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If Foreign Investment Is not Foreign: Round-Trip Versus Genuine Foreign Investment in Russia

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  • Svetlana Ledyaeva
  • Päivi Karhunen
  • John Whalley

Abstract

In this paper we study the phenomenon of round-trip investment between Russia and key offshore financial centers (OFCs), namely, Cyprus and British Virgin Islands, which is now a significant part of foreign investment into Russia. Using firm-level data we study differences in location strategies between round-trip and genuine foreign investors into Russia and the factors which determine the fraction of round-trip investment in total foreign investment into Russian regions. In empirical analysis we also distinguish between different firm size and industries. We conclude that round-trip investors tend to invest more in corrupt and resource abundant Russian regions compared to genuine foreign investors. Furthermore, the share of round-trip investment in total foreign investment is significantly higher in corrupt Russian regions. In general, these results point to the corruption component of round-trip investment. Second, we find that genuine foreign investors tend to invest more in regions with higher level of skilled labour and use sea ports more compared to round-trip investors, indicating that genuine foreign investment is more technologically advanced and more oriented towards international markets than round trip.

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Bibliographic Info

Paper provided by CEPII research center in its series Working Papers with number 2013-05.

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Date of creation: Feb 2013
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Handle: RePEc:cii:cepidt:2013-05

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Keywords: Russia; round-trip investment; capital flight; foreign investment;

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