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Returns on FDI: Does the U.S. Really Do Better?

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  • Barry Bosworth
  • Susan M. Collins
  • Gabriel Chodorow-Reich

Abstract

According to the U.S. external accounts, U.S. investors earn a significantly higher rate of return on their foreign investments than foreigners earn in the United States. This continued strong performance has produced a positive net investment income balance despite the deterioration in the U.S. net asset position in recent years. We examine the major competing explanations for the apparent differential between the rates of return. In particular, almost the entire difference occurs in FDI, where American firms operating abroad appear to earn a persistently higher return than that earned by foreign firms operating in the U.S. We first review a number of explanations in the literature for this differential. We then offer some new evidence on the role of income shifting between jurisdictions with varying rates of taxation. Using country-specific income and tax data, we find that about one-third of the excess return earned by U.S. corporations abroad can be explained by firms reporting "extra" income in low tax jurisdictions of their affiliates.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13313.

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Date of creation: Aug 2007
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Publication status: published as Returns on Foreign Direct Investment: Does the United States Really Do Better? [with Comment and Discussion] Barry Bosworth, Susan M. Collins, Gabriel Chodorow-Reich and Cédric Tille Brookings Trade Forum , Foreign Direct Investment (2007), pp. 177-210 Published by: Brookings Institution Press
Handle: RePEc:nbr:nberwo:13313

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  1. James R. Hines, Jr. & Eric M. Rice, 1990. "Fiscal Paradise: Foreign Tax Havens and American Business," NBER Working Papers 3477, National Bureau of Economic Research, Inc.
  2. Ellen R McGrattan & Edward C Prescott, 2008. "Technology Capital and the U.S. Current Account," Levine's Bibliography 122247000000001827, UCLA Department of Economics.
  3. Cedric Tille, 2003. "The impact of exchange rate movements on U.S. foreign debt," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 9(Jan).
  4. Robert E. Lipsey, 2006. "Measuring International Trade in Services," NBER Working Papers 12271, National Bureau of Economic Research, Inc.
  5. Stephanie E. Curcuru & Tomas Dvorak & Francis E. Warnock, 2007. "The stability of large external imbalances: the role of returns differentials," International Finance Discussion Papers 894, Board of Governors of the Federal Reserve System (U.S.).
  6. Gourinchas, Pierre-Olivier & Rey, Hélène, 2005. "From World Banker to World Venture Capitalist: US External Adjustment and the Exorbitant Privilege," CEPREMAP Working Papers (Docweb) 0606, CEPREMAP.
  7. John Kitchen, 2007. "Sharecroppers or Shrewd Capitalists? Projections of the US Current Account, International Income Flows, and Net International Debt," Review of International Economics, Wiley Blackwell, vol. 15(5), pages 1036-1061, November.
  8. Andrew Bernard & J. Bradford Jensen & Peter Schott, 2008. "Transfer Pricing by U.S.-Based Multinational Firms," Working Papers 08-29, Center for Economic Studies, U.S. Census Bureau.
  9. Harry Grubert & Timothy Goodspeed & Deborah L. Swenson, 1993. "Explaining the Low Taxable Income of Foreign-Controlled Companies in the United States," NBER Chapters, in: Studies in International Taxation, pages 237-276 National Bureau of Economic Research, Inc.
  10. Goodspeed, T-J & White, A-D, 1996. "International taxation," Papers 96-11, Wellesley College - Department of Economics.
  11. William R. Cline, 2005. "United States as a Debtor Nation, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 3993.
  12. Harry Huizinga & Luc Laeven, 2006. "International profit shifting within multinationals: a multi-country perspective," European Economy - Economic Papers 260, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  13. Stephanie E. Curcuru & Tomas Dvorak & Francis E. Warnock, 2007. "The Stability of Large External Imbalances: The Role of Returns Differentials," NBER Working Papers 13074, National Bureau of Economic Research, Inc.
  14. Ricardo Hausmann and Federico Sturzenegger, 2006. "Global imbalances or bad accounting? The missing dark matter in the wealth of nations," Business School Working Papers globalimbal, Universidad Torcuato Di Tella.
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Cited by:
  1. Curcuru, Stephanie E. & Thomas, Charles P. & Warnock, Francis E., 2013. "On returns differentials," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 1-25.
  2. repec:onb:oenbwp:y::i:154:b:1 is not listed on IDEAS
  3. Tarek Alexander Hassan, 2010. "Country Size, Currency Areas, and International Asset Returns," 2010 Meeting Papers 365, Society for Economic Dynamics.
  4. Tarek A. Hassan, 2009. "Country Size, Currency Unions, and International Asset Returns," Working Papers 154, Oesterreichische Nationalbank (Austrian Central Bank).
  5. Habib, Maurizio Michael, 2010. "Excess returns on net foreign assets: the exorbitant privilege from a global perspective," Working Paper Series 1158, European Central Bank.

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