Phantom FDI: A Structural Gravity Analysis Using MREID

Saad Ahmad, Jeffrey Bergstrand, Jordi Paniagua and Heather Wickramarachi
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Saad Ahmad: United States International Trade Commission (USITC)
Jeffrey Bergstrand: University of Notre Dame
Jordi Paniagua: University of Notre Dame. University of Valencia.
Heather Wickramarachi: United States International Trade Commission (USITC)

No 2607, Working Papers from Department of Applied Economics II, Universidad de Valencia

Abstract: Foreign direct investment (FDI) measured by public sources includes investments made by firms for financial and accounting related (or nonproduction-based) rea- sons, typically concentrated in offshore financial centers (OFCs). Recent studies suggest that profit-shifting may also occur in non-OFC regions. Consequently, many datasets used to understand the economic factors behind a firm’s decision to shift production activities acoss countries may still contain such“phantom FDI.†Conse- quently, analytical methods have recently been developed to remove phantom FDI flows and improve the accuracy of FDI measures. In this paper, we apply a structural gravity approach to identify and measure phantom FDI using the new Multinational Revenue, Employment, and Investment Database (MREID). We use this approach to provide estimates of phantom FDI for numerous developed countries in our sam- ple. Our baseline results are then validated using an alternative production-function approach.

Keywords: Foreign direct investment; phantom FDI; multinational firms; profit shifting; structural gravity; multinational activity; FDI measurement (search for similar items in EconPapers)
JEL-codes: F21 F23 F38 (search for similar items in EconPapers)
Date: 2026-04
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