IDEAS home Printed from https://ideas.repec.org/a/eee/jimfin/v140y2024ics0261560623001729.html
   My bibliography  Save this article

What is real and what is not in the global FDI network?

Author

Listed:
  • Damgaard, Jannick
  • Elkjaer, Thomas
  • Johannesen, Niels

Abstract

Macro statistics on foreign direct investment (FDI) are blurred by offshore financial centers with enormous inward and outward investment positions. This paper uses new data sources, both macro and micro, to estimate the global FDI network while disentangling real investment and phantom investment and allocating real investment to ultimate investor economies. We find that Phantom FDI into corporate shells with no substance and no real links to the local economy accounts for around 40 percent of global FDI. Ignoring Phantom FDI and allocating Real FDI to ultimate investors increases the explanatory power of standard gravity variables by around 25 percent.

Suggested Citation

  • Damgaard, Jannick & Elkjaer, Thomas & Johannesen, Niels, 2024. "What is real and what is not in the global FDI network?," Journal of International Money and Finance, Elsevier, vol. 140(C).
    • Handle: RePEc:eee:jimfin:v:140:y:2024:i:c:s0261560623001729
    DOI: 10.1016/j.jimonfin.2023.102971
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0261560623001729
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jimonfin.2023.102971?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Dyreng, Scott D. & Lindsey, Bradley P. & Thornock, Jacob R., 2013. "Exploring the role Delaware plays as a domestic tax haven," Journal of Financial Economics, Elsevier, vol. 108(3), pages 751-772.
    2. Antonio Coppola & Matteo Maggiori & Brent Neiman & Jesse Schreger, 2021. "Redrawing the Map of Global Capital Flows: The Role of Cross-Border Financing and Tax Havens," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 136(3), pages 1499-1556.
    3. Philip R. Lane & Gian Maria Milesi-Ferretti, 2018. "The External Wealth of Nations Revisited: International Financial Integration in the Aftermath of the Global Financial Crisis," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 66(1), pages 189-222, March.
    4. Beata Javorcik & Steven Poelhekke, 2017. "Former Foreign Affiliates: Cast Out and Outperformed?," Journal of the European Economic Association, European Economic Association, vol. 15(3), pages 501-539.
    5. Jannick Damgaard & Thomas Elkjaer, 2017. "The Global FDI Network: Searching for Ultimate Investors," IMF Working Papers 2017/258, International Monetary Fund.
    6. Guttorm Schjelderup, 2016. "Secrecy jurisdictions," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(1), pages 168-189, February.
    7. Torfinn Harding & Beata S. Javorcik, 2011. "Roll Out the Red Carpet and They Will Come: Investment Promotion and FDI Inflows," Economic Journal, Royal Economic Society, vol. 121(557), pages 1445-1476, December.
    8. Lars P. Feld & Jost H. Heckemeyer, 2011. "Fdi And Taxation: A Meta‐Study," Journal of Economic Surveys, Wiley Blackwell, vol. 25(2), pages 233-272, April.
    9. Maarten ‘t Riet & Arjan Lejour, 2018. "Optimal tax routing: network analysis of FDI diversion," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(5), pages 1321-1371, October.
    10. Galstyan, Vahagn, 2019. "Estimates of Foreign Assets and Liabilities for Ireland," Research Technical Papers 3/RT/19, Central Bank of Ireland.
    11. Dischinger, Matthias & Riedel, Nadine, 2011. "Corporate taxes and the location of intangible assets within multinational firms," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 691-707, August.
    12. Becker, Johannes & Johannesen, Niels & Riedel, Nadine, 2020. "Taxation and the allocation of risk inside the multinational firm," Journal of Public Economics, Elsevier, vol. 183(C).
    13. Huizinga, Harry & Laeven, Luc & Nicodeme, Gaetan, 2008. "Capital structure and international debt shifting," Journal of Financial Economics, Elsevier, vol. 88(1), pages 80-118, April.
    14. Arel-Bundock, Vincent, 2017. "The Unintended Consequences of Bilateralism: Treaty Shopping and International Tax Policy," International Organization, Cambridge University Press, vol. 71(2), pages 349-371, April.
    15. Olivier Blanchard & Julien Acalin, 2016. "What Does Measured FDI Actually Measure?," Policy Briefs PB16-17, Peterson Institute for International Economics.
    16. Thomas Tørsløv & Ludvig Wier & Gabriel Zucman, 2023. "The Missing Profits of Nations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(3), pages 1499-1534.
    17. Inga Hardeck & Patrick U. Wittenstein, 2018. "Assessing the Tax Benefits of Hybrid Arrangements — Evidence from the Luxembourg Leaks," National Tax Journal, National Tax Association;National Tax Journal, vol. 71(2), pages 295-334, June.
