Good friends in high places: Politico-economic determinants of the expropriation and taxation of multinational firms

Abstract

Scholars explaining the conditions that lead governments to expropriate local operations of foreign multinational firms largely focus on how large sunk costs decrease the multinationals’ bargaining power vis-a-vis the host government and how some political regimes (dictatorships) are more inclined to expropriate than others (democracies). Those explanations miss important considerations related to the host-country technological and political environment. In response, we develop and analyze a game theoretical model suggesting that expropriation of multinational firm operations is more likely when: (1) the host-country government capability to monitor taxation of multinational firms is lower; (2) the host-country government capability to run said operations is higher; (3) the host-country government is relatively independent from the exports of the multinational firm-led exports, and (4) political competition is highly restricted. Perhaps paradoxically, we also find that multinational firms are more likely to “self-tax” when host-country governments are too lenient. We illustrate these model-based findings with matched case studies of host-country government interactions with multinational firms in the Venezuelan and Norwegian oil industries of the 20th century.