The Role of Caribbean Tax Havens and Offshore Financial Centres in Chinese Outward Foreign Direct Investment

Abstract

Little empirical attention has been paid to the rapid expansion and the apparent decline of foreign direct investment between China and the Caribbean tax havens and offshore financial centres. Building on institutional theories, we argue that investment flows between these jurisdictions are primarily a response to China’s capital market imperfections, with other institutional factors playing a contributing role. Using evidence from 72 Chinese firms for the period 1999 to 2010, we show that such outward investments involve significant capital augmentation and organisational restructuring to enable expansion in China. These processes of identifying and exploiting institutional environments can best be explained using the internalisation theory of foreign direct investment