    18. Johannesen, Niels, 2012. "Optimal fiscal barriers to international economic integration in the presence of tax havens," Journal of Public Economics, Elsevier, vol. 96(3), pages 400-416.
    19. Beata Smarzynska Javorcik, 2004. "Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers Through Backward Linkages," American Economic Review, American Economic Association, vol. 94(3), pages 605-627, June.
    20. Huizinga, Harry & Laeven, Luc, 2008. "International profit shifting within multinationals: A multi-country perspective," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1164-1182, June.
    21. Gabriel Zucman, 2014. "Taxing across Borders: Tracking Personal Wealth and Corporate Profits," Journal of Economic Perspectives, American Economic Association, vol. 28(4), pages 121-148, Fall.
    22. Francis Weyzig, 2013. "Tax treaty shopping: structural determinants of Foreign Direct Investment routed through the Netherlands," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(6), pages 910-937, December.
    23. Alfaro, Laura & Chanda, Areendam & Kalemli-Ozcan, Sebnem & Sayek, Selin, 2004. "FDI and economic growth: the role of local financial markets," Journal of International Economics, Elsevier, vol. 64(1), pages 89-112, October.
    24. Axel Dreher, 2006. "Does globalization affect growth? Evidence from a new index of globalization," Applied Economics, Taylor & Francis Journals, vol. 38(10), pages 1091-1110.
    25. Niels Johannesen & Gabriel Zucman, 2014. "The End of Bank Secrecy? An Evaluation of the G20 Tax Haven Crackdown," American Economic Journal: Economic Policy, American Economic Association, vol. 6(1), pages 65-91, February.
    26. Hines, James R, Jr, 1996. "Altered States: Taxes and the Location of Foreign Direct Investment in America," American Economic Review, American Economic Association, vol. 86(5), pages 1076-1094, December.
    27. Joel Slemrod, 2008. "Why Is Elvis on Burkina Faso Postage Stamps? Cross‐Country Evidence on the Commercialization of State Sovereignty," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 5(4), pages 683-712, December.
    28. Johannesen, Niels & Miethe, Jakob & Weishaar, Daniel, 2022. "Homes Incorporated: Offshore Ownership of Real Estate in the U.K," CEPR Discussion Papers 17738, C.E.P.R. Discussion Papers.
    29. Bruno Casella, . "Looking through conduit FDI in search of ultimate investors – a probabilistic approach," UNCTAD Transnational Corporations Journal, United Nations Conference on Trade and Development.
    30. James R. Hines & Eric M. Rice, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(1), pages 149-182.
    31. Desai, Mihir A. & Foley, C. Fritz & Hines, James Jr., 2006. "The demand for tax haven operations," Journal of Public Economics, Elsevier, vol. 90(3), pages 513-531, February.
    32. Michelle Hanlon & Edward L. Maydew & Jacob R. Thornock, 2015. "Taking the Long Way Home: U.S. Tax Evasion and Offshore Investments in U.S. Equity and Debt Markets," Journal of Finance, American Finance Association, vol. 70(1), pages 257-287, February.
    33. Rosanne Altshuler & Harry Grubert, 2005. "The Three Parties in the Race to the Bottom: Host Governments, Home Governments and Multinational Companies," CESifo Working Paper Series 1613, CESifo.
    34. Daniel Haberly & Dariusz Wójcik, 2015. "Tax havens and the production of offshore FDI: an empirical analysis," Journal of Economic Geography, Oxford University Press, vol. 15(1), pages 75-101.
    35. Harry Grubert & Joel Slemrod, 1998. "The Effect Of Taxes On Investment And Income Shifting To Puerto Rico," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 365-373, August.
    36. Jannick Damgaard & Thomas Elkjaer, 2014. "Foreign Direct Investment and the External Wealth of Nations: How Important Is Valuation?," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 60(2), pages 245-260, June.
    37. Torfinn Harding & Beata S. Javorcik, 2012. "Foreign Direct Investment and Export Upgrading," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 964-980, November.
    38. Johannesen, Niels, 2014. "Tax avoidance with cross-border hybrid instruments," Journal of Public Economics, Elsevier, vol. 112(C), pages 40-52.
    39. Swenson, Deborah L., 1994. "The impact of U.S. tax reform on foreign direct investment in the United States," Journal of Public Economics, Elsevier, vol. 54(2), pages 243-266, June.
    40. Griffith, Rachel & Miller, Helen & O'Connell, Martin, 2014. "Ownership of intellectual property and corporate taxation," Journal of Public Economics, Elsevier, vol. 112(C), pages 12-23.
    41. Mutti, John & Grubert, Harry, 2004. "Empirical asymmetries in foreign direct investment and taxation," Journal of International Economics, Elsevier, vol. 62(2), pages 337-358, March.
    42. Clifford, Sarah, 2019. "Taxing multinationals beyond borders: Financial and locational responses to CFC rules," Journal of Public Economics, Elsevier, vol. 173(C), pages 44-71.
