Behavior Of Multinational Enterprises Research Articles

Tax havens reexamined: The impact of global digital tax reforms on international taxation

This review delves into the evolving landscape of tax havens in the wake of comprehensive digital tax reforms. This study scrutinizes the implications of global efforts to address tax evasion and profit shifting, particularly in the context of the digital economy. With the proliferation of digital services and cross-border transactions, traditional tax frameworks have struggled to capture the economic activities of multinational corporations operating in cyberspace. Consequently, tax havens have emerged as facilitators of aggressive tax planning strategies, exacerbating global tax inequalities and eroding fiscal sovereignty. Against this backdrop, the study analyzes the efficacy and repercussions of recent digital tax reforms spearheaded by international organizations and individual nations. It examines the implementation challenges, compliance burdens, and potential loopholes associated with these reforms. Moreover, the research evaluates the impact of digital tax measures on the behavior of multinational enterprises, exploring their responses in terms of tax planning strategies and business models. Furthermore, the study investigates the broader implications of digital tax reforms on international taxation dynamics, including their influence on tax competition, investment flows, and economic development. Special attention is paid to the implications for developing countries, which often bear the brunt of revenue losses resulting from profit shifting to tax havens. By synthesizing empirical evidence, policy analysis, and theoretical insights, this study offers a comprehensive reevaluation of tax havens in the digital age. It sheds light on the complex interplay between technological advancements, regulatory frameworks, and global economic dynamics shaping contemporary tax landscapes.

Sustainable value creation in multinational enterprises: The role of corporate governance actors

Multinational enterprises (MNEs) are increasingly expected to make their global operations sustainable, while overcoming important obstacles in a rugged global landscape. In this perspective article, we argue that a focus on their corporate governance (CG) actors – i.e., owners, directors, and executives – is key for understanding the premises of MNEs’ sustainable value creation. We develop an actor-centered perspective on MNEs whereby factors inherent to and surrounding CG actors – e.g., their cognition, personality, and values, as well as their interactions and governance – will determine the pervasiveness of their bounded rationality and bounded reliability, thus influencing whether, how, and under what conditions these key actors will contribute through their decisions to sustainable value creation. Our perspective advances nascent actor-centered research on MNEs’ non-market strategies, including corporate social responsibility and sustainability. Exploring the underlying mechanisms at the source of individual-level variation (next to firm-, industry-, and country-level variation) related to sustainable value creation may support theory development that can ultimately break new ground in explaining the strategic behavior and sustainable performance of MNEs. We formulate future research suggestions toward that end.

The establishment mode of Chinese MNEs abroad and the Belt and Road Initiative: insights from a strategy tripod perspective

PurposeEmerging-market multinational enterprises (MNEs) have pushed institutional factors to the cutting-edge of international business research. As for Chinese MNEs, the importance of institutions has been strengthened since the Chinese government launched the Belt and Road Initiative (BRI), which seeks to promote a comprehensive platform for cooperation among countries. This study aims to investigate the role played by the BRI as an institutional factor moderating the influence of other institution-, industry- and firm-specific factors on establishment mode choice by Chinese MNEs.Design/methodology/approachDrawing on the strategy tripod, a perspective claiming that a firm's strategies are the result of internal, industrial and institutional conditions, this study develops a number of hypotheses that are tested with data on 1,076 outward foreign direct investments (OFDIs) of Chinese MNEs between 2013 and 2021.FindingsThe results show that the BRI moderates the influence of both the firm's prior international acquisition experience and Chinese government's OFDI restrictions on the establishment by means of an acquisition. They also report that this moderating effect does not apply for acquisition experience in the host country nor institutional distance.Originality/valueThis study contributes to reinforce the importance of institutions as the third leg of a strategy tripod when explaining international behavior of Chinese MNEs. It also suggests that the BRI is a diplomatic tool that may act as a substitute for the firm's resources and may mitigate the negative influence of other external factors.

How Do MNEs and Domestic Firms Respond Locally to a Global Demand Shock? Evidence from a Pandemic

Global shocks bring unanticipated changes in the business environment of foreign multinational enterprises (MNEs) and rival domestic firms. We examine whether there is a difference between how MNEs and domestic firms react in heterogeneous local or subnational markets to a global demand shock. Leveraging the 2009–2010 H1N1 influenza pandemic as a source of exogenous variation in global demand for influenza vaccines, we investigate the role of subnational heterogeneity in economic resources, industry infrastructure, and political alignment within an emerging economy on the behavior of incumbent MNEs and rival domestic firms. We find that following the pandemic, MNE market share in the influenza vaccine market relative to the noninfluenza vaccine markets declines more in regions with lower government health spending per capita and also, in regions unaligned with the federal government. Additional analyses suggest that these changes in market share are not caused by a reduction in MNE revenues. Rather, they are caused by domestic firms that were already present in noninfluenza vaccine markets diversifying by entering the highly related influenza vaccine market. Finally, a granular examination of the differential responses reveals that such responses are not related to preshock differences in regional coverage of MNEs and domestic firms. This study contributes to the extant literature by suggesting that the direct costs or opportunity costs of new market and region entry are relatively greater for MNEs than for domestic firms, particularly in regions that have inadequate health infrastructure and are politically not aligned. This paper was accepted by Joshua Gans, business strategy. Funding: The authors acknowledge funding support from the National University of Singapore [Start-up Research Grant R-313-000-143-133]; the University of Minnesota [Summer Research Grant]; the Industrial Credit and Investment Corporation of India Bank Chair at Indian Institute of Management Ahmedabad; and the Campbell and Teller National Fellow Program at Hoover Institution, Stanford University. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2022.4313 .

