| Abstract: | Why has the United States been able to keep receiving net international investment income as a debtor country? Several authors have pointed out that it is because US direct investments abroad have been generating better returns than have foreign direct investments in the United States. However, there is no consensus on why this is the case. This paper investigates this issue by conducting panel regressions to identify the main determinants of return on US direct investment abroad (RUSDIA) and those of return on foreign direct investment in the United States (RFDIUS), using data from 49 countries over the 1994–2013 period. Our findings suggest that the largest contributor to the RUSDIA‐RFDIUS gap is USDIA's advantage in the internalisation effect, which more than offset any negative age effect. The second largest contributor is income‐shifting activities by US‐controlled MNCs aiming to lower their overall tax payments. The third contributor is the negative age effect of inward FDI in the United States, which more than offset its weak internalisation effect. Altogether, those effects account for about 50% of the average return gap from 1994 to 2013. The contribution of the risk‐compensation hypothesis to the return gap is negligible. |
