Effects of the foreign direct investments program on the U. S. balance of payments

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Virginia Tech


This study evaluates the effect of the Foreign Direct Investment Program on the U.S. balance of payments. It fits several simple models to cross-section data reported to the Office of Foreign Direct investments by U.S. multinational firms. With these, estimates of earnings and exports associated with direct investments were made. The reduction in the level of direct investment itself was estimated, using a flexible accelerator model. Finally, the amount of foreign borrowing and associated interest payments induced by the Program were calculated.

It appears that the Program produced a reduction of about $1 billion in each of its first two years. The reduction in subsequent years was substantially less. The internal rate of discount, a key summary measure of the effect of controls, is discussed. Evidence is presented showing that the internal rate of discount associated with reductions in investment is quite high, suggesting that the Program was an inferior policy choice to the extent that it reduced investment itself.

The internal rate of discount associated with foreign borrowing was substantially less. To the extent that the Program induced foreign borrowing, it appears neither clearly better nor clearly worse than policy alternatives.