Estimating Round‐Tripping FDI from Firm‐Level Data in China

When capital leaves a country and then flows back as foreign direct investment (FDI), we call it round‐tripping FDI. It is widely suspected that China's official FDI statistics contain a substantial amount of round‐tripping FDI. However, it is difficult to quantify the round‐tripping FDI due to the lack of data. In this paper, we propose two methods to identify round‐tripping FDI. The first one tracks capital flows at the firm level. If a firm in China invests in a foreign firm and this foreign firm makes an investment back to China shortly after, then we consider this investment to China as round‐tripping FDI. Our second measure of round‐tripping FDI adds to the first measure by including investments in China made by Chinese investors registered in tax havens. The first estimate of round‐tripping FDI accounts for up to 3% of China's total FDI from 1999 to 2015, whereas the second estimate accounts for up to 70% in the period. Our firm‐level analysis shows that industrial firms facing higher tax burdens are more likely to make round‐tripping FDI. We also show that at the city level, adjusted FDI statistics by subtracting the estimated round‐tripping FDI are better predictors of imports and exports. Finally, we show that provinces receiving higher shares of round‐tripping FDI are more likely to be punished for illegal financial activities. Taken together, these findings suggest that our measures of round‐tripping FDI, although noisy, are indicative of real transactions.