The Evolution of Global FDI: Patterns of Investment in Tax Havens and China

Global foreign direct investment (FDI) has experienced remarkable growth over the past two decades. As the figure below shows, total global FDI liabilitiesFDI represents an investment that gives the investor significant control over a foreign enterprise. In balance of payments accounting, it appears as an asset in the investor’s country and a liability in the recipient country. have more than tripled, surging from about $21 trillion in 2006 to over $67 trillion by 2023.FDI data are from the External Wealth of Nations database, which is described in detail in Philip R. Lane and Gian Maria Milesi-Ferretti’s February 2018 IMF Economic Review article, “The External Wealth of Nations Revisited: International Financial Integration in the Aftermath of the Global Financial Crisis.” The dataset was recently updated through year-end 2023, as described in this January 2025 Brookings Institution article.

We can observe two periods of rapid expansion: 2006 to 2015, during which FDI liabilities more than doubled from about $21 trillion to over $45 trillion, and 2015 to 2023, during which they reached over $67 trillion despite the global COVID-19 pandemic.

Global Foreign Direct Investment Liabilities, 2006-2023

SOURCES: Lane and Milesi-Ferretti (2018), External Wealth of Nations database and authors’ calculations.

NOTE: FDI liabilities are in U.S. dollars.

The composition of global FDI during this substantial growth reflects two particularly interesting patterns: the evolving role of financial centers—tax havens like the Cayman Islands or the Netherlands—and China’s emerging position as a destination for international investment.

Intellectual Property and FDI in Global Financial Centers

Financial centers have historically played a dominant role in attracting global FDI through complex tax optimization strategies, particularly around intellectual property (IP). As the next figure illustrates, their share of total FDI liabilities peaked at 39% in 2015 but fell to 30% by 2023, suggesting a significant shift in multinational firms’ investment behaviors.

Policy changes, particularly the 2017 Tax Cuts and Jobs Act in the U.S., have fundamentally reshaped how multinationals manage their IP holdings.See our August 2024 Federal Reserve Bank of St. Louis Working Paper, “The Impact of the 2017 Tax Cuts and Jobs Act on U.S. Multinationals’ Intangible Assets.” Our analysis shows that this was not just simple repatriation, but instead represented a deeper restructuring of global IP management approaches. Notably, the decline in shares of total FDI was not uniform across financial centers. Ireland, for instance, showed different patterns than pure tax havens—countries that impose no corporate income taxes—reflecting its unique position and tax structure.

Distribution of Global Foreign Direct Investment Liabilities, 2006-2023

SOURCES: Lane and Milesi-Ferretti (2018), External Wealth of Nations database and authors’ calculations.

NOTES: FDI liabilities are in U.S. dollars. Financial centers are the British Virgin Islands, the Cayman Islands, Hong Kong, Ireland, Luxembourg, Netherlands, Singapore and Switzerland. The G7 countries are Canada, France, Germany, Italy, Japan, the U.K. and the U.S.

Patterns of FDI Growth in China

China’s experience also offers an interesting narrative around global patterns in FDI. Amid increasing geopolitical tensions between the U.S. and China, and widespread discussion about supply chain resilience, China’s share of global FDI liabilities grew steadily from 3% in 2006 to 5.7% in 2022. However, the most recent data show a slight decline to 5.3% in 2023. Given the dramatic growth in total global FDI (see the first figure), China’s rising share through 2022 represents an impressive increase in absolute terms—from about $600 billion to over $3.5 trillion. Its FDI liabilities represent the accumulated stock of foreign ownership in Chinese assets, including factories, real estate, equity stakes in Chinese companies, and reinvested earnings from existing operations.

While the 2023 decline in China’s share of FDI might reflect emerging geopolitical tensions or changing investment strategies, its overall level of FDI liabilities remains substantially higher than it was a decade ago. This sustained, high level of foreign investment suggests several key dynamics:

• Market access remains crucial for reaching China’s large consumer market.
• China’s production capabilities, including its skilled workforce and established supplier networks, continue to attract investment despite rising labor costs.
• Many multinationals appear to be pursuing a “China plus one” strategy rather than wholesale relocation.

Under a China plus one strategy, companies maintain their Chinese operations while simultaneously diversifying by establishing additional facilities in countries like Vietnam, Thailand or India. This approach allows firms to reduce concentration risk and access complementary capabilities while still benefiting from China’s sophisticated manufacturing ecosystem and large domestic market.

Tax Considerations, Economic Fundamentals and Investment Decisions

Overall trends suggest a maturing pattern in global FDI, characterized by the steady growth of investment into major economies and a stabilization or decline in traditional tax havens. While tax considerations remain relevant, market access and productive capabilities appear to be increasingly dominant drivers of investment decisions. If global FDI continues its upward trajectory, this focus on fundamental economic factors over pure tax considerations may become more pronounced.

Notes

1. FDI represents an investment that gives the investor significant control over a foreign enterprise. In balance of payments accounting, it appears as an asset in the investor’s country and a liability in the recipient country.
2. FDI data are from the External Wealth of Nations database, which is described in detail in Philip R. Lane and Gian Maria Milesi-Ferretti’s February 2018 IMF Economic Review article, “The External Wealth of Nations Revisited: International Financial Integration in the Aftermath of the Global Financial Crisis.” The dataset was recently updated through year-end 2023, as described in this January 2025 Brookings Institution article.
3. See our August 2024 Federal Reserve Bank of St. Louis Working Paper, “The Impact of the 2017 Tax Cuts and Jobs Act on U.S. Multinationals’ Intangible Assets.”