Controlling without owning – owning without controlling: A critical note on two extensions of internalization theory

Recent attempts to extend internalization theory into new fields of enquiry illustrate the crucial role of control in the theory. In this paper, we focus on two examples: one applying internalization theory to external business relationships of multinational enterprises (MNEs) and one applying new internalization theory to MNEs’ governance. We argue that, in both cases, the ability of the extended theory to explain MNE behavior can be questioned, either because of the governance of the external relationships is shared between the MNE and its counterparts (as in the first case), or because of the substantial increase in the level of complexity of the MNE’s decision-making system (as in the second case). We conclude that scholars applying internalization theory to MNEs’ external business relationships, and to their decision-making processes, should address what shared governance in external business relationships, and the issue of bounded rationality/bounded reliability, actually mean for the possibility to apply the usual economic logic behind internalization theory. It is essential that future research focuses on what impact the circumscribed control in the two cases has on the ability of MNEs to assess, both ex ante and ex post, the level of transaction costs and managerial costs as bases for its decisions to invest abroad and run foreign operations.

How do MNEs and Domestic Firms Respond Locally to a Global Demand Shock? Evidence from a Pandemic

Global shocks bring unanticipated changes in the business environment of foreign multinational enterprises (MNEs) and rival domestic firms. We examine whether there is a difference between how MNEs and domestic firms react in heterogeneous local or subnational markets to a global demand shock. Leveraging the 2009-10 H1N1 influenza pandemic as a source of exogenous variation in global demand for influenza vaccines, we investigate the role of subnational heterogeneity in economic resources, industry infrastructure, and political alignment within an emerging economy on the behavior of incumbent MNEs and rival domestic firms. We find that following the pandemic, MNE market share in the influenza vaccine market relative to the non-influenza vaccine markets declines more in regions with lower government health spending per capita, and also in regions unaligned with the federal government. Additional analyses suggest that these changes in market share are not caused by a reduction in MNE revenues. Rather, they are caused by domestic firms that were already present in non-influenza vaccine markets diversifying by entering the highly-related influenza vaccine market. Finally, a granular examination of the differential responses reveals that such responses are not related to pre-shock differences in regional coverage of MNEs and domestic firms. This study contributes to the extant literature by suggesting that the direct costs, or opportunity costs, of new market and region entry are relatively greater for MNEs than for domestic firms, particularly in regions that have inadequate health infrastructure and are politically not aligned.

Navigating the Web of Informal Institutions When Investing in a Strange Land: Chinese Multinational Enterprises in Australia

Multinational enterprises (MNEs) need to understand and handle various informal institutions in host countries to survive and succeed. How MNEs effectively manage informal institutional characteristics of host countries is an important question for both practitioners and scholars. This paper addresses this important but neglected topic based on an in-depth longitudinal qualitative study. It identifies some key informal institutions in Australia, examines how such institutional distinctiveness shapes the behaviour of Chinese expatriates and MNEs and how they handle such informal institutional differences between China and Australia. Our findings challenge some taken-for-granted assumptions regarding informal institutions in the literature and demonstrate that informal institutions of host countries significantly shape the behaviour of expatriates and firm-level strategies of MNEs.

Sustainable Tax Behavior of MNEs: Effect of International Tax Law Reform

As tax is related to the sustainable growth of societies around the world, international tax avoidance by multinational enterprises (MNEs) has gained public attention. The Organization for Economic Co-operation and Development (OECD) introduced the Base Erosion and Profit Shifting (BEPS) Action Plan to promote sustainable tax behavior of MNEs. To guide policymakers and regulators in curving MNEs’ tax schemes utilizing market imperfection, this paper empirically assesses whether the international law reform regarding information disclosures on global operation achieves the intended result of lowering MNEs’ tax avoidance. In addition, the conditional effect of family ownership and intangible asset intensity is addressed to find the factors that strengthen the tax avoidance level of MNEs. This study employs propensity score matching and difference-in-differences method to analyze the changes in international tax liabilities of Korean MNEs in response to BEPS Action Plan 13. The empirical results show that the sustainable tax behavior of MNEs increased when international tax law demanded that they reveal critical information on global allocation of income, economic activity, and taxes paid among countries. Furthermore, the results show that there was a higher increase in the international tax liabilities of MNEs with higher intangible asset intensity. The results suggest to policymakers that the private information disclosure of MNEs’ global operation and sharing such information is essential in tackling MNEs’ BEPS activities, and intangible assets are indeed an important source of tax avoidance.

Business Networks and Enclave Formation: Why Foreign Direct Investment Fails to Transfer Technology

Foreign Direct Investment (FDI) frequently fails to provide transfers of important ideas and technologies to host countries. Incorporating insights from network theory, we argue that this is a predictable outcome of foreign investment because there is a natural tendency among multinational enterprises (MNEs) toward enclave formation. MNE subsidiaries face risks associated with poor information in host countries, which they mitigate by partnering with known firms in their existing business networks. In-group dynamics and network inertia perpetuate the closed nature of foreign