## Chart of the Week: FDI in Financial Centers

_IMF Blog, June 13, 2017_

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## Bibliographic details
- Authors: The Editors
- Published: June 13, 2017

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### Overview
- 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.

### Key findings
- 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.

### Drivers of FDI expansion in financial centers
- 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.

### Implications for policymakers
- 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.

### Key statistics
- 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*

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## References

- [paper](http://www.imf.org/en/Publications/WP/Issues/2017/05/10/International-Financial-Integration-in-the-Aftermath-of-the-Global-Financial-Crisis-44906)
- [https://www.imf.org/wp-content/uploads/2017/06/ENG_Jun_5_FDI_cotw-REV.jpg](https://www.imf.org/wp-content/uploads/2017/06/ENG_Jun_5_FDI_cotw-REV.jpg)

_Source: https://www.imf.org/en/blogs/articles/2017/06/13/chart-of-the-week-fdi-in-financial-centers_