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 More on this topic More by this author



Backstage: The new balance of Asia-EU-US trade relations

Amid the Asia-Europe Economic Forum on the fringes of the 12th ASEM Summit, Bruegel senior fellow hosts a conversation on developing global trade relations, with guests Moonsung Kang, professor as Korea University, and Michael G. Plummer, director at SAIS Europe – Johns Hopkins University, for an episode of the Bruegel Backstage series on ‘The Sound of Economics’.

By: The Sound of Economics Topic: Global Economics & Governance Date: October 17, 2018
Read article More on this topic More by this author


Greece: What to expect after the bail-out

After being under the close scrutiny of three financial assistance programmes since May 2010, Greece has finally left the bail-out in August 2018. How different is the post-bail-out era from the preceding eight years? Will Greece be able to stand on its own? And how might the country improve its economic outlook? In this post, which summarises a presentation recently given at an Athens conference, the author answers these three questions.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: October 9, 2018
Read article Download PDF More by this author

Parliamentary Testimony

Belgian Federal ParliamentCroatian Parliament

Transatlantic relations

Testimony before the Belgian Federal Parliament ( La commissions des Relations extérieures de la Chambre des représentants )

By: Maria Demertzis Topic: Belgian Federal Parliament, Croatian Parliament, Testimonies Date: September 27, 2018
Read article Download PDF More on this topic More by this author

External Publication

LNG and Nord Stream 2 in the context of uncertain gas import demand from the EU

Georg Zachmann sees the development of import demand for natural gas in the EU as uncertain. In case of strongly increasing import demand, both Nord Stream 2 and liquified natural gas imports could contribute to ensure European supply.

By: Georg Zachmann Topic: Energy & Climate Date: September 27, 2018
Read article More on this topic More by this author


China Made Two Promises in Africa. Can It Keep Them?

China has committed to a market-driven relationship with Africa, as well as a new $60 billion investment plan on the continent, following the recent China-Africa summit. In this light, the author assesses the China-Africa economic relationship, suggesting those new objectives may not be so easy to achieve.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: September 19, 2018
Read about event More on this topic

Past Event

Past Event

Perils and potential: China-US-EU trade relations

We are hosting a number of Chinese and EU experts to discuss trade relations between the three forces.

Speakers: Miguel Ceballos Barón, Alicia García-Herrero, Wei Jianguo, André Sapir, Herman Van Rompuy, Zhang Weiwei, Guntram B. Wolff, Zhou Xiaochuan, Zhang Yansheng and Ruan Zongze Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 17, 2018
Read article More by this author



Director's Cut - The extent of Turkey's crisis

Bruegel director Guntram Wolff welcomes Brad Setser, senior fellow at the Council on Foreign Relations, and Jean Pisani-Ferry, Mercator senior fellow at Bruegel, to discuss the deterioration of Turkey's economy.

By: The Sound of Economics Topic: European Macroeconomics & Governance, Global Economics & Governance Date: August 24, 2018
Read article More by this author


US-China trade war: What’s in it for Europe?

To help evaluate whether the market response is warranted or exaggerated, the author measured the trade impact of additional import tariffs based on standard economic theory, namely two key parameters—the tariff pass-through rate and the price elasticity of demand. The end of multilateralism seems clear, at least for trade.

By: Alicia García-Herrero Topic: European Macroeconomics & Governance, Global Economics & Governance Date: August 23, 2018
Read article Download PDF More on this topic

Policy Contribution

The macroeconomic implications of healthcare

Health-care systems play a crucial role in supporting human health. They also have major macroeconomic implications, an aspect that is not always properly acknowledged. Using a standard method to measure efficiency, data envelopment analysis (DEA), the authors find significant differences between countries. This finding calls for policy responses.

By: Zsolt Darvas, Nicolas Moës, Yana Myachenkova and David Pichler Topic: European Macroeconomics & Governance Date: August 23, 2018
Read article


Goodbye deleveraging: Fiscal and monetary expansion to support growth in China

China has opted for a renewed fiscal and monetary stimulus to address the risk of the US-led trade war. The dual policies send a clear signal that economic growth is the priority, but such measures do not come without a cost. Deleveraging efforts will have to be put on hold for the time being.

By: Alicia García-Herrero, Gary Ng and Jianwei Xu Topic: Finance & Financial Regulation, Global Economics & Governance Date: August 23, 2018
Read article More on this topic More by this author


Wir brauchen gezielte Migration für unsere Renten

Deutschland benötigt die geordnete Zuwanderung produktiver Arbeitskräfte aus dem Ausland. Um diesen Prozess besser zu steuern, will die Bundesregierung nun ein Fachkräfteeinwanderungsgesetz auf den Weg bringen.

By: Jochen Andritzky Topic: European Macroeconomics & Governance Date: August 22, 2018
Read article More on this topic More by this author


Germany’s Government Still Has an Allergy to Investing

The new coalition budget looks a lot like the old German coalition budget.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: July 23, 2018
Load more posts