The Determinants of FDI Reinvestment Rates

Profits accruing to foreign-owned firms can either be repatriated to the origin country or reinvested in the host country. Using bilateral country-level FDI earnings flow data, this paper empirically investigates what determines how much is reinvested in a given country. Panel data regressions are estimated on OECD country pairs for the time period 2005-2020 with origin and host country fixed effects. Macroeconomic conditions, institutional factors, agency problems, taxation, and global economic factors are considered as explanatory variables. Lagged independent variables are used as instruments in a 2SLS specification. The main finding is that geographical distance and the world GDP growth rate reduce reinvestment rates, while a shared legal origin increases them.