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: Banking and capital markets

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.

Read about event More on this topic
 

Upcoming Event

Feb
10
11:00

Corporate investment during the COVID-19 crisis

How did corporate investment fare during the pandemic? Has government support sufficiently helped firms get through the crisis and prepare for the green and digital transformations ahead?

Speakers: Chiara Criscuolo, Jan Mischke, Ricardo Mourinho, Debora Revoltella and Guntram B. Wolff Topic: European governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic
 

Past Event

Past Event

The EU’s new foreign investment screening mechanism

At this members-only event we will discuss the European Commission's new foreign investment screening mechanism

Speakers: Damien Levie and Nicolas Véron Topic: Banking and capital markets Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 17, 2021
Read article More on this topic More by this author
 

External Publication

L’Union européenne et les États-Unis, un an après

Après une année troublée par Kaboul et AUKUS, qu'avons-nous retenu de l'an I de la présidence Biden ? Maria Demertzis revient sur les évènements marquants de l'année 2021 pour la relation entre les États-Unis et l'Union européenne.

By: Maria Demertzis Topic: Global economy and trade Date: December 8, 2021
Read article More on this topic More by this author
 

Parliamentary Testimony

Dutch Parliament

The future of the stability and growth pact

Testimony given to a Tweede Kamer der Staten-Generaal roundtable discussion on the future of the stability and growth pact.

By: Guntram B. Wolff Topic: Dutch Parliament Date: November 24, 2021
Read about event More on this topic
 

Past Event

Past Event

Covid recovery and the green transition: What can promotional banks do?

What is the role of promotional banks in financing the green transition?

Speakers: Sophie Barbier, Maria Demertzis, Ricardo Mourinho and Lucinio Muñoz Topic: Green economy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 18, 2021
Read article Download PDF More on this topic
 

Book/Special report

European governance

Instruments of a strategic foreign economic policy

Study for the German Federal Foreign Office produced by Bruegel, the Kiel Institute for the World Economy and DIW Berlin.

By: Katrin Kamin, Kerstin Bernoth, Jacqueline Dombrowski, Gabriel Felbermayr, Marcel Fratzscher, Mia Hoffmann, Sebastian Horn, Karsten Neuhoff, Niclas Poitiers, Malte Rieth, Alexander Sandkamp, Pauline Weil, Guntram B. Wolff and Georg Zachmann Topic: European governance Date: November 12, 2021
Read article Download PDF More by this author
 

Parliamentary Testimony

European governanceFrench Senate

European Union countries’ National Recovery and Resilience Plans: A cross-country comparison

Testimony before the Economic Affairs Committee of the French Senate.

By: Simone Tagliapietra Topic: European governance, French Senate, Macroeconomic policy Date: November 12, 2021
Read article More on this topic More by this author
 

Blog Post

What to make of the EU-US deal on steel and aluminium?

While deeply disappointing that the surprise deal maintains aluminium and steel tariffs against the EU beyond a modest quota, it alleviates a major irritant in transatlantic relations and contains interesting and innovative features relating to climate policy and to dispute settlement under WTO rules.

By: Uri Dadush Topic: Global economy and trade Date: November 4, 2021
Read article More by this author
 

Opinion

European governance

Can EU fiscal rules jump on the green bandwagon?

By and large, setting a new green golden rule would be a useful addition to the existing EU fiscal framework.

By: Guntram B. Wolff Topic: European governance, Green economy, Macroeconomic policy Date: October 22, 2021
Read article
 

Blog Post

European governance

Germany’s post-pandemic current account surplus

The pandemic has increased the net lending position of the German corporate sector. By incentivising private investment, policymakers could trigger a virtuous cycle of increasing wages, decreasing corporate net lending, which would eventually lead to a reduction of the economy-wide current account surplus.

By: Lionel Guetta-Jeanrenaud and Guntram B. Wolff Topic: European governance, Macroeconomic policy Date: October 21, 2021
Read article
 

External Publication

European Parliament

Tailoring prudential policy to bank size: the application of proportionality in the US and euro area

In-depth analysis prepared for the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Alexander Lehmann and Nicolas Véron Topic: Banking and capital markets, European Parliament, Macroeconomic policy Date: October 14, 2021
Read article More by this author
 

External Publication

Global Economic Resilience: Building Forward Better

A roadmap for systemic economic reform calling for step-change in global economic governance to increase resilience and build forward better from economic shocks, prepared for the G7 Advisory Panel on Economic Resilience.

By: Thomas Wieser Topic: Global economy and trade, Macroeconomic policy Date: October 14, 2021
Load more posts