Research Discussion Paper – RDP 20 Some Causes and Consequences of Direct Investment Inflows to Australia

Introduction

In this paper we attempt to explain direct investment capital inflows to Australia and the consequential current account outflows. There is an overlap as well as a causal connection between the capital and current account items. Undistributed income of foreign controlled branches and subsidiaries appear twice in the Australian balance of payments as part of direct investment inflow and as part of current account outflow. We explain this item (FIUY) separately and also other direct investment inflow (FIOD) and distributed earnings (MDID$ which includes interest, dividends, and remitted branch profits). To assist in explaining these flows, we have developed a new way of estimating the amount of business assets controlled by direct investment firms (LDIRV).