Chart of the Week: FDI in Financial Centers

IMF Blog, June 13, 2017

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International financial flows have declined significantly after the crisis, and their composition has changed.
Between 2007 and 2015, portfolio and other investment flows took a dip while foreign direct investment (FDI) continued to surge.
The increase in FDI is concentrated in financial centers, which now account for almost half of global FDI claims.

There was a large decline in flows to and from advanced economies, with a sizable scaling down of international activity by large European banks reflected in a reduction of other investment flows.
Financial centers play a disproportionate role after the crisis in facilitating trade in international assets and liabilities, especially FDI.
Financial centers include advanced economies such as Ireland, Luxembourg, the Netherlands, Switzerland, and the United Kingdom—and small offshore centers such as Bermuda and the Cayman Islands.
As a group, these countries accounted for 7-8 percent of global GDP between 2007 and 2015, yet the increase in their FDI claims and liabilities over the period has been dramatic: they currently account for about half of the world’s total FDI claims.

Special purpose entities:
- Legal entities used to raise capital or hold assets and liabilities that perform no production function.
- Typically part of tax management strategies or regulatory arbitrage.
- In Luxembourg, more than 90 percent of FDI claims are in special purpose entities.
Re-domiciliation and tax-driven relocation:
- Multinational companies increasingly move their domicile to a financial center to allocate assets optimally and reduce tax and regulatory burdens.
- Practices include inversions and re-domiciliation where firms relocate legal quarters to lower-tax nations while retaining key operations in the higher-tax country of origin.
- Ireland example: the stock of FDI claims increased by US$900 billion between 2007 and 2015—over three times the size of Irish GDP in 2015.

The concentration of FDI in financial centers and the growing role of purely financial asset re-allocation by large corporations make it harder to assess a country’s financial linkages and external vulnerabilities.
This evolution poses a big challenge for policymakers in measuring, monitoring, and responding to international financial exposures that may have little to do with domestic economic activity.

Time window emphasized: 2007 and 2015 (repeated as 2007–2015).
Financial centers accounted for 7-8 percent of global GDP between 2007 and 2015.
Financial centers currently account for about half of the world’s total FDI claims.
In Luxembourg, more than 90 percent of FDI claims are in special purpose entities.
Ireland: stock of FDI claims increased by US$900 billion between 2007 and 2015—over three times the size of Irish GDP in 2015.

Chart of the Week: FDI in Financial Centers — The Editors — June 13, 2017