The sources of international investment income in emerging market economies

Abstract

We investigate international investment income flows in 26 emerging market countries during the period of 1998-2015. Net investment income registered a deficit for this group of countries of between 2-3% of GDP during this period. This deficit has been dominated by payments on foreign direct investment liabilities, which is consistent with the change in the composition of the external liabilities of these countries. Our results indicate that both capital account and trade openness are associated with the deficits on direct investment income. In addition, there was a small deficit in portfolio investment income, which is affected by the development of domestic financial markets and investor protection. Other investments' income and the income from foreign exchange reserves have a negligible role in total investment income.

The welfare effects of FDI: A quantitative analysis

“…This is seen as a result of the globalisation of financial markets (Forbes et al, 2017) and the expansion of FDI Milesi-Ferretti, 2007, 2018). While the primary income account includes flows from other sources such as portfolio investment as well, Joyce (2020) documents that for emerging markets the key contributor to PIB deficits are FDI-related profit outflows.…”

“…But the trends described above suggest this may no longer be the case. Both Joyce (2020) and Forbes et al (2017) point out that PIB deficits are so large in some countries that they are rivalling the trade balance, thereby significantly affecting the current account balance. This is especially true for emerging markets.…”