Foreign investment and perceptions of vulnerability to foreign exchange crises: evidence from transition economies

The article discusses different causes of financial crises and shows that the imputation of reinvested profits of the subsidiaries of foreign firms as a debit item on a host country's balance of payments account tends to overstate the current account deficit and to make the host country seem more vulnerable to financial crisis. It also shows that, because of the workings of the foreign direct investment financial life cycle, this phenomenon is most evident for countries that have recently received large inflows of capital. The transition economies of East Europe certainly fall among such countries. Authors verify the working of the foreign direct investment financial life cycle using a panel of transition economies.