Property Rights, Tax Incentives and Bogus Foreign Direct Investment

Abstract

To our knowledge, this paper provides the first evidence of the effects of FDI round-tripping incentives on the scale of round-tripping. We find that round-tripping could be an explanation for the data reporting discrepancies between FDI host and source countries since investors have no incentive to report their “bogus” foreign investment to their source countries. If the data reporting discrepancies were caused partly by round-tripping, those reporting differences should be correlated with round-tripping incentives. Therefore, we first calculate the difference between the FDI inflows from 10 source regions reported by 50 host countries and FDI outflows reported by these 10 source regions. Second, these reporting differences are regressed on measures of the host countries' political stability, property rights protection and preferential fiscal incentives to foreign investment. Our results from both aggregate and disaggregated data show that the FDI reporting differences are positively related to the host countries' preferential fiscal incentives, and negatively correlated with the host country's property rights protection and political stability. These results are statistically significant and robust to different function specifications and different indicators for property rights protection.