The Direct Investment Income Puzzle
56 Pages Posted: 5 Oct 2018 Last revised: 21 Jun 2019
Date Written: June 2019
The official statistics – whether the published aggregates or the confidential microdata – do not support the longstanding view that US direct investment abroad (USDIA) outperforms foreign direct investment in the US (FDIUS). Rather, the apparent yields differential results primarily from two subtleties of the data. First, USDIA business activity is "double counted" at holding companies. Second, unlike FDIUS, USDIA profits are not recorded on a fully after-tax basis. Leading explanations for the relative profitability of USDIA, such as income shifting and industry composition, have limited or countervailing effects. The US does not enjoy an exorbitant privilege in direct investment returns.
Keywords: Foreign direct investment, exorbitant privilege, income puzzle, current account adjustment
JEL Classification: E22, F21, F23, F32, H26
Suggested Citation: Suggested Citation