International Financial Centers, Foreign Direct Investment, and Economic Volatility

ABSTRACT

Comparing economies with and without international financial centers (IFCs) over 1970–2023, with IFC status determined from the 121 centers ranked by the Global Financial Centres Index, we find that IFCs are not significantly associated with FDI inflows but are strongly associated with higher FDI outflows—1.2%–2.5% of GDP for non‐offshore IFCs and 11%–16% for offshore IFCs. Observed across both regional and global centers, this asymmetry suggests that IFCs are associated with capital sent abroad by domestic firms rather than capital brought in by foreign investors. In parallel, we find no robust evidence of a significant association between IFC presence—whether offshore or not—and economic volatility.