International Financial Integration*

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A. Data Issues

The methodologies used to construct data on external assets and liabilities can differ both
across and within countries. For the purpose of cross-country comparisons, one
particularly important factor in this regard is the methodology used to estimate the stock of
FDI and portfolio equity investment, and in particular whether these stocks are evaluated
at book or market value. Only few countries (United States, France, and Sweden) provide
estimates of the stock of FDI both at book and market value.¹ Other countries provide only
one set of FDI estimates, most at book value (Australia and Netherlands use market
value). For portfolio equity investment, most countries provide estimates at market value
(Canada, which uses book value, is the exception). Generally, book value estimates
understate the market value of the underlying assets and liabilities.

With regard to the time series dimension, problems can arise because of within-country
changes in the classification of certain types of assets or liabilities. For example, for the
earlier years of the sample portfolio debt investment holdings are included in other
investment holdings in the United Kingdom. More generally, the breakdown of external
assets and liabilities between different categories is available only partially, especially for
the earlier years of the sample.

When studying individual the dynamics of external holdings and rates of return, we have
strived to use a data set as homogeneous as possible, taking into account both structural
breaks and methodological differences in the calculation of assets and liabilities.

¹ The United States provides estimates of FDI abroad and in the US at historical cost,
current cost, and market value. For a discussion of the impact of different FDI valuation
methods, see Pratten (1992) on the United Kingdom, and Eisner and Pieper (1991) on the
United States.

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