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The Determinants of FDI Reinvestment Rates

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  • Balázs Zélity

    (Wesleyan University)

Abstract

Profits accruing to foreign-owned firms can either be repatriated to the origin country or reinvested in the host country. Using bilateral country-level FDI earnings flow data, this paper empirically investigates what determines how much is reinvested in a given country. Panel data regressions are estimated on OECD country pairs for the time period 2005-2020 with origin and host country fixed effects. Macroeconomic conditions, institutional factors, agency problems, taxation, and global economic factors are considered as explanatory variables. Lagged independent variables are used as instruments in a 2SLS specification. The main finding is that geographical distance and the world GDP growth rate reduce reinvestment rates, while a shared legal origin increases them.

Suggested Citation

  • Balázs Zélity, 2025. "The Determinants of FDI Reinvestment Rates," Open Economies Review, Springer, vol. 36(2), pages 431-465, April.
    • Handle: RePEc:kap:openec:v:36:y:2025:i:2:d:10.1007_s11079-024-09763-8
    DOI: 10.1007/s11079-024-09763-8
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    More about this item

    Keywords

    Reinvestment; Repatriation; FDI; Agency problems; Distance; Legal origins; Taxation;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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