Measuring Chinese MNE Activity: the Challenge of Corporate Inversions and Capital in Transit Related FDI

FDI data has historically been recorded on a bilateral basis between the immediate origin and destination of the investor. This approach, however, makes its use problematic for understanding MNE activity because: (i) offshore corporate inversions may obscure the real origin of the MNE, leading to the exclusion of FDI from inverted businesses in data collected at the firm-level; and (ii) MNEs frequently transit capital via intermediary jurisdictions. Here we analyze the choice of Chinese MNEs to use inversions and capital in transit related FDI. Our econometric modeling explores whether systematic differences exist between private and state-owned MNEs in these two choices, finding the former are more predisposed towards inversions but not capital in transit. We argue from this that the prevalence of inversions systematically biases Chinese FDI data, with important implications for how we measure Chinese MNE activity. State-owned firms are overrepresented in Chinese FDI data, meaning their preferences and patterns are interpreted as more indicative of overall Chinese MNE behavior than is actually the case.