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The gravity of Offshore Financial Centers: estimating real FDIs using a binary choice model

Author

Listed:
  • Marco Albori

    (Bank of Italy)

  • Alessio Anzuini

    (Bank of Italy)

  • Fabrizio Ferriani
  • Luca Rossi

    (Bank of Italy)

Abstract

Offshore Financial Centers (OFCs) exert a profound distortion on economic analyses based on cross-border capital flows reported in official statistics, as a large share of those investments is known to be solely due to tax and regulatory avoidance purposes. Notwithstanding the importance of this phenomenon, scant information is available concerning its actual magnitude. This paper focuses on Foreign Direct Investments (FDIs) and fills this gap by using an extensive list of FDI determinants and estimating a gravity-like binary choice specification to assess how much bilateral FDIs are driven by economic integration motives versus profit shifting opportunities. We find that the share of so-called phantom FDIs, after rising in 2010-15, stabilized at around 40% of total FDIs in recent years and that this share is systematically larger in OFCs, reconciling available evidence on the abnormal amount of recorded FDIs in OFCs.

Suggested Citation

  • Marco Albori & Alessio Anzuini & Fabrizio Ferriani & Luca Rossi, 2023. "The gravity of Offshore Financial Centers: estimating real FDIs using a binary choice model," Questioni di Economia e Finanza (Occasional Papers) 805, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_805_23
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    References listed on IDEAS

    as
    1. Delatte, Anne-Laure & Guillin, Amelie & Vicard, Vincent, 2022. "Grey zones in global finance: The distorted geography of cross-border investments," Journal of International Money and Finance, Elsevier, vol. 120(C).
    2. Antonio Coppola & Matteo Maggiori & Brent Neiman & Jesse Schreger, 2021. "Redrawing the Map of Global Capital Flows: The Role of Cross-Border Financing and Tax Havens," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 136(3), pages 1499-1556.
    3. Nadia Accoto & Valerio Astuti & Costanza Catalano, 2023. "A probabilistic method for reconstructing the foreign direct investments network in search of ultimate host economies," Questioni di Economia e Finanza (Occasional Papers) 760, Bank of Italy, Economic Research and International Relations Area.
    4. Beck, Roland & Coppola, Antonio & Lewis, Angus & Maggiori, Matteo & Schmitz, Martin & Schreger, Jesse, 2023. "The Geography of Capital Allocation in the Euro Area," SocArXiv rzwd2, Center for Open Science.
    5. James R. Hines & Eric M. Rice, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(1), pages 149-182.
    6. Jannick Damgaard & Thomas Elkjaer & Niels Johannesen, 2019. "What Is Real and What Is Not in the Global FDI Network?," IMF Working Papers 2019/274, International Monetary Fund.
    7. Casella, Bruno, 2019. "Looking through conduit FDI in search of ultimate investors – a probabilistic approach," MPRA Paper 95188, University Library of Munich, Germany.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Foreign Direct Investments; FDI network; tax havens; gravity models;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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