Capital Round-Tripping: Determinants of Emerging Market Firm Investments into Offshore Financial Centers and Their Ethical Implications

Päivi Karhunen, Svetlana Ledyaeva () and Keith D. Brouthers
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Päivi Karhunen: Aalto University School of Business
Svetlana Ledyaeva: Aalto University School of Business
Keith D. Brouthers: King’s College London

Journal of Business Ethics, 2022, vol. 181, issue 1, No 8, 117-137

Abstract: Abstract Foreign direct investment (FDI) in offshore financial centers (OFCs) is gaining increased attention in business ethics research. Much of this research tends to focus on OFCs as locations where firms can avoid taxes, considering such behavior as unethical. Yet, there is dearth of studies on capital round-tripping by emerging market firms, which is an integral part of this phenomenon. Such round-tripping involves firms sending capital into OFCs only to invest it back in the home country under the guise of “foreign” investment. Presently there is little discussion of the ethical implications of such round-trip FDI activities. In this paper, we conceptualize round-tripping as institutional arbitrage and look at the determinants and ethical implications of such investments into OFCs. Exploring Russian round-tripping we note that firms tend to invest more funds in OFCs that offer a combination of tax and secrecy, or secrecy and property rights protection arbitrage opportunities. In either case firms exploit the opportunities provided by institutional differences between the OFC and Russia while investing back into Russia. Our results tend to indicate that equating OFC investment to tax avoidance and thus deeming it as unethical behavior is too narrow an explanation in the case of emerging economy round-tripping. This is because such investments are often motivated by the unethical behavior of home country stakeholders and may in fact provide benefits to society.

Keywords: Emerging market firms; Offshore financial centers; Round-trip investment; Russia; Institutional arbitrage; Ethics (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10551-021-04908-y

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