The Direct Investment Income Puzzle

Abstract

The official statistics – whether the published aggregates or the confidential microdata – do not support the longstanding view that US direct investment abroad (USDIA) outperforms foreign direct investment in the US (FDIUS). Rather, the apparent yields differential results primarily from two subtleties of the data. First, USDIA business activity is double counted at holding companies. Second, unlike FDIUS, USDIA profits are not recorded on a fully after-tax basis. Leading explanations for the relative profitability of USDIA, such as income shifting and industry composition, have limited or countervailing effects. The US does not enjoy an exorbitant privilege in direct investment returns.