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

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.

Impact of Round-tripping FDI on Tax Avoidance of Enterprises

“…This mechanism reflects the fact that firms proactively engage in tax competition by choosing where to invest in order to minimise their tax liabilities and optimise their economic performance on a global scale. While pursuing tax advantages, companies need to carefully balance legality and compliance to guard against potential legal risks and ensure that their tax avoidance strategies are legally compliant in the context of international tax competition while maintaining a solid reputation (Karhunen et al, 2022).…”

International business research: The real challenges are data and theory

“…Round tripping is a widespread phenomenon, undertaken by firms of every country, but especially prevalent in the case of China, Russia, Canada, and Indonesia, for which it accounts for more than 15% of inward FDI (Damgaard, Elkjaer & Johannessen, 2019). Round-tripping is undertaken to minimize tax, to hide the identity of the ultimate owners, and to reduce home-country political risk and capital controls (Borga & Caliandro, 2018;Karhunen, Ledyaeva, & Brouthers, 2021). It results in over-estimating the amount of investment, since funds sent from a country to an OFC and then round-tripped back to that country are counted twice, leading to volume biases.…”

Balancing people, planet and profit: export strategies for sustainable value creation

“…Prior research points out conflicting issues related to firms’ unethical behaviour in foreign contexts, such as corruption (Robertson and Watson, 2004), negative impact of people and society (Kolk et al. , 2017) or unethical behaviour of home country stakeholders (Karhunen et al. , 2022).…”

“…One way for businesses to achieve sustainable value creation is by expanding into international markets, particularly through exports (Bıçakcıo glu, 2018). Prior research points out conflicting issues related to firms' unethical behaviour in foreign contexts, such as corruption (Robertson and Watson, 2004), negative impact of people and society (Kolk et al, 2017) or unethical behaviour of home country stakeholders (Karhunen et al, 2022). Still, internationalisation remains a beneficial strategy for firms exploring sustainable value creation opportunities based on technological evolution (e.g.…”