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Measuring Wealth and Financial Intermediation and Their Links to the Real Economy$
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Charles R. Hulten and Marshall B. Reinsdorf

Print publication date: 2015

Print ISBN-13: 9780226204260

Published to Chicago Scholarship Online: September 2015

DOI: 10.7208/chicago/9780226204437.001.0001

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PRINTED FROM CHICAGO SCHOLARSHIP ONLINE (www.chicago.universitypressscholarship.com). (c) Copyright University of Chicago Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in CHSO for personal use.date: 26 September 2021

The Return on US Direct Investment at Home and Abroad

The Return on US Direct Investment at Home and Abroad

Chapter:
(p.205) 7 The Return on US Direct Investment at Home and Abroad
Source:
Measuring Wealth and Financial Intermediation and Their Links to the Real Economy
Author(s):

Stephanie E. Curcuru

Charles P. Thomas

Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226204437.003.0007

A longstanding puzzle is that the United States is a net borrower from the rest of the world, yet continues to receive income on its external position. A large difference between the yields on direct investment at home and abroad is responsible and this paper examines potential explanations for this differential. We find that most of the differential disappears after one adjusts for the US taxes owed by the parent on foreign earnings, the sovereign risk and sunk costs associated with investing abroad, and the age of foreign direct investment in the US. Taken together, our results suggest most of the difference in yields should remain as long as there is a difference in tax rates between the United States and the countries in which US firms invest, and US investments are perceived as relatively safe. This has implications for the long-run sustainability of the US current account deficit which will depend, in part, on the long-run behavior of this income.

Keywords:   Foreign direct investment, returns differentials, United States current account

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