The Use of Tax Havens by MNEs in Business Clusters: A Cross-country and Firm-level Analysis

Abstract

This paper examines the use of tax havens by MNEs located in business clusters versus their non-cluster counterparts. We extend the knowledge-based theory to construct a number of empirical hypotheses that are tested using dichotomous choice models. The firm-level dataset covers 21,389 MNEs from 5 OECD countries during the years 2009-2017. We find evidence that MNEs, who are part of a business cluster use tax haven subsidiaries to a greater extent compared with MNEs, who are not part of a business cluster. This association continues to hold whilst controlling for other important factors that drive tax haven FDI. Additional insights suggest that firm age, size and technological sophistication can impact the magnitude of the correlation between MNEs in business clusters and their tax haven activity. The findings of this paper shed more light on the use of tax havens among MNEs in their international business operations and have important implications for policy makers and managers.