The gravity of Offshore Financial Centers: estimating real FDIs using a binary choice model

Marco Albori (), Alessio Anzuini, Fabrizio Ferriani and Luca Rossi
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Marco Albori: Bank of Italy

No 805, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Offshore Financial Centers (OFCs) exert a profound distortion on economic analyses based on cross-border capital flows reported in official statistics, as a large share of those investments is known to be solely due to tax and regulatory avoidance purposes. Notwithstanding the importance of this phenomenon, scant information is available concerning its actual magnitude. This paper focuses on Foreign Direct Investments (FDIs) and fills this gap by using an extensive list of FDI determinants and estimating a gravity-like binary choice specification to assess how much bilateral FDIs are driven by economic integration motives versus profit shifting opportunities. We find that the share of so-called phantom FDIs, after rising in 2010-15, stabilized at around 40% of total FDIs in recent years and that this share is systematically larger in OFCs, reconciling available evidence on the abnormal amount of recorded FDIs in OFCs.

Keywords: Foreign Direct Investments; FDI network; tax havens; gravity models (search for similar items in EconPapers)
JEL-codes: C33 F21 F23 (search for similar items in EconPapers)
Date: 2023-10
New Economics Papers: this item is included in nep-fdg and nep-int
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Journal Article: The gravity of Offshore Financial Centers: Estimating real FDIs using a binary choice model (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:opques:qef_805_23

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