Alternative distributions of foreign direct investment stocks: Evidence from captive financial institutions affiliated to private equity and real estate investment funds in Luxembourg

Abstract This paper presents alternative distributions of foreign direct investment (FDI) stocks held by captive financial institutions (CFIs) affiliated to private equity and real estate investment funds in Luxembourg. The study focuses on CFIs with total assets larger or equal to 500 million euros. The paper breaks down FDI stocks by geographical location, sector and main economic activity. The analysis is undertaken on both the liabilities side and the assets side of CFIs’ balance sheets. The paper considers four alternative counterpart concepts: the immediate counterpart country (traditionally favoured by international statistical standards), the sponsor (or capital manager) counterpart, the target (or capital recipient) counterpart and the client (or capital provider) counterpart. Results show that the traditional distribution of FDI stocks based on the immediate counterpart country differs substantially from the alternative distributions based on the sponsor/target/client counterparts. The alternative distributions provide two important improvements. First, the traditional distribution can be misleading as blurring the initial provider of capital and the final recipient of capital, but the alternative distributions can disentangle capital providers (clients), capital managers (sponsors) and final capital recipients (targets). Second, the alternative distributions can distinguish between FDI that effectively benefits the host country and FDI that transits via the host country to be invested in third countries. This second aspect is particularly important for countries hosting a financial centre such as Luxembourg.

Keywords: Capital flows, Foreign direct investment, Captive financial institutions and money lenders, Sector S127, Investment funds, Private equity investment funds, Real estate investment funds, Financial structuring

JEL codes: C80, C81, F23, F30, G23, G32