The earnings of a country’s multinational firms appear in its balance of payments in the primary income component of the current income balance. Primary income includes the net flow of income received for the provision of a factor of production, such as labor, financial or other assets, to and from nonresidents. Investment income is usually the largest component of these income flows, and income from FDI appears there with income from portfolio and other types of investments (such as banks) as well as income from the central bank’s reserves.
The countries with the largest net flows of foreign direct investment income in 2021 were:
U.S. $348.9 billion
Japan $95.4 billion
Germany $90.4 billion
France $54.1 billion
Netherlands $34.7 billion
U.K. $25.6 billion
(The Netherlands data exclude income flows associated with Special Purpose Entities, which serve as conduits for FDI flows.)
The ranking of countries by FDI income receipts can be compared with the listing of countries by the number of multinational firms with headquarters located in their borders. Pizzola, Carroll and Mackie (2020) of Ernst & Young provide a ranking of countries by the number of Fortune Global 500 firms headquartered in their jurisdictions. The U.S., Japan, France, Germany and the U.K. all appear at the top of the list. But the country at the number one position with the largest number of multinationals is China. Why doesn’t China also appear in the list of top FDI recipients?
There are several answers. First, China does not report the values of the components of its primary income, so we do not know what its net FDI income is. But it does report total net primary income, and that balance has almost always been negative. If FDI income is the largest component of primary income as it is for many other emerging market countries, then it has been contributing to the primary income deficit.
Second, while China is a net creditor nation with an overall net international investment position in 2021 of $2.2 trillion, its direct investment assets are less than its liabilities: $2.79 trillion vs $3.60 trillion, or net $ -0.82 trillion, according to the IMF’s Balance of Payments data. Similarly, while China has become a major source of FDI outflows, FDI inflows are larger: $178.8 billion in the acquisition of assets vs. $344.1 in the acquisition of liabilities in 2021. As long as investments into China exceed its own foreign acquisitions, the flow of income derived from these activities will be negative.
Brad Setser of the Council of Foreign Relations has also written about China’s primary account. He is puzzled by is decline in the decline in the balance in the second quarter of 2022 at a time when foreign holdings of Chinese bonds were falling. He also writes that:
“China was locked down and its economy shrank—not an ideal environment for foreign firms to make large profits.”
Pizzola, Carroll and Mackie point out that the headquarters of the multinational firms have over time shifted away from the U.S. and other members of the Group of 7 nations (Canada, France, Germany, Italy, Japan, U.K., U.S.) While the U.S. still accounts for the second largest number of headquarters, its total declined between 2000 and 2020. Japan also registered a decline in the number of multinational firms headquartered there. As other counties become the headquarters of multinational firms, their FDI income receipts will rise as well
The primary account balance plays an important role in many countries’ current accounts. In China, for example, in 2022 the surplus in the current account of $401.9 billion was smaller than the trade balance surplus of $576.3 billion because of the deficit in the primary account of $193.6 billion. (Secondary income, which includes remittances, registered a surplus of $19.1 billion.) It would be useful to have the full data on primary income to understand what is driving this component of China’s balance of payments.