Blog Post

Why US investors earn more on their foreign assets than Germans

The United States benefits from large yields on its foreign assets relative to foreign liabilities, while in most continental European countries foreign assets and liabilities yield almost the same. Risk factors can explain only a small part of this difference; tax, intellectual property and financial sophistication issues might contribute to the high yields on US foreign assets.

By: Date: December 1, 2017 Topic: Finance & Financial Regulation

Back in the 1960s, Valéry Giscard d’Estaing described as ‘exorbitant privilege’ the advantages that the United States enjoys on its foreign assets relative to its foreign liabilities. US investors earn more on their foreign assets abroad than foreigners earn on their US investments, resulting in a boost to annual investment income flow to the United States (Figure 1). And in several years, revaluation of US assets – due to stock-price increases, for example – came in higher than the revaluation of US liabilities.

We examined these US privileges in global comparison in a paper we just published with Pia Hüttl. In this blog post I focus on the yield (investment income flow) on foreign assets and liabilities. In a later post I’ll also look at revaluations.

In line with the literature, we find that the main reason for high yields on US net total assets is high yield on foreign direct investments (FDI) made by US investors abroad. For example, on average between 2000 and 2016, yield on US FDI abroad was 7.2%, while yield on German FDI abroad was much lower at 4.8%. Other continental European countries benefited from yields quite similar to German yields. Only a few other advanced countries, like Norway, Switzerland, Japan and the United Kingdom, had FDI yields comparable to the US.

What is the reason for the high US yields?

What is the reason for the high US yields? One answer could be risk; it is possible that US investors invest in riskier projects than, for example, German investors, and riskier investments should deliver (on average over a long time horizon) a higher yield.

Unfortunately, available data does not allow us the consideration of all aspects of risk. But we can control for an important risk factor: the country composition of foreign assets and liabilities. For example, FDI investment in Austria might be less risky than FDI investment in Thailand. Certainly, it is also possible that US investors invest in markedly different sectors of the Austrian economy, or if they invest in the sector of the Austrian economy, they might invest in companies within the same sector that have different risk profiles. While we cannot exclude this hypothesis, we believe that considering the country-composition of foreign investment already captures most of the risk factors.

We therefore calculate the average yield on FDI liabilities of 78 investment destination countries. For each country, we use weights which are proportional to FDI investment made by that country –for example, for the US we consider the country-composition of US FDI abroad. The results suggest that the US indeed invests in countries in which FDI yields are somewhat higher – but only somewhat. For example, between 2006 and 2016, the average FDI yield in countries in which the US invested was 5.9%, while the average yield in countries in which the Germans invested was 5.4%. Therefore, the geographical composition of FDI assets, or different riskiness of FDI investments, is only a small part of the story.

Much more important is the yield relative to average yield of the destination countries: US, and also British and Japanese investors, were able to outperform the average yield earned in the countries of their FDI destinations, while German and most other continental European investors earn just that average (Figure 2).

Therefore, one conclusion we draw is that risk likely explains only part of the large yields on US foreign assets. What explains the rest? We raise three possibilities.

Do investments in ‘tax optimisation’ countries distort FDI yields?

A recent study by Garcia-Bernardo and his co-authors used a numerical method to identify off-shore financial centres, which are frequently used for ‘tax optimisation’ purposes. We found that about 60% of US and 40% of UK FDI is invested in such countries, and Japanese investors also invested a surprisingly large share of Japan’s FDI investments in the Cayman Islands. In principle, this should not alter yields, given that we compare reported profit transfers (relative to FDI assets) and thereby undeclared income does not enter the statistics we use. However, when investment in ‘tax optimisation’ countries is so high, FDI yield and stock data might be measured imprecisely.

Does the treatment of intellectual property distort the statistics?

Some companies might establish the bulk of their intellectual property in their home country and have little physical investment in other countries, yet profit from these other countries might be related to their home-country intellectual property. Thereby, the ratio of profit to physical investment abroad can be large.

Could financial sophistication contribute to high yields on FDI assets?

Financial sophistication might help investors to better identify profitable investment opportunities and the US, the UK and Japan are financially quite sophisticated countries.

Further research should analyse the relevance of these and other possible reasons for the high FDI yields earned by US, UK and Japanese investors.

 


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article Download PDF More on this topic

External Publication

Europe – the global centre for excellent research

This report, requested by the European Parliament's Committee on Industry, Research and Energy, analyses the EU’s potential to be a global centre of excellence for research as a driver of its future growth in a complex global S&T landscape, and how EU public resources can contribute to this.

