The Return on U.S. Direct Investment at Home and Abroad

46 Pages Posted: 4 Dec 2012

See all articles by Stephanie E. Curcuru

Stephanie E. Curcuru

Board of Governors of the Federal Reserve System

Charles P. Thomas

Thomas & Son Analytics

Date Written: October 2012

Abstract

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.

Keywords: F21, F23, F3

JEL Classification: foreign direct investment, returns differentials, U.S. current account

Suggested Citation

Curcuru, Stephanie E. and Thomas, Charles P., The Return on U.S. Direct Investment at Home and Abroad (October 2012). FRB International Finance Discussion Paper No. 1057. Available at SSRN: https://ssrn.com/abstract=2178421 or http://dx.doi.org/10.2139/ssrn.2178421

Stephanie E. Curcuru (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Charles P. Thomas

Thomas & Son Analytics ( email )

5409 Center St
Chevy Chase, MD 20815
United States
2022075834 (Phone)

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