterized as quite astonishing.

Table 1: Inward and outward FDI-stock accumulation in the Netherlands – 1980s-2005

FDI-stock accumulation Outward FDI-stock accumulation
1980 $ 19 bn Growth 1980 $ 42 bn Growth
1990 $ 69 bn 258% 1990 $ 107 bn 153%
2000 $ 243 bn 254% 2000 $ 305 bn 185%
2005 $ 463 bn 90% 2005 $ 641 bn 110%

Source: UNCTAD

In 1980, the accumulated foreign direct investments in the Netherlands amounted $19 billion. By 1990 it grew to $69 billion, by 2000 it grew to $243 billion and in 2005 it reached a staggering $463 billion. These figures represent growth percentages of 258% in the 1980s, 254% in the 19990s and 90% in the first 5 years of 21st century. As host economy the Dutch attracted a substantial 10.3% of worldwide FDI-stocks by 2005.

As a home economy, Dutch businesses undertook investments in foreign countries themselves. These investments grew from $42 billion in 1980, to $107 billion in 1990, to $305 billion in 2000, and grew to a staggering $641 billion by 2005. The corresponding growth percentages are 153% for the 1980s, 185% for the 1990s and a 110% for the first 5 years of the 21st century.

Though these growth percentages are lower than those for inward FDI, the Dutch economy can be referred to more as home economy than it is a host economy in terms of nominal investments.

After graduating I thought of these figures when – by coincidence – I was directed to a video on YouTubeI. This video is titled “The most important video you’ll ever see!”. I couldn’t agree more.

It shows a seemingly boring Professor mathematics, but proves to be a pretty interesting lecturer. In this video he explains how the exponential function works. Most important to remember from this video is the number 70.

Divide any growth percentage by 70 and you have calculated the time-frame in which a original base amount is doubled. In other words, if there is a business that promises a 10% increase in profits yearly, it would double its original profit after 7 years. Now, that would be a great stock to have if they actually achieve this.

If you put these two sources of information together we arrive at the point at which you could imagine there is a story to be found with these growth figures. How can it be that in 25 years time inward FDI-stock accumulated 24-fold and outward FDI-stock 15-fold?

The international expansion of businesses – either through established operations (or existing operations) or through investing capital in the Netherlands – had a yearly growth percentage of 13.6%. The doubling rate then is 5.15 years.

For Dutch businesses venturing abroad or investing capital in foreign countries the yearly growth percentage is 11.5%, with a doubling rate of 6.1 years.

Now, there are three possible explanations. First, growth was driven by increasing numbers of businesses that established operations or undertook strategic capital investments in productive businesses. This would mean that it was all about real economic growth. Second, the growth was monetary-driven. This would mean that real growth was stable and thus negligible, meaning that growth was a result of a growing monetary base. Third, it is a combination of these two. This is a question of causation.

I suppose the third option most plausible. Without internationalising businesses there would be no vehicles to carry monetary growth. Any monetary growth is linked to expanding economic activities (and thus increasing levels of collateral), otherwise we would have experienced a period of massive monetary inflation.

The question therefore is: to what extent was FDI-stock accumulation caused by increasing investments in real activities, and to what extent was this accumulation induced by an increasing monetary base, allowing evermore capital investments?

If anyone knows of a way how to solve this numerical exercise I welcome it very much.

Additional Data

I am afraid it cannot be done without more data. For example, it would be very helpful to have FDI-statistics broken down into more specific levels. These behold figures on greenfield investments (new operations), in brownfield investments (continuance of existing operations) and capital investments (mergers and acquisitions, equity stakes, etc.). Unfortunately, FDI-statistics are not this detailed.

The numerical exercise might also be easier by providing statistics on the number of foreign operations and employment involved. In 2003 the Netherlands was a host economy for more than 5.100 operations, contributing 529.000 jobs, or 7% of total employment. Total employment in 1984 totalled to 181.467 employees working at 1.765 foreign operations. In other words, employment-growth vehicled by foreign operations was 192%, and the number of operations grew a 189%.

Dutch GDP figures provide a context for FDI-stock accumulation. Tables 2 and 3 give these figures. Because FDI-statistics are denominated in US dollars, I provided US GDP statistics as well. It may also be helpful to have information on M3 figures. But I do not know whether these investments actually were denominated in dollars, or that these investment are only expressed in US dollars to allow statistical comparison analyses.

Table 2: Macro-economic trends – Gross Domestic Product (GDP) – Size of GDP: Netherlands and United States

Netherlands Growth United States Growth
1980 $138.8 bn $2,768.9 bn
1990 $ 264.1 bn 90% $5,757.2 bn 108%
2000 $467.7 bn 77% $9,764.8 bn 70%
2005 $572.9 bn 23% $12,364.1 bn 27%

Source: OECD Factbook 2009: Economic, Environmental and Social Statistics

Table 3: Relative share of FDI-stock in Dutch GDP

GDP Netherlands Inward FDI-stock accumulation % of GDP Outward FDI-stock accumulation % of GDP
1980 $138.8 bn $ 19 bn 7% $ 42 bn 30%
1990 $ 264.1 bn $ 69 bn 26% $ 107 bn 41%
2000 $467.7 bn $ 243 bn 52% $ 305 bn 65%
2005 $572.9 bn $ 463 bn 81% $ 641 bn 112%

Combination of UNCTAD and OECD statistics from table 1 and 2.

For economic geographers it would also be useful to have FDI-statistics linked to geographic locations. As there is a growing number of economists who study economic geographic patterns with geographic information systems software (GIS), there is a growing need for fine-tuning these statistics. Such studies point out geographic distribution patterns that allow policy-makers to enhance their policies, and allow investors to search for suitable investment locations.

The data-sets I have on foreign operations contain information on these locations, so if there are people out there who want to take a look at getting these in a GIS-program, feel free to contact me.

Concluding Remarks

I have faced a moment of ‘research lock-in’ and I had, nor have I any idea how to approach this analysis. As I see it, it resembles my limitation to explain these growth figures.

Sometimes it is best to just state one is left unsure how these growth figures were established, than to claim it was either this or that. The only sensible thing to state is to name the possible explanations and argue what seems most likely.

As an economist I welcome anyone who can point out what can be done to further enhance our understanding of international economic integration. Do we need to improve our statistics, or have I missed a method that would do the trick? Indeed, it is a question of causation…


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