Dan — As erg noted, I argue that the anecdotal evidence points to
corporate tax arbitrage as a key explanation. But if you come across
the definative b-school explanation, do let me know. So ask Bill Gates,
or the big pharma CEOs with big profits in Ireland for the answer, not
old George Soros.
I’ll set aside my argument that investing in US dollar denominated
assets is actually very risky for a foreign investors looking to
maintain their real wealth in local currencies terms. The big current
account deficit and all. Not everyone agrees with it.
But I don’t think the US just is good at borrowing at low cost to
buy high yielding assets argument works that well. For a couple of
reasons. First, US returns abroad really aren’t that good. The shocking
thing is that reported foreign returns on their FDI are really bad —
less than they would have gotten holding long-term Treasuries
generally. It isn’t US skill, at least not skill at anything other than
taking foreign direct investors for a ride that shows up in the data
(now if FDI in the US doesn’t want to show profits in the US for tax
reasons, the story changes … ). Second, most US FDI is just not in
risky markets, nor are most US debt securities claims on risky places.
Most US FDI is in the UK. lots more is in Switzerland. Throw in Japan,
Canada and the Eurozone and you have a decent mental image of US assets
abroad. Read the CBO report on this topic. Or look at the data the IMF
has assembled on the sources of FDI in China (hint — it ain’t mostly
coming from the US). US investors also own foreign bonds — but they
are mostly the securities issued in well developed markets that are
almost as liquid as our own. UK, Japan, Canada, eurozone and the like.
We have lent tons of money to the Caymans too; I bet the Caymans
also invests a lot in the US …. hhmmm? Maybe some b-school prof can
help us out there. Or tax attorney.