Firms' financial surpluses in advanced economies: the role of net foreign direct investments

According to macroeconomic predictions firms are expected to be net borrowers: the net change of their financial assets should be smaller than the net change of their financial liabilities. However, since the mid-1990s, the non-financial sector has been on average a net lender in countries such as Japan, the UK, Germany and the Netherlands. Conversely firms remained on average net borrowers in countries such as France, Italy and the US. Using financial accounts, we investigate the sources of corporate sector surpluses and deficits applying panel data techniques. Our statistics include 18 industrial countries over the period 1995-2014. We find that firms' surpluses are structurally linked to net foreign direct investments. The econometric results are robust to the use of variables that control for the business cycle, such as the output gap, the ratio of corporate investment to GDP, firms' profits and leverage, and taxation.