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The return on U.S. direct investment at home and abroad

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  • Stephanie E. Curcuru
  • Charles P. Thomas
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    Abstract

    A longstanding puzzle is that the United States is a net borrower from the rest of the world, yet continues to receive income on its external position. A large difference between the yields on direct investment at home and abroad is responsible and this paper examines potential explanations for this differential. We find that most of the differential disappears after one adjusts for the U.S. taxes owed by the parent on foreign earnings, the sovereign risk and sunk costs associated with investing abroad, and the age of foreign direct investment in the U.S.. Taken together, our results suggest most of the difference in yields should remain as long as there is a difference in tax rates between the United States and the countries in which U.S. firms invest, and U.S. investments are perceived as relatively safe. This has implications for the long-run sustainability of the U.S. current account deficit which will depend, in part, on the long-run behavior of this income.

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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 1057.

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    Date of creation: 2012
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    Handle: RePEc:fip:fedgif:1057

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    1. Philip R. Lane and Gian Maria Milesi-Ferretti, 2008. "Where Did All The Borrowing Go? A Forensic Analysis of the U.S. External Position," The Institute for International Integration Studies Discussion Paper Series iiisdp239, IIIS.
    2. Philip Lane & Gian Maria Milesi-Ferreti, 2005. "A Global Perspective on External Positions," Trinity Economics Papers tep16, Trinity College Dublin, Department of Economics.
    3. Stephanie E. Curcuru & Tomas Dvorak & Francis E. Warnock, 2008. "Cross-Border Returns Differentials," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1495-1530, November.
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    7. Stephanie E. Curcuru & Tomas Dvorak & Francis E. Warnock, 2008. "Cross-border returns differentials," International Finance Discussion Papers 921, Board of Governors of the Federal Reserve System (U.S.).
    8. Jorion, Philippe, 1996. "Returns to Japanese investors from US investments," Japan and the World Economy, Elsevier, vol. 8(3), pages 229-241, September.
    9. Stephanie E. Curcuru & Charles P. Thomas & Francis E. Warnock, 2009. "Appendix to "NBER International Seminar on Macroeconomics 2008"," NBER Chapters, in: NBER International Seminar on Macroeconomics 2008 National Bureau of Economic Research, Inc.
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    16. repec:tcd:wpaper:tep16 is not listed on IDEAS
    17. Stephanie E. Curcuru & Tomas Dvorak & Francis E. Warnock, 2008. "Cross-Border Returns Differentials," NBER Working Papers 13768, National Bureau of Economic Research, Inc.
    18. Forbes, Kristin J., 2010. "Why do foreigners invest in the United States?," Journal of International Economics, Elsevier, vol. 80(1), pages 3-21, January.
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