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

Blog Post

Hong Kong’s economy is still important to the Mainland, at least financially

Hong Kong’s current situation is important for the world in as far as its role as major offshore financial centre is key for China’s inbound and outbound investment and financing. Capital outflows from Hong Kong are especially risky given Hong Kong's so far useful but rigid monetary regime, namely a peg to the USD under a currency board

By: Alicia García-Herrero and Gary Ng Topic: Global Economics & Governance Date: August 19, 2019
Read about event

Upcoming Event

Sep
9
08:30

China-EU investment relations: Exploring competition and industrial policies

This is a closed-door workshop jointly organised by MERICS and Bruegel looking at China-EU investment relations.

Speakers: Alicia García-Herrero Topic: Finance & Financial Regulation, Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article Download PDF More on this topic More by this author

External Publication

An Effective Regime for Non-viable Banks: US Experience and Considerations for EU Reform

The US regime for non-viable banks has maintained a high degree of stability and public confidence by protecting deposits, while working to minimise the public cost of that protection. EU reformers can draw valuable insights from the US experience. A review of the US regime supports arguments in favour of harmonisation and centralisation of bank insolvency proceedings and deposit insurance in Europe’s banking union.

By: Nicolas Véron Topic: Finance & Financial Regulation Date: July 22, 2019
Read article More on this topic

Blog Post

China’s investment in Africa: What the data really says, and the implications for Europe

China has clearly signalled to Europe that it does not shy away from involvement in Africa, historically Europe’s area of influence. But the nature of China’s direct investment flows to the continent will have to change if they are to prove sustainable.

By: Alicia García-Herrero and Jianwei Xu Topic: Global Economics & Governance Date: July 22, 2019
Read article More on this topic

Blog Post

Talking about Europe: Die Zeit and Der Spiegel 1940s-2010s

An on-going research project is seeking to quantify and analyse printed media discourses about Europe over the decades since the end of the Second World War. A first snapshot screened more than 2.8 million articles in Le Monde between 1944 and 2018. In this second instalment we carry out an analogous exercise on a dataset of more the 500 thousand articles from two German weekly magazines: Die Zeit and Der Spiegel. We also report on the on-going work to refine the quantitative methodology.

By: Enrico Bergamini, Emmanuel Mourlon-Druol, Francesco Papadia and Giuseppe Porcaro Topic: European Macroeconomics & Governance Date: July 18, 2019
Read article More on this topic

Opinion

What bond markets tell about China’s economy

Macro data doesn’t provide a comprehensive picture to investors, but bond issuance data can fill in some gaps.

By: Alicia García-Herrero and Gary Ng Topic: Global Economics & Governance Date: July 10, 2019
Read article More on this topic

Blog Post

‘Lo spread’: The collateral damage of Italy’s confrontation with the EU

The authors assess whether the European Commission's actions towards Italy since September 2018 have had a visible impact on the spread between Italian sovereign-bond yields and those of Germany, and particularly whether the Commission’s warnings have acted as a ‘signalling device’ for bond-market participants that it might be difficult for Italy to obtain the support of the ESM or the ECB’s OMT programme if needed.

By: Grégory Claeys and Jan Mazza Topic: European Macroeconomics & Governance Date: July 8, 2019
Read article More by this author

Blog Post

It’s hard to live in the city: Berlin’s rent freeze and the economics of rent control

A proposal in Berlin to ban increases in rent for the next five years sparked intense debate in Germany. Similar policies to the Mietendeckel are currently being discussed in London and NYC. All three proposals reflect and raise similar concerns – the increase in per-capita incomes is not keeping pace with increases in rents, but will a cap do more harm than good? We review recent views on the matter.

By: Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: July 8, 2019
Read article More on this topic More by this author

Opinion

Farewell, flat world

In the last 50 years, the most important economic development has been the diminishing income gap between the richer and poorer countries. Now, there is a growing realisation that transformations in the global economy have been re-established centrally from intangible investments, to digital networks, to finance and exchange rates.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: July 2, 2019
Read about event More on this topic

Past Event

Past Event

China’s investment in Africa: consequences for Europe

How is Chinese investment impacting Africa, and what could be the consequences for Europe?

Speakers: Solange Chatelard, Maria Demertzis, Alicia García-Herrero, Abraham Liu and Estelle Youssouffa Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 24, 2019
Read article More on this topic More by this author

External Publication

Liability: When Things Go Wrong in an Increasingly Interconnected and Autonomous World: A European View

In the following article, Scott Marcus first considers the sources of potential defects and what might be done to redress them. He then goes on to consider what constitutes a product defect as well as the associated liability in light of recent (and potential future) EU Directives.

By: J. Scott Marcus Topic: Innovation & Competition Policy Date: June 6, 2019
Read article More on this topic More by this author

Opinion

L’euro sans l’Europe : un projet incohérent

Jean Pisani-Ferry constate que tous les grands partis ne remettent plus en cause l’euro. Il souligne néanmoins que trois vulnérabilités – économique, politique et internationale – menacent la monnaie unique.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: May 28, 2019
Load more posts