By: Michael Baltensperger and Reinhilde Veugelers Topic: Innovation & Competition Policy Date: May 22, 2019
Read article More on this topic More by this author

Blog Post

The latest European growth-rate estimates

The quarterly growth rate of the euro area in Q1 2019 was 0.4% (1.5% annualized), considerably higher than the low growth rates of the previous two quarters. This blog reviews the reaction to the release of these numbers and the discussion they have triggered about the euro area’s economic challenges.

By: Konstantinos Efstathiou Topic: European Macroeconomics & Governance Date: May 20, 2019
Read article More on this topic More by this author

Blog Post

What is in store for the EU’s trade relationship with the US ?

If faced with a resurgent President Trump after the next US election, the EU will have some difficult decisions to make as it is compelled to enter a one-sided negotiation. Failure to strike a deal will imperil the world’s largest trade relationship and contribute to the progressive unravelling of the rules enshrined in the World Trade Organization – although the changes required of Europe by Trump’s demands may ultimately turn out to be in the interest of Europeans.

By: Uri Dadush Topic: Global Economics & Governance Date: May 16, 2019
Read about event More on this topic

Past Event

Past Event

CANCELLED: Future of taxation in the EU

Due to a previously unannounced air traffic controllers strike in Belgium, the Prime Minister Morawiecki is unable to land in time for the event. We apologise for any inconvenience.

Speakers: Marie Lamensch, Mateusz Morawiecki and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 16, 2019
Read article More on this topic More by this author

Podcast

Podcast

Director's Cut: Evolution of US-China relations amid trade-tariff conflict

Bruegel director Guntram Wolff and Bruegel fellow Uri Dadush welcome William Alan Reinsch, senior adviser and Scholl chair in international business at the Center for Strategic and International Studies, for a discussion of how China-US relations are developing in the context of unfolding trade war.

By: The Sound of Economics Topic: Global Economics & Governance Date: May 14, 2019
Read article More on this topic More by this author

Blog Post

Implications of the escalating China-US trade dispute

If allowed to escalate, the trade dispute between China and the United States will significantly increase the likelihood of a global protectionist surge and a collapse in the rules-based international trading system. Here the author assesses the specific impacts on the Chinese and US economies, as well as the strategic problems this dispute poses for Europe.

By: Uri Dadush Topic: Global Economics & Governance Date: May 14, 2019
Read article More on this topic

Blog Post

Germany’s even larger than expected fiscal surpluses: Is there a link with the constitutional debt brake?

Germany is having a political debate on the adjustment of its budgetary plans due to revised forecasts, and an academic debate on the debt brake. Yet, since 2011, general government revenues and surpluses have been systematically and significantly higher than forecast. The German surplus reached 1.7% of GDP in 2018. This bias did not exist from 1999-2008 before the introduction of the debt brake. While the IMF also got its forecasts of German surpluses wrong, the extent of the bias is larger for the German government’s forecasts. These data suggest that the political debate should focus on the debt brake and its implementation rather than on how to close the budgetary ‘hole’.

By: Catarina Midoes and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: May 13, 2019
Read article More on this topic More by this author

Blog Post

All eyes on the Fed

Last week the US Federal Reserve left the federal funds rate unchanged and lowered the interest rate on excess reserves. We review economists’ recent views on the monetary policy conduct and priorities of the United States’ central bank system.

By: Inês Goncalves Raposo Topic: Global Economics & Governance Date: May 6, 2019
Read article Download PDF More by this author

Parliamentary Testimony

Promoting sustainable and inclusive growth and convergence in the European Union

This speech was delivered by Guntram Wolff at the Informal ECOFIN Meeting in Bucharest on 5 April 2019.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance, Testimonies Date: April 8, 2019
Read article Download PDF More on this topic More by this author

Working Paper

Europe in the midst of China-US strategic competition: What are the European Union's options?

With the trade conflict between the United States and China bringing China-US strategic competition into the open, the European Union faces an urgent question: how to position itself in the competition.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: April 8, 2019
Read article Download PDF

Policy Contribution

Promoting sustainable and inclusive growth and convergence in the European Union

This Policy Contribution was written for the Informal ECOFIN Meeting, Bucharest, 5 April 2019. The authors look at the EU’s economic agenda, discussing the priorities for the next five years.

By: Maria Demertzis, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: April 4, 2019
Read article More on this topic More by this author

Blog Post

Lockin' tax haven's door

Tax avoidance and evasion harm the public coffers, and increase inequality and poverty. This post summarises the recent debate on several aspects of the issue: the update of the European blacklist of tax havens and the related recent report from Oxfam, a call for reform of international taxation by the IMF, and the request for IRS reform by US democratic senators.

By: Enrico Bergamini Topic: Global Economics & Governance Date: March 25, 2019
Load more posts