ABSTRACT
In recent years China's outward foreign direct investment (hereafter OFDI) has grown at a faster rate than at any time in its preceding history. Although there is active debate about these trends in the International Business (IB) literature, particularly concerning natural-resource-seeking and strategic-asset-seeking OFDI, relatively little has been made of the rapid expansion of outward investment from China to the world's tax havens. This is surprising as by 2006 around 44 percent of China's officially recognized OFDI flows and one-fifth of all OFDI stock was directed at just one tax haven alone, the Cayman Islands. 1 A considerable share of China's inward investment, moreover, originated from another haven, the British Virgin Islands. In general, these flows have been considered merely as a statistical discrepancy created by the ‘round-tripping’ of capital. This process involves firms sending capital abroad only in order to bring it back under the semblance of ‘foreign’ investment to enjoy special government benefits and lower taxes. Even a cursory review of the evidence, however, raises questions about whether round-tripping alone can fully explain these trends. If, for example, so much OFDI from China is undertaken solely for the purposes of round-tripping, why does so much of it go to only one of the several dozen possible tax havens? And why is Hong Kong, which has historically been the favoured host country for China's round-tripping OFDI, now receiving less than the Cayman Islands? Why, furthermore, is there so much inward investment to China from one other tax haven – the British Virgin Islands? Finally, why did estimates of the net FDI flows from the Cayman Islands and British Virgin Islands (henceforth abbreviated CBVI) to China stand at a surplus of around US$ 16.5 billion in the 2004 to 2006 period? If round-tripping alone was the answer they should roughly balance themselves out. On the face of it these observations suggest a more complex picture than the round-tripping explanation alone describes.
