The Impact of Regulatory Initiatives and Cross-Border Capital Flows : Offshore Financial Centres

As a consequence of recent regulatory initiatives against ‘banking secrecy', international financial activities in offshore financial centres (OFC), which comprise mostly small island tax-havens, may have diminished appeal to financial institutions and investors in advanced economies. In this paper, the determinants of cross-border capital flows are investigated using a two-stage least squares and probit methodology, with heteroskedastic standard errors. The results, based on a sample of 222 host jurisdictions, of which 46 were OFCs and 46 were tax havens, suggest that countries with lower tax rates and a higher quality of governance may encourage cross-border capital inflows by non-resident investors. There are also indications that the decision to move assets offshore through arbitrage in tax and local law, or the decision to become an OFC, are constrained by the cost of maintaining governance quality