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Jannick Damgaard, Thomas Elkjaer, and Niels Johannesen
Macro statistics on foreign direct investment (FDI) are blurred by offshore centers with enormous inward and outward investment positions. This paper uses several new data sources, both macro and micro, to estimate the global FDI network while disentangling real investment and phantom investment and allocating real investment to ultimate investor economies. We find that phantom investment into corporate shells with no substance and no real links to the local economy may account for almost 40 percent of global FDI. Ignoring phantom investment and allocating real investment to ultimate investors increases the explanatory power of standard gravity variables by around 25 percent.
Jannick Damgaard and Thomas Elkjaer
This paper addresses three types of geographical decoupling in foreign direct investment (FDI), i.e., challenges when using traditional FDI data as a proxy for real economic integration between economies: (i) large bilateral asymmetries between inward and outward FDI, (ii) the role of special purpose entities (SPEs), and (iii) the effect of moving from immediate counterpart to ultimate investing economy (UIE). A unique global FDI network is estimated, where SPEs are removed and FDI positions are broken down by the UIE. Total inward FDI in the new network is reduced by one-third, and financial centers are less dominant.
Jannick Damgaard, Thomas Elkjaer, and Marco A Espinosa-Vega

(SPEs), or intangibles, e.g., intellectual property rights that are easily moved between economies in an increasingly digitalized global environment. This paper analyzes the three main ways that FDI measures are geographically decoupled and then estimates the first global FDI network to address them. First, there are bilateral asymmetries between FDI positions for most economy pairs in the published numbers: one economy’s outward FDI does not match the counterpart economy’s inward FDI from that economy. For instance, in the IMF’s Coordinated Direct Investment Survey

Jannick Damgaard, Thomas Elkjaer, Niels Johannesen, and Sánchez Muñoz

outsized role in the global FDI network: the Netherlands, Luxembourg, Hong Kong SAR, Switzerland, Singapore, Ireland, Bermuda, the British Virgin Islands and the Cayman Islands jointly host more than 40 percent of global FDI although their combined share of global GDP is only around 3 percent. Strikingly, these economies have tax systems that, in one way or another, are useful in the tax planning of multinational firms (e.g. Hines, 2010 ; Zucman, 2014 ). Tax planning is therefore a plausible explanation for the otherwise puzzling size of these FDI positions. Indeed

Jannick Damgaard and Thomas Elkjaer

Front Matter Page Statistics Department Contents Abstract I. Introduction II. Bilateral Asymmetries in Official FDI Data III. The Role of Special Purpose Entities IV. FDI by Ultimate Investing Economy V. Constructing New Global FDI Estimates VI. Global FDI Networks VII. Conclusion VIII. References Tables 1. List of Low-Tax Economies Figures 1. Asymmetries in FDI between Economy Pairs 2. Top 20 Inward FDI Economies 3. Inward FDI Positions by Immediate and Ultimate Investing Economy 4. Round-Tripping 5. SPE

Jannick Damgaard, Thomas Elkjaer, and Niels Johannesen

Front Matter Page Statistics Department Front Matter Page What Is Real and What Is Not in the Global FDI Network? * Jannick Damgaard (Danmarks Nationalbank) Thomas Elkjaer (International Monetary Fund) Niels Johannesen (University of Copenhagen and CEBI) December 2, 2019 Contents 1 Introduction 2 Estimating the global FDI network 2.1 Data sources 2.2 Total FDI by economy of immediate investor 2.3 Decomposition: Real vs Phantom investment 2.4 Real FDI by economy of ultimate investor 2.5 Summary statistics 3

Jannick Damgaard, Thomas Elkjaer, and Niels Johannesen

figures in tax havens. Prominent cases include Irish GDP growth of 26 percent in 2015, following some multinationals’ relocation of intellectual property rights to Ireland, and Luxembourg’s status as one of the world’s largest FDI hosts. To get better data on a globalized world, economic statistics also need to adapt. The new global FDI network is useful to identify which economies host phantom investments and their counterparts, and it gives a clearer understanding of globalization patterns. Such data offer greater insight to analysts and can guide policymakers in

Jannick Damgaard and Thomas Elkjaer

29 0 Japan 4 0 4 30 30 0 Source: IMF (World Economic Outlook Database) and OECD ( BMD4 Partner Country and Main Aggregates Databases). Note: Includes all countries as reported as of end-2015 to the OECD for publication by January 2017. Some OECD countries may have reported zero when no information about SPEs was available. Annex II: Construction of the New Global FDI Network The new global FDI estimates are developed in the following steps: Step 1. Data input (from latest available year, mostly 2015) Inward FDI

Jannick Damgaard, Thomas Elkjaer, and Niels Johannesen

, Jannick , and Thomas Elkjaer . 2017 . “ The Global FDI Network: Searching for Ultimate Investors .” IMF Working Paper 17/258 , International Monetary Fund , Washington, DC . 10.5089/9781484329658.001 Lane , Philip R. , and Gian Maria Milesi-Ferretti . 2018 . “ The External Wealth of Nations Revisited: International Financial Integration in the Aftermath of the Global Financial Crisis .” IMF Economic Review 66 ( 1 ): 189 – 222 . 10.1057/s41308-017-0048-y

Mr. Sakai Ando and Mengxue Wang

, Bradford Jensen , Stephen Redding , and Peter Schott . 2012 . “ The Empirics of Firm Heterogeneity and International Trade .” Annual Review of Economics . 10.1146/annurev-economics-080511-110928 Damgaard , Jannick , Thomas Elkjaer , and Niels Johannesen . 2019 . “ What Is Real and What Is Not in the Global FDI Network? ” IMF Working Papers . 10.5089/9781513521527.001 Harrison , Ann E. , and Jason. Scorse . 2005 . “ Do foreign-owned firms pay more? : evidence from the Indonesian manufacturing sector 1990–99 .” ILO Working