Effective Rates of Return on Direct Investment
The Graph of the Weekshow the effective rates of return on direct investment in the US and abroad. It comes from the article "U.S. International Deficits, Debt, and Income Payments: Key Relationships Affecting the Outlook", by John Kitchen from the January 2007 issue of Business Economics. From the survey:
The observed rate of return for U.S. direct investment abroad has historically been much higher than for foreign direct investment in the United States. The effective rate of return for U.S. direct investment assets abroad during non-recession periods over the past three decades averaged 10.3 percent compared to the much lower 4.9 percent for foreign direct investment assets in the United States. Mataloni (2000), Hung and Mascaro (2004), CBO (2005), and Cline (2005) are among the studies that have examined the issues and possible relationships that lie behind the higher rates of return for U.S. direct investment assets abroad relative to the returns for foreign direct investment assets in the United States. The CBO (2005) study, for example, identifies “three factors [that] may account for the difference in returns on cross-border direct investment,” including greater maturity of business ownership and operations for U.S. subsidiaries abroad than for foreign subsidiaries in the United States, compensation for higher political and economic risks for U.S.-owned assets abroad, and the possible overstatement of profits on U.S.-owned assets abroad for tax reasons. A recent alternative and controversial explanation is that the observed, measured higher effective rates of return result from mis-measurement of the true value of assets, with an understatement of the value of U.S. assets abroad and, hence, the existence of “dark matter” asset valuation (Hausmann and Sturzenegger, 2005, and this issue).
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