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A probabilistic method for reconstructing the foreign direct investments network in search of ultimate host economies

Author

Listed:
  • Nadia Accoto

    (Bank of Italy)

  • Valerio Astuti

    (Bank of Italy)

  • Costanza Catalano

    (Bank of Italy)

Abstract

The Ultimate Host Economies (UHEs) of a given country are defined as the ultimate destinations of Foreign Direct Investment (FDI) originating in that country. Bilateral FDI statistics struggle to identify them due to the non-negligible presence of conduit jurisdictions, which provide attractive intermediate destinations for pass-through investments due to favorable tax regimes. At the same time, determining UHEs is crucial for understanding the actual paths followed by FDI among increasingly interdependent economies. In this paper, we first reconstruct the global FDI network through mirroring and clustering techniques, starting from data collected by the International Monetary Fund. Then we provide a method for computing an (approximate) distribution of the UHEs of a country by using a probabilistic approach to this network, based on Markov chains. More specifically, we analyze the Italian case.

Suggested Citation

  • Nadia Accoto & Valerio Astuti & Costanza Catalano, 2023. "A probabilistic method for reconstructing the foreign direct investments network in search of ultimate host economies," Questioni di Economia e Finanza (Occasional Papers) 760, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_760_23
    as

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    File URL: https://www.bancaditalia.it/pubblicazioni/qef/2023-0760/QEF_760_23.pdf
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    References listed on IDEAS

    as
    1. Filipa Lima & Flávio Pinheiro & João Falcão Silva & Pedro Matos, 2020. "Foreign direct investment – using network analysis to understand the position of Portugal in a global FDI network," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Bridging measurement challenges and analytical needs of external statistics: evolution or revolution?, volume 52, Bank for International Settlements.
    2. Casella, Bruno, 2019. "Looking through conduit FDI in search of ultimate investors – a probabilistic approach," MPRA Paper 95188, University Library of Munich, Germany.
    3. Thomas J. Sargent & John Stachurski, 2022. "Economic Networks: Theory and Computation," Papers 2203.11972, arXiv.org, revised Jul 2022.
    4. 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.
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    Cited by:

    1. Marco Albori & Alessio Anzuini & Fabrizio Ferriani & Luca Rossi, 2023. "The gravity of Offshore Financial Centers: estimating real FDIs using a binary choice model," Questioni di Economia e Finanza (Occasional Papers) 805, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    foreign direct investment; ultimate host economies; Special Purpose Entities; network reconstruction; clustering; absorbing Markov chains;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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