What Is Real and What Is Not in the Global FDI Network? Jannick - - PowerPoint PPT Presentation

What Is Real and What Is Not in the Global FDI Network?

Jannick Damgaard (Danmarks Nationalbank) Thomas Elkjær (International Monetary Fund) Niels Johannesen (University of Copenhagen)

December 2, 2019

The views are expressed here are those of the authors; they do not necessarily reflect the views of the institutions with which they are affiliated

Introduction

FDI is important dimension of economic integration

• enters common indexes of globalization
• widely believed to boost productivity and growth

However, FDI is not only about productive investment Example: Luxembourg has inward FDI of $4 trillion

same as the U.S. or the five major EU economies combined

What is going on? Many tax avoidance strategies involve large nominal investments in offshore financial centers

Offshore financial centers play an outsized role in the global FDI network

1000 2000 3000 4000 5000 Inward FDI ($ billions)

Netherlands United States Luxembourg China United Kingdom Hong Kong SAR Switzerland Singapore Germany Ireland France Bermuda British Virgin Islands Cayman Islands Australia Canada Brazil Spain Belgium Mexico

This paper

Define ”Phantom FDI” as investment into empty shells

almost no employees and no substantial links to the local economy

Our goal: Estimate global FDI network while separating ”Phantom FDI” and ”Real FDI” Data sources:

• Coordinated Direct Investment Survey (CDIS) standard FDI statistics
• new OECD statistics on FDI into Special Purpose Entities (”SPEs”)
• new OECD statistics on FDI by economy of ultimate investors
• ORBIS: global database with firm-level data

A stylized corporate group structure

U.S. COMPANY GERMAN COMPANY LUX COMPANY

$100 investment $100 investment

Standard FDI statistics confound ”Real” and ”Phantom” FDI

U.S. COMPANY GERMAN COMPANY LUX COMPANY

$100 investment $100 investment Standard FDI Statistics: $100 FDI in Lux from US $100 FDI in Germany from Lux  $200 FDI globally  No US-Germany FDI link

Our goal is to measure ”Phantom” FDI and real investment links

U.S. COMPANY GERMAN COMPANY LUX COMPANY

$100 investment $100 investment Standard FDI Statistics: $100 FDI in Lux from US $100 FDI in Germany from Lux  $200 FDI globally  No US-Germany FDI link

Our New FDI Database:

$100 ”Real FDI” in Germany from US $100 ”Phantom FDI” in Lux  $100 ”Real FDI” globally  $100 ”Phantom FDI” globally

Our database also yields measures of exposure to tax avoidance opportunities

U.S. COMPANY GERMAN COMPANY LUX COMPANY

$100 investment $100 investment Standard FDI Statistics: $100 FDI in Lux from US $100 FDI in Germany from Lux  $200 FDI globally  No US-Germany FDI link

Our New FDI Database:

$100 ”Real FDI” in Germany from US $100 ”Phantom FDI” in Lux  $100 ”Real FDI” globally  $100 ”Phantom FDI” globally Our tax avoidance indicators $100 US exposure from outward FDI $100 German exposure from inward FDI

”Phantom” FDI is around $15 trillion (around 40% of Total FDI)

0.00 0.10 0.20 0.30 0.40 0.50 10000 20000 30000 40000 50000 2009 2010 2011 2012 2013 2014 2015 2016 2017 Real FDI in $ billion (left axis) Phantom FDI in $ billion (left axis) Share of Phantom FDI in Total (right axis)

Method

STEP #A: complete network

• f standard FDI data

Use inward FDI reported by 122 countries to Coordinated Direct Investment Survey (CDIS) Use mirror outward FDI when inward FDI is not available in CDIS

• Cayman Islands does not report inward FDI from Canada
• Canada reports outward FDI to Cayman Islands for $34 billion
• We set inward FDI in Cayman Islands from Canada at $34 billion

STEP #B: split Total FDI into ”Phantom” FDI and ”Real” FDI

How can we estimate the split between Phantom and Real FDI for economies that do not report this? Intuitive idea: When FDI is large relative to GDP, only a small share of it is is Real FDI (1) Estimate structural relation between

