The recorded annual inflows of foreign direct investment (FDI) measure annual real investments in foreign-owned companies rather poorly, according to the research report How Does Foreign Direct Investment Measure Real Investment by Foreign-owned Companies? Firm-level Analysis (ETLA Reports 27). The authors, Topias Leino (Bank of Finland) and Jyrki Ali-Yrkkö (ETLA) have found out that FDI has significantly underestimated real investments by foreign companies in Finland since the beginning of the global recession in 2008.
According to the study FDI target enterprises use other sources of funding in addition to FDI. On the other hand Finland’s FDI figures increasingly consist of funds that merely pass through the FDI enterprises and subgroups, arguably with little or no real economic linkage to the Finnish economy.
A few large transactions, often related to crossborder mergers and acquisitions, can explain a great deal of the recorded annual FDI flows. As regards crossborder mergers and acquisitions, capital recorded as FDI is not invested in the target company, but is received by previous owners.
The data of the study included firm-level information on FDI inflows and real investment (Gross Fixed Capital Formation) by foreign-owned companies located in Finland.
Invest in Finland provided funding for the project.
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