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The return on U.S. direct investment at home and abroad

Listed author(s):
  • Stephanie E. Curcuru
  • Charles P. Thomas

A longstanding puzzle is that the United States is a net borrower from the rest of the world, yet continues to receive income on its external position. A large difference between the yields on direct investment at home and abroad is responsible and this paper examines potential explanations for this differential. We find that most of the differential disappears after one adjusts for the U.S. taxes owed by the parent on foreign earnings, the sovereign risk and sunk costs associated with investing abroad, and the age of foreign direct investment in the U.S.. Taken together, our results suggest most of the difference in yields should remain as long as there is a difference in tax rates between the United States and the countries in which U.S. firms invest, and U.S. investments are perceived as relatively safe. This has implications for the long-run sustainability of the U.S. current account deficit which will depend, in part, on the long-run behavior of this income.

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File URL: http://www.federalreserve.gov/pubs/ifdp/2012/1057/default.htm
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File URL: http://www.federalreserve.gov/pubs/ifdp/2012/1057/ifdp1057.pdf
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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 1057.

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Date of creation: 2012
Handle: RePEc:fip:fedgif:1057
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