Foreign direct investments bias the net external asset position

Abstract

The bias of the net external asset position (NEAP) which arises from the revaluation of Foreign Direct Investment (FDI) is examined. The bias is defined as the difference between the historical value and the market value of the balance of inward and outward FDI. Possible effects of the revaluation of FDI on the NEAP are discussed theoretically and empirical evidence is given on the magnitude of the bias. It is concluded that the use of NEAP data with FDI at historic cost – as frequently found to test hypotheses in growth theory and finance theory – leads to positively or negatively biased results in countries with a large net-FDI position compared to their NEA