Returns on FDI: Does the U.S. Really Do Better?

31 Pages Posted: 24 Aug 2007 Last revised: 18 Oct 2007

See all articles by Barry Bosworth

Barry Bosworth

Brookings Institution - Economic Studies Program

Susan M. Collins

affiliation not provided to SSRN

Gabriel Chodorow-Reich

Harvard University Department of Economics

Date Written: August 2007

Abstract

According to the U.S. external accounts, U.S. investors earn a significantly higher rate of return on their foreign investments than foreigners earn in the United States. This continued strong performance has produced a positive net investment income balance despite the deterioration in the U.S. net asset position in recent years. We examine the major competing explanations for the apparent differential between the rates of return. In particular, almost the entire difference occurs in FDI, where American firms operating abroad appear to earn a persistently higher return than that earned by foreign firms operating in the U.S. We first review a number of explanations in the literature for this differential. We then offer some new evidence on the role of income shifting between jurisdictions with varying rates of taxation. Using country-specific income and tax data, we find that about one-third of the excess return earned by U.S. corporations abroad can be explained by firms reporting "extra" income in low tax jurisdictions of their affiliates.

Suggested Citation

Bosworth, Barry and Collins, Susan M. and Chodorow-Reich, Gabriel, Returns on FDI: Does the U.S. Really Do Better? (August 2007). NBER Working Paper No. w13313. Available at SSRN: https://ssrn.com/abstract=1008807

Barry Bosworth (Contact Author)

Brookings Institution - Economic Studies Program ( email )

1775 Massachusetts Avenue, NW
Washington, DC 20036
United States
202-797-6000 (Phone)
202-797-6181 (Fax)

Susan M. Collins

affiliation not provided to SSRN

Gabriel Chodorow-Reich

Harvard University Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
6174963226 (Phone)
6174963226 (Fax)

HOME PAGE: http://scholar.harvard.edu/chodorow-reich

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