    43. Casella, Bruno, 2019. "Looking through conduit FDI in search of ultimate investors – a probabilistic approach," MPRA Paper 95188, University Library of Munich, Germany.
    44. Javier Garcia-Bernardo & Jan Fichtner & Eelke M. Heemskerk & Frank W. Takes, 2017. "Uncovering Offshore Financial Centers: Conduits and Sinks in the Global Corporate Ownership Network," Papers 1703.03016, arXiv.org, revised May 2017.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hebous, Shafik & Johannesen, Niels, 2021. "At your service! The role of tax havens in international trade with services," European Economic Review, Elsevier, vol. 135(C).
    2. Overesch Michael, 2016. "Steuervermeidung multinationaler Unternehmen: Die Befunde der empirischen Forschung," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 17(2), pages 129-143, July.
    3. Cooper, Maggie & Nguyen, Quyen T.K., 2020. "Multinational enterprises and corporate tax planning: A review of literature and suggestions for a future research agenda," International Business Review, Elsevier, vol. 29(3).
    4. Vincent Bouvatier & Gunther Capelle-Blancard & Anne-Laure Delatte, 2017. "Banks Defy Gravity in Tax Havens," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-03101505, HAL.
    5. Sebastian Beer & Ruud de Mooij & Li Liu, 2020. "International Corporate Tax Avoidance: A Review Of The Channels, Magnitudes, And Blind Spots," Journal of Economic Surveys, Wiley Blackwell, vol. 34(3), pages 660-688, July.
    6. Menkhoff, Lukas & Miethe, Jakob, 2019. "Tax evasion in new disguise? Examining tax havens' international bank deposits," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 176, pages 53-78.
    7. Peter Egger & Marko Koethenbuerger, 2016. "Hosting multinationals: Economic and fiscal implications," Aussenwirtschaft, University of St. Gallen, School of Economics and Political Science, Swiss Institute for International Economics and Applied Economics Research, vol. 67(01), pages 45-69, February.
    8. Petr Janský & Miroslav Palanský, 2019. "Estimating the scale of profit shifting and tax revenue losses related to foreign direct investment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(5), pages 1048-1103, October.
    9. Petr Janský & Jan Láznička & Miroslav Palanský, 2021. "Tax treaties worldwide: Estimating elasticities and revenue foregone," Review of International Economics, Wiley Blackwell, vol. 29(2), pages 359-401, May.
    10. Vincent Vicard, 2023. "Profit Shifting, Returns on Foreign Direct Investments and Investment Income Imbalances," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 71(2), pages 369-414, June.
    11. Fuest, Clemens & Hugger, Felix & Neumeier, Florian, 2022. "Corporate profit shifting and the role of tax havens: Evidence from German country-by-country reporting data," Journal of Economic Behavior & Organization, Elsevier, vol. 194(C), pages 454-477.
    12. Dominika Langenmayr & Franz Reiter, 2022. "Trading offshore: evidence on banks’ tax avoidance," Scandinavian Journal of Economics, Wiley Blackwell, vol. 124(3), pages 797-837, July.
    13. Manon Francois & Vincent Vicard, 2023. "Tax Avoidance and the Complexity of Multinational Enterprises," Working Papers 2023-04, CEPII research center.
    14. Katarzyna Bilicka & Michael Devereux & Irem Güçeri, 2023. "Tax-Avoidance Networks and the Push for a “Historic” Global Tax Reform," Tax Policy and the Economy, University of Chicago Press, vol. 37(1), pages 57-108.
    15. Javier Garcia-Bernardo & Petr Janský & Thomas Tørsløv, 2022. "Decomposing Multinational Corporations’ Declining Effective Tax Rates," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 70(2), pages 338-381, June.
    16. Richard Phillips & Hannah Petersen & Ronen Palan, 2021. "Group subsidiaries, tax minimization and offshore financial centres: Mapping organizational structures to establish the ‘in-betweener’ advantage," Journal of International Business Policy, Palgrave Macmillan, vol. 4(2), pages 286-307, June.
    17. Johannesen, Niels, 2022. "The global minimum tax," Journal of Public Economics, Elsevier, vol. 212(C).
    18. Garcia-Bernardo, Javier & Janský, Petr, 2024. "Profit shifting of multinational corporations worldwide," World Development, Elsevier, vol. 177(C).
    19. Michael Overesch & Georg Wamser, 2009. "Who Cares About Corporate Taxation? Asymmetric Tax Effects on Outbound FDI," The World Economy, Wiley Blackwell, vol. 32(12), pages 1657-1684, December.
    20. Ludvig Wier & Hayley Erasmus, 2023. "The Dominant Role of Large Firms in Profit Shifting," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 71(3), pages 791-816, September.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jimfin:v:140:y:2024:i:c:s0261560623001729. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30443 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.