Profitability Life Cycle of Foreign Direct Investment and its Application to the Czech Republic

Filip Novotný

The main driver of economic growth in the Czech Republic has been foreign direct investment (FDI). The decisions of foreign direct investors are profit-seeking, so a deterioration in the income balance of the current account has been observed as a consequence. The profitability profile of FDI is estimated on a panel of countries and then applied to the Czech Republic. The FDI profitability life cycle has a non-linear time profile with a duration of between 15 and 16 years. Maximum profitability is reached in the 7th to 8th year after the initial investment. Central and Eastern European (CEE) countries have a higher return on capital compared to the overall sample of countries. Knowing the FDI profitability life cycle enables us to construct various scenarios for the evolution of total FDI earnings depending on the future FDI inflows (changing FDI stock) assumed.

JEL codes: C33, F21, F32

Keywords: Balance of payments, life cycle, profits from FDI

Issued: December 2015

Download: CNB WP No. 11/2015 (pdf, 1.7 MB)