• ”FDI intensity” (FDI/GDP)
• ”Real FDI share” (Real FDI/Total FDI)

for reporting economies (2) Extrapolate to non-reporting economies

Very strong structural relationship between FDI/GDP and Real/Total FDI

Luxembourg Netherlands Hungary slope: -.504 robust s.e.: .036 r-squared: .845 period: 2013-2017

• bservations: 75
• 3
• 2
• 1

1 Real FDI / Total FDI (in logs)

• 2

2 4 Total FDI / GDP (in logs)

We extrapolate this structural relationship to all other economies

Denmark Portugal Sweden Austria Iceland Belgium Switzerland Hungary Netherlands Luxembourg Cyprus Bahamas Jersey Malta Barbados Mauritius Falkland Islands Gibraltar Bermuda Cayman Islands

.2 .4 .6 .8 1 Real FDI / Total FDI (Predicted) 50 100 150 200 Total FDI / GDP (Actual) Predicted Reported

STEP #C: allocate ”Real” FDI to ultimate owner economies

Use new OECD FDI data when available: some countries themselves allocate FDI to ultimate investor economies Estimate from ORBIS firm-level data when not reported:

• standard stat: FDI in Spain from immediate owners in US: $23 billion
• Orbis: FDI in Spain from immediate owners in US: $13 billion
• Orbis: FDI in Spain from ultimate owners in US: $29 billion
• our estimate: FDI in Spain from ultimate owners in US: $50 billion

(23 billion × 29/13 = 50 billion)

Findings

Some uncertainty but the order of magnitude is right

5000 10000 15000 20000 Phantom FDI ($ billions) 2009 2010 2011 2012 2013 2014 2015 2016 2017 Year

Baseline estimate Alternative prediction model Only reported Phantom FDI Offshore centers only

Major recipients of ”Phantom” FDI are

• ffshore financial centers

1000 2000 3000 4000 Phantom FDI ($ billions)

Luxembourg Netherlands Hong Kong SAR British Virgin Islands Bermuda Singapore Cayman Islands Switzerland Ireland Mauritius United Kingdom Cyprus Malta Hungary Curacao Barbados Bahamas Jersey Gibraltar Puerto Rico

Self-reported Estimated

Real factors have 25% more power explaining Real FDI links

200 400 600 Real FDI ($ billions)

USA-GBR USA-JPN GBR-USA USA-DEU CHN-JPN DEU-USA CHN-USA DEU-GBR CHN-DEU GBR-JPN JPN-USA USA-CHN GBR-DEU DEU-JPN CHN-GBR GBR-CHN JPN-DEU JPN-GBR DEU-CHN JPN-CHN

Estimated Real FDI link Standard FDI link

”Round-tripping” modest in Europe but large in China and Russia

0.00 0.10 0.20 0.30 Round-tripping factor

C h i n a R u s s i a C a n a d a I n d

• n

e s i a G e r m a n y I t a l y S p a i n F r a n c e U n i t e d K i n g d

• m

T u r k e y U n i t e d S t a t e s N e t h e r l a n d s I n d i a S w i t z e r l a n d S

• u

t h K

• r

e a B r a z i l A r g e n t i n a M e x i c

• A

u s t r a l i a S a u d i A r a b i a

Self-reported Estimated

Exposure to tax avoidance opportunities through outward FDI into SPEs

0.00 0.20 0.40 0.60 0.80 Share of outward FDI to SPEs

Brazil Indonesia China United States Russia India Turkey Canada United Kingdom Saudi Arabia Taiwan Province of China Germany Italy Australia Mexico Japan France South Korea Spain Argentina

Exposure to tax avoidance opportunities through inward FDI from SPEs

0.00 0.20 0.40 0.60 0.80 Share of inward FDI from SPEs

Russia China Indonesia India Germany Italy France United Kingdom Spain Brazil Japan South Korea United States Turkey Canada Argentina Australia Taiwan Province of China Mexico Saudi Arabia

Conclusion

Conclusion

”Phantom” FDI and ”Real” FDI are confounded in standard FDI statistics:

• cannot assess the strength of real economic ties
• cannot gauge tax-motivated FDI into empty shells

We estimate that:

• ”Phantom” FDI accounts for 40% of Total FDI globally
• vast majority of ”Phantom” FDI is into OFCs
• suggestive of tax avoidance