Over the period 1982–2006, the U.S. Bureau of Economic Analysis (BEA) estimates the return on investments of foreign subsidiaries of U.S. multinational companies averaged 9.4 percent per year after taxes while U.S. subsidiaries of foreign multinationals earned on average only 3.2 percent. We estimate the importance of two factors that distort BEA returns: _technology capital_ and _plant-specific intangible capital_. Technology capital is accumulated know-how from intangible investments in R&D, brands, and organizations that can be used in foreign and domestic locations. Technology capital used abroad generates profits for foreign subsidiaries with no foreign direct investment. Plant-specific intangible capital in foreign subsidiaries is expensed abroad, lowering current profits on foreign direct investment (FDI) and increasing future profits. We develop a multicountry general equilibrium model with an essential role for FDI and apply the same methodology as the BEA to construct economic statistics for the model economy. We estimate that mismeasurement of intangible investments accounts for over 60 percent of the difference in BEA returns.
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Published in _American Economic Review_ (Vol. 100, Iss. 4, September 2010, pp. 2-13), https://doi.org/10.1257/aer.100.4.1493.
An updated version of this paper was published as [Staff Report 406](https://doi.org/10.21034/sr.406) with an accompanying technical appendix, [Staff Report 407](https://doi.org/10.21034/sr.407).