Round-Tripping Foreign Direct Investment:
Why It Matters and What Can Be Done
by Magdolna Sass, Imre Fertő
In an increasingly interconnected global economy, traditional measures of Foreign Direct Investment (FDI) often fail to capture the full story. One phenomenon that has slipped under the radar of policymakers and researchers alike is “round-tripping” FDI: funds originally generated in a home country are sent abroad—often via intermediary jurisdictions—only to return as supposedly “foreign” investment. While recorded as inbound capital, these funds are, in reality, domestic resources masking themselves as foreign. In our new study in Global Policy, we unpack the drivers of round-tripping across 22 OECD countries between 2011 and 2021, revealing its scope, causes, and policy implications. Below, we translate the findings into accessible language, highlighting why understanding round-tripping is vital for equitable taxation, transparent investment flows, and the integrity of global financial systems.
What Is Round-Tripping—and Why Should We Care?
At its core, round-tripping occurs when a firm domiciled in Country A routes capital through Country B—often a low-tax or secrecy jurisdiction—before reinvesting it back into Country A as “foreign” capital. This hides the fact that the investment originated domestically, thus the (in reality) domestic investor gains access to benefits reserved for true foreign investors: tax incentives, legal protections under bilateral investment treaties, and sometimes preferential regulatory treatment. As we explain, this practice “distorts FDI data, erodes tax revenues, weakens regulatory oversight, and can create unfair competitive advantages,” among other negative spillovers (p. 1). Furthermore, the phenomenon can undermine global efforts to curb profit-shifting and aggressive tax planning, since round-trip investors exploit loopholes in both home- and host-country regulations.
Measuring Round-Tripping: A Methodological Leap Forward
One longstanding hurdle in understanding round-tripping has been disentangling it from other intermediary flows—especially “transhipment,” where capital passes through Country B en route to Country C. We leverage a dataset from the OECD (based on BPM6–BMD4 standards) that identifies the ultimate controlling owner of FDI stocks, rather than merely the direct investor. In practice, this means that when a domestic firm in Country A invests abroad (to Country B) and then sends funds back to Country A, the data capture Country A as the ultimate origin of the transaction. This methodology allows to quantify round-trip flows separately from transit-only flows, offering a clearer picture of how much inbound FDI is truly “foreign.”
By analysing 120 country-year observations across 22 OECD members (2011–2021), we constructed a panel in which the dependent variable is the share of round-trip FDI in total inward FDI. This ratio controls for differences in absolute FDI levels, making cross-country comparisons meaningful. The econometric model then explores a suite of potential determinants—economic, fiscal, institutional, and global—that might explain why some home economies experience higher round-trip shares than others.
Key Findings: What Drives Round-Tripping?
- Economic Development and Market Size
Higher levels of GDP per capita are positively associated with the share of round-tripping FDI. Richer economies tend to have more firms with the organizational capacity to establish foreign intermediaries and navigate complex ownership structures. Likewise, larger countries (by population) exhibit higher round-tripping shares, likely because bigger markets generate greater FDI volumes, simultaneously creating more opportunities for profit-shifting back into the home economy.
- Tax Burden Matters
Perhaps the most robust finding is the positive link between a country’s overall tax burden (tax revenue as a share of GDP) and round-tripping FDI. In high-tax jurisdictions, firms have stronger incentives to reroute capital through lower-tax intermediaries to reduce their effective tax rate. Our results align with studies in other contexts (e.g., Chari & Acikgoz 2016; Fourati et al. 2019) and underscore that policy discussions around global minimum taxation should also consider how domestic tax structures fuel round-trip activity.
- Controlled Foreign Company (CFC) Rules Can Help
Countries with robust CFC legislations—designed to prevent domestic shareholders from shielding passive income in low-tax foreign subsidiaries—exhibit lower round-trip shares. By allowing tax authorities to “claw back” profits declared offshore, CFC rules diminish the allure of round-tripping. However, heterogeneity in CFC enforcement across jurisdictions suggests that greater policy harmonization (especially under BEPS frameworks) could further constrain profit-shifting strategies.
- Legal Tradition and Regulatory Context
We employ “legal origin” dummies to capture broader regulatory and institutional differences, finding that countries following a German legal tradition tend to have lower round-trip shares, while evidence on the Anglo-Saxon legal tradition is mixed. Moreover, countries with stricter statutory FDI restrictions (equity limits, approval mechanisms) also show a (weakly) negative association with round-trip activity. These insights suggest that institutional frameworks—both at home and in intermediary jurisdictions—can shape firms’ roundtripping inclinations.
