Offshore Foreign Direct Investment, Capital Round‐Tripping, and Corruption: Empirical Analysis of Russian Regions

Abstract

Recent economic geography research has identified the round‐tripping of capital from emerging economies to offshore financial centers (OFCs) and back as foreign direct investment (FDI) as a central element of the global offshore FDI network. However, the factors behind this phenomenon are not yet fully understood. Our study develops a general framework that conceptualizes the phenomenon of round‐trip investment. In particular, we argue that secrecy arbitrage, defined as interplay of onshore corruption and offshore secrecy, largely explains round‐trip investment between onshore jurisdictions and OFCs. First, we argue that part of the round‐trip FDI consists of proceeds from corruption, which is laundered in OFCs and reinvested back to the location of origin. Second, we maintain that the secrecy dimension of the OFC also motivates the round‐tripping of licit capital, as businesses use the secrecy provided by OFCs to hide their true identities from corrupt authorities in the home location. To test the validity of our argument about onshore corruption as a driver for round‐trip investment, we empirically analyze firm‐level data on the distribution of offshore FDI (which, we argue, is largely round‐trip) across Russian regions. Our empirical findings confirm that FDI from OFCs is positively associated with host region corruption, and this relationship is stronger for OFCs with a higher secrecy score. Hence, we conclude that round‐trip FDI is strongly motivated by the interplay between onshore corruption and offshore secrecy.

Editorial Introduction to the Special Section: Deconstructing Offshore Finance

“…They also demonstrate the vital role of finance in global economic activities such that it is impossible to comprehend the geography of the world economy without serious engagement with offshore finance. As Haberly and Wójcik (, page #TK) put it, “While traditionally interpreted as a reflection of the real operations of multinational firms, FDI has become increasingly dominated by networks of abstract financial accounting entities spanning onshore and offshore jurisdictions.” More specifically, “at least 30 percent, and likely closer to 50 percent of world FDI can be described as offshore FDI lacking a direct attachment to productive activity in the economy where it is reported.” As Ledyaeva et al () show, in Russia this percentage is closer to 60 to 70 percent. These findings have serious implications for researchers and policy makers who wish to understand how firm activities may or may not translate into actual productive economic activities and regional/local developmental impacts through such a fundamental measurement as FDI.…”

“…Ledyaeva et al () continue the investigation of offshore FDI with an article mapping and explaining its geography in Russian regions. The article focuses on round‐tripping, whereby capital flows from Russia to offshore jurisdictions and then returns to Russia as foreign investment.…”

International tax planning within the structure of corporate entities owned by the shareholder‐individuals through Panama Papers destinations

“…There do not seem to be relevant country-specific studies of profit shifting out of Spain and Cyprus. For Cyprus this may be because it is more often seen as a place into which profit is shifted (IMF, 2014;Clausing, 2016), or a place that provides financial secrecy (Ledyaeva, Karhunen, Kosonen, & Whalley, 2015).…”

Innovation in Russia: The Territorial Dimension

“…Great heterogeneity characterizes Russian regions' levels of embedment in international business networks (Gonchar and Marek, 2014;Ledyaeva et al, 2015). Foreign With FDI scattered across the country in a mosaic pattern, opportunities to benefit from this source of extra-local knowledge are distributed unevenly across Russian regions.…”