Reinvested Earnings Bias, the 'Five Percent' Rule and the Interpretation of the Balance of Payments - With an Application to Transition Economies

@inproceedings{Brada2003ReinvestedEB,
  title={Reinvested Earnings Bias, the 'Five Percent' Rule and the Interpretation of the Balance of Payments - With an Application to Transition Economies},
  author={Josef C. Brada and Vladim{\'i}r Tom{\vs}{\'i}k},
  year={2003}
}
We show that the imputation of reinvested profits of the subsidiaries of foreign firms as a debit item on a host country's balance of payments account tends to overstate the current account deficit. We also show that, because of the workings of the FDI financial life cycle, this phenomenon is most evident for countries that have recently received large inflows of capital. The transition economies of East Europe certainly fall among such countries, and we show that, for the Czech Republic and… CONTINUE READING

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