- The Role of Globalization
We differentiate between financial globalization (cross-border capital and portfolio flows) and economic globalization (trade openness, FDI flows, and data on transnational activity). Interestingly, financial globalization is associated with lower round-tripping, perhaps because firms in financially integrated economies can tap global capital markets directly, diminishing the need to disguise capital as FDI. Conversely, economic globalization correlates positively with round-trip shares, reflecting that increased trade and investment flows often accompany incentives for tax-advantaged inbound FDI.
- Tax Havens as Intermediary Destinations
Finally, we test whether a country’s status as a tax haven impacts its home-country round-trip share. The results indicate a partly significant positive relationship: while low tax rates attract foreign capital in general, tax haven features (e.g., banking secrecy, efficient legal frameworks) can also foster domestic firms’ use of round-trip structures. In short, even well-regulated offshore centres admit forms of round-trip and transhipment flows that distort global FDI statistics and tax bases.
Why This Research Matters for Policy
Accurate Measurement of FDI
Distorted FDI figures can mislead policymakers on how much “real” foreign investment is entering an economy. By quantifying round-trip flows separately, we provide a more transparent view of a country’s actual foreign investment footprint.
Protecting Domestic Tax Bases
High-tax jurisdictions face revenue erosion when domestic capital is funnelled abroad only to return as FDI. The strong link between tax burden and round-trip FDI underscores the urgent need for coordinated international tax policies, including a global minimum tax to level the playing field.
Strengthening Regulatory Oversight
Firms that engage in round-tripping often exploit legal and regulatory loopholes. The finding that German-style legal frameworks and stringent FDI restrictions are associated with reduced round-trip shares suggests that domestic reforms—such as simplifying ownership disclosure requirements—could make round-trip strategies less attractive.
Reinforcing CFC and BEPS Initiatives
That CFC rules help curb round-tripping supports ongoing OECD and G20 efforts to bolster anti-base erosion measures. By harmonizing CFC provisions across jurisdictions, governments can make it riskier for multinationals to roundtrip and park profits offshore under the guise of inbound FDI.
Examining the Limits of Globalization
The contrasting effects of financial versus economic globalization highlight a nuanced challenge: while capital market integration can offer transparent avenues for cross-border finance, expanded trade and investment links (maybe due to more intense competition) may inadvertently enable round-trip FDI. Policymakers must therefore balance openness with robust regulatory safeguards—for instance, by improving beneficial ownership transparency and tightening disclosure rules for FDI.
Toward a More Transparent FDI Landscape
Round-trip FDI does not merely represent a statistical quirk; it has real economic consequences. By routing domestic capital through foreign vehicles, firms can sidestep higher tax rates and claim benefits intended for genuine foreign investors—eroding both government revenues and healthy competition. The OECD champions of round-tripping (Czechia, Norway, Ireland, Germany, France, Italy) underscore that even well-regulated, high-income economies are not immune to this practice.
To address these distortions, we urge closer international coordination in taxation, legal frameworks, and data reporting. Potential policy responses include:
- Enhanced Beneficial Ownership Transparency: Requiring FDI to disclose ultimate owners (beyond direct subsidiaries) could help customs and tax authorities spot round-trip flows more readily.
- Stronger CFC and Anti-Profit-Shifting Rules: Harmonizing rules across borders—building on BEPS/GloBE initiatives—can reduce incentives for domestic firms to exploit foreign tax regimes.
- Targeted FDI-Screening Mechanisms: For countries with high round-trip shares, scrutinizing inbound FDI from known intermediary jurisdictions (e.g., Luxembourg, Netherlands, Hong Kong) can help distinguish genuine foreign investment from round-trip structures.
- Tax Harmonization Efforts: As global minimum tax discussions unfold, ensuring that domestic tax rates and incentives do not create arbitrage opportunities will be critical.
By shedding light on the macro-level drivers of round-trip FDI in OECD economies, our research offers a roadmap for both scholars and policymakers. The findings remind us that not all is FDI what it appears to be—and that without vigilant data collection and policy coherence, round-trip flows can continue to distort economic statistics, undermine tax bases, and erode trust in international investment regimes.
References
Sass, M., & Fertő, I. (2025). Round-Tripping Foreign Direct Investments: What are the Main Factors?
Global Policy, 0(0), 1–11.
https://doi.org/10.1111/1758-5899.70014
