If foreign investment is not foreign: Round-trip versus genuine foreign investment in Russia

28  February 2013    4:00 pm CET

Svetlana Ledyaeva (with Päivi Karhunen and John Whalley), Helsinki School of Economics

In cooperation with:


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