If foreign investment is not foreign: Round-trip versus genuine foreign investment in Russia
28 February 2013 4:00 pm
Svetlana Ledyaeva (with Päivi Karhunen and John Whalley), Helsinki School of Economics
wiiw, Rahlgasse 3, 1060 Vienna, lecture hall (entrance from the ground floor)
In this paper we study the phenomenon of round-trip investment between Russia and key offshore financial centers (OFCs), namely, Cyprus and British Virgin Islands, which is now a significant part of foreign investment into Russia. Using firm-level data we study differences in location strategies between round-trip and genuine foreign investors into Russia and the factors which determine the fraction of round-trip investment in total foreign investment into Russian regions. In empirical analysis we also distinguish between different firm size and industries. We conclude that round-trip investors tend to invest more in corrupt and resource abundant Russian regions compared to genuine foreign investors. Furthermore, the share of round-trip investment in total foreign investment is significantly higher in corrupt Russian regions. In general, these results point to the corruption component of round-trip investment. Second, we find that genuine foreign investors tend to invest more in regions with higher level of skilled labour and use sea ports more compared to round-trip investors. The former result indicates that genuine foreign investment is more technologically advanced than round-trip. The latter result indicates that round-trip investment is more oriented towards local market while for genuine foreign investors it is more towards international markets (in inward and backward linkages).
Keywords: Russia, round-trip investment, capital flight, foreign investment
JEL classification: F21, F23