Profitability Life Cycle of Foreign Direct Investment: Application to the Czech Republic

ABSTRACT

The decisions of foreign direct investors are profit-seeking, so deterioration in the primary income balance of the current account is observed. We estimate the common profitability profile of foreign direct investment (FDI) on a panel of mostly European countries in the period from 1990 to 2015. The FDI profitability life cycle has a non-linear time profile with duration of 16 years. Maximum profitability is reached in the sixth year after the initial investment. We then construct three scenarios for the evolution of total FDI earnings in the Czech Republic depending on the future FDI inflows (changing FDI stock) assumed.

KEY WORDS:

• balance of payments
• life cycle
• profits from FDI

JEL CLASSIFICATION:

• C33
• F21
• F32

Acknowledgments

The author would like to thank the three anonymous reviewers for their helpful comments. The views expressed in this article are those of the author and not necessarily those of the Czech National Bank.

Supplemental Data

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Notes

1. Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, and Slovenia.

2.

(1) $V_z=\frac{{\sum }_{n=1}^{\mathrm{\infty }}nFD{I}_{z-n}}{{\sum }_{n=1}^{\mathrm{\infty }}FD{I}_{z-n}}$(1)

where z is time (year) and FDI is the inflow of FDI in year z.

3. Brada and Tomšík (2003: 22).

4. Their sample of countries comprises nine advanced countries (Austria, Denmark, Finland, France, Germany, Italy, the Netherlands, Portugal, and Sweden) and eight transition countries (the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia).

Additional information

Funding

This work was supported by Czech National Bank Research Project No. D1/14.