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  • Measuring FDI and Its Impact

    on the Danish Economy

    Ph.D. Thesis by

    Jannick Damgaard


    Ulrich Kaiser

    Nikolaj Malchow-Møller

    Department of Business and Economics

    University of Southern Denmark

    March 2011

  • Preface


    The thesis at hand is the outcome of my Ph.D. studies that have taken place at Danmarks

    Nationalbank, University of Southern Denmark, and the International Monetary Fund (IMF)

    in the past few years. I am grateful to Danmarks Nationalbank for financing my studies and

    to the IMF for the hospitality shown me during my four-month stay in Washington DC.

    I am indebted to a number of people. First of all, I would like to thank my advisor,

    Ulrich Kaiser, for encouraging me to start my Ph.D. studies and for his continued support

    and inputs throughout the entire project. The constructive advice and suggestions received

    from my second advisor, Nikolaj Malchow-Møller, are also highly appreciated. I am grateful

    to Thomas Elkjær for his support; both when he was my manager at Danmarks Nation-

    albank, and later when he joined the IMF. I am also thankful to my current manager at

    Danmarks Nationalbank, Niki Saabye, for his open-door policy and readiness to discuss any

    issue that was on my mind. I thank colleagues from Danmarks Nationalbank, the IMF,

    and the European Central Bank for countless fruitful discussions on topics related to the

    compilation and economic impact of FDI. Additionally, I have enjoyed the company of my

    fellow Ph.D. students at Danmarks Nationalbank, and I would like to express my gratitude

    to my “office mate”, Allan Sall Tang Andersen, for exchanging ideas and making the days

    in the office enjoyable and inspiring. I thank Palle Bach Mindested, Lars Jul Overby, and

    Robert Wederkinck for regularly stopping by the office and for their interest and support

    in relation to my Ph.D. project. Finally, I have benefited from the enormous helpfulness of

    Robert Evans and his linguistic and general remarks on the thesis.

    As always, any remaining errors are the responsibility of the author alone, and the views

    expressed in the thesis are those of the author and do not necessarily represent the views of

    Danmarks Nationalbank.

    Copenhagen, March 2011

    Jannick Damgaard


  • Table of Contents

    Table of Contents

    Abstract iv

    Dansk resumé (Abstract in Danish) vi

    Introduction 1

    Essay 1 4

    FDI and the External Wealth of Nations: How Important is Valuation?

    Essay 2 26

    Forecasting FDI Equity Income for the Danish Balance of Payments

    Essay 3 51

    Productivity Spillovers from FDI: Ownership Structures, Domestic Firm Characteristics, and FDI Characteristics


  • Abstract


    The thesis consists of an introduction and three essays related to the measurement of

    foreign direct investment (FDI) and its impact on the Danish economy; each essay is self-


    The first essay (FDI and the External Wealth of Nations: How Important is Valuation? )

    studies the importance of FDI equity valuation methods. The balance sheet approach used

    in macroeconomic analysis has increased the focus on stocks of external assets and liabilities,

    but different valuation practices for FDI positions make cross-country comparisons difficult.

    To enhance comparability, the recently adopted IMF Balance of Payments and International

    Investment Position Manual, Sixth Edition, introduces seven valuation methods for unlisted

    FDI equity. This essay identifies the most generally applicable methods in terms of data

    requirements and demonstrates, using the Danish international investment position (IIP),

    that both the choice of valuation method and estimation technique can still fundamentally

    change a country’s external wealth data. For the Danish IIP, the application of different

    estimation techniques within the commonly used price-to-earnings method generates vari-

    ation in FDI equity liabilities amounting to 131 percent of the Danish GDP, pointing to

    the need for further international harmonization. The price-to-book value method generates

    more robust market value estimates than the price-to-earnings method, suggesting that the

    valuation basis for the forthcoming Coordinated Direct Investment Survey — own funds at

    book value — will provide useful information for compiling the IIP.

    The second essay (Forecasting FDI Equity Income for the Danish Balance of Payments)

    addresses the late and significant revisions that are often observed in FDI equity income in

    many countries, hampering the quality of preliminary balance of payments statistics. The

    empirical study tests a range of models on Danish data and finds that forecasts for FDI

    equity income based on a combination of past profitability and consensus data for changes

    in expected private consumption growth outperform forecasts solely based on historical prof-

    itability. When the refined models are applied to the Danish balance of payments, the largest

    improvements are observed for outward and inward FDI separately. Revisions of net FDI

    equity income only decrease marginally because the significant revisions in gross terms re-

    sulting from the historical models have a tendency to (partly) cancel out each other on a net


    The third and final essay (Productivity Spillovers from FDI: Ownership Structures, Do-

    mestic Firm Characteristics, and FDI Characteristics) is unique in testing the importance

    of the foreign ownership definition when estimating productivity spillovers from FDI to do-

    mestic firms; a crucial aspect in countries with a widespread use of holding companies. In


  • Abstract

    addition, it moves beyond the standard framework by not only analyzing aggregate pro-

    ductivity spillovers, but also testing the importance of both domestic firm characteristics

    and FDI characteristics. The empirical analysis is the first one to exploit the rich details

    offered by official Danish firm-level panel data. The analysis displays significant evidence of

    negative spillovers at the aggregate level, but the results differ widely across industries. It

    also reveals that not including firms under indirect foreign control in the group of foreign

    firms, as is done in some studies, leads to biased results. With regard to domestic firm

    characteristics, high export orientation and high competition mitigate some of the negative

    productivity spillovers. Finally, the estimations show that the negative spillovers largely

    stem from foreign firms (i) with low productivity, (ii) with high foreign trade orientation,

    and (iii) ultimately controlled by investors outside Scandinavia.


  • Dansk resumé (Abstract in Danish)

    Dansk resumé (Abstract in Danish)

    Afhandlingen best̊ar af tre essays, der omhandler måling af direkte investeringer og deres

    betydning for dansk økonomi; hvert essay kan læses selvstændigt.

    Det første essay (FDI and the External Wealth of Nations: How Important is Valuation? )

    undersøger betydningen af metoderne, der benyttes til at værdisætte direkte investeringer.

    Brugen af balancetilgangen i makroøkonomisk analyse har øget fokus p̊a beholdninger af

    aktiver og passiver over for udlandet, men forskelle i værdisætningsprincipperne gør det

    vanskeligt at sammenligne data p̊a tværs af lande. For at forbedre sammenligneligheden

    har IMF i den nyligt publicerede betalings- og kapitalbalancemanual (BPM6 ) introduceret

    syv metoder til at værdisætte direkte investeringer i unoterede virksomheder. Dette papir

    identificerer de mest anvendelige metoder med hensyn til datatilgængelighed og viser med

    udgangspunkt i den danske kapitalbalance, at b̊ade valget af værdisætningsmetode og es-

    timationsteknik stadig kan ændre data for kapitalbalancen fundamentalt. Anvendelsen af

    forskellige estimationsteknikker til beregning af det bredt anvendte kurs/indtjeningsforhold

    genererer en forskel i værdien af direkte investeringer (egenkapital, passiver) p̊a 131 procent

    af det danske BNP og illustrerer dermed behovet for yderligere international harmonisering.

    Kurs/indre værdi er mere robust er kurs/indtjening, hvilket tyder p̊a, at værdisætningsme-

    toden til IMF’s kommende Coordinated Direct Investment Survey — indre værdi — vil

    indeholde værdifuld information til opgørelse af kapitalbalancen.

    Det andet essay (Forecasting FDI Equity Income for the Danish Balance of Payments)

    omhandler de markante revisioner af formueindkomsten fra direkte investeringer i forbindelse

    med den årlige revision af betalingsbalancens løbende poster, som har en negativ effekt p̊a

    anvendeligheden af de foreløbige opgørelser. Papiret tester en række modeller og konkluderer,

    at skøn for formueindkomsten fra direkte investeringer baseret p̊a en kombination af historisk

    egenkapitalforrentning og ændringer i konsensusdata for den forventede forbrugsvækst er

    mere nøjagtige end de hidtidige skøn, der alene var baseret p̊a den historiske egenkapitalfor-

    rentning. N̊ar de nyudviklede modeller anvendes