Abstract
In this paper we test competing hypotheses about the shape of the time-profile of foreign direct investment profitability on a panel of countries. Using partial linearization method we derive the time-profile of the cumulative profitability for the stock of direct investment from aggregate macroeconomic data. By testing the non-linearity hypothesis of the cumulative profitability life-cycle of direct investment we find a cubic curve.
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Notes
EU-15, CEEC-5 (Czech Republic, Hungary, Poland, Slovakia, Slovenia), CEEC-14 (other CEEC including Russia), and other countries (mainly USA, Canada, and Switzerland).
Bulgaria, Czech Republic, Croatia, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia.
\( V_{z} = \sum\nolimits_{{n = 1}}^{\infty } {nFDI_{{z - n}} } /\sum\nolimits_{{n = 1}}^{\infty } {FDI_{{z - n}} } \), where z is time (year) and FDI is inflow of FDI in the year z.
In the particular example above, the non-shaded columns in the figure represent the linear shape of cumulative profitability of FDI. However, in general the size of the columns might not be increasing proportionally and thus the shape of the cumulative profitability might be non-linear.
But usually, the foreign investors try to acquire a majority share of affiliate’s equity capital in order to ensure future dividends.
Commonly accredited to Clement Juglar (1819–1905), ‘short-term cycles’ refer to a period of between 7 and 11 years and were based on historical financial information. Juglar (1889) studied business conditions and confirmed that their actions were not completely random, but generally operated within a number of regular cycles. He described three distinct phases in the cycle, namely prosperity, crisis, and liquidation.
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Novotný, F., Podpiera, J. The profitability life-cycle of direct investment: an international panel study. Econ Change Restruct 41, 143–153 (2008). https://doi.org/10.1007/s10644-008-9045-5
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DOI: https://doi.org/10.1007/s10644-008-9045-5