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The determinants of portfolio investment in offshore financial centers

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  • Foad, Hisham
  • Lundberg, Clark

Abstract

An offshore financial center (OFC) is generally defined as a jurisdiction in which the financial sector is disproportionately larger than the domestic economy. We examine what national level push factors determine a country's investment in OFCs using a panel data set covering 78 source countries investing in over 200 foreign jurisdictions. OFCs are defined using an existing method based on institutional characteristics and fiscal policies as well as with a novel data-driven method based on actual financial positions relative to GDP. We find that OFC investment is driven by various aspects of low profitability in the source country. Source country factors such as inefficient labor markets, weak infrastructure, and competitive markets drive investments toward OFCs. These factors have an even larger impact on OFC investment than corporate tax rates in the source country. This suggests that a country seeking to reduce utilization of OFC's should focus on policies like improving domestic infrastructure and the efficiency of labor markets.

Suggested Citation

  • Foad, Hisham & Lundberg, Clark, 2017. "The determinants of portfolio investment in offshore financial centers," International Review of Financial Analysis, Elsevier, vol. 54(C), pages 76-86.
  • Handle: RePEc:eee:finana:v:54:y:2017:i:c:p:76-86
    DOI: 10.1016/j.irfa.2017.08.003
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    References listed on IDEAS

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    1. James R. Hines, 2010. "Treasure Islands," Journal of Economic Perspectives, American Economic Association, vol. 24(4), pages 103-126, Fall.
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    3. Luisa R. Blanco & Cynthia L. Rogers, 2014. "Are Tax Havens Good Neighbours? FDI Spillovers and Developing Countries," Journal of Development Studies, Taylor & Francis Journals, vol. 50(4), pages 530-540, April.
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    5. James R. Hines & Eric M. Rice, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," The Quarterly Journal of Economics, Oxford University Press, vol. 109(1), pages 149-182.
    6. Dharmapala, Dhammika & Hines Jr., James R., 2009. "Which countries become tax havens?," Journal of Public Economics, Elsevier, vol. 93(9-10), pages 1058-1068, October.
    7. Ahmed Zoromé, 2007. "Concept of Offshore Financial Centers; In Search of an Operational Definition," IMF Working Papers 07/87, International Monetary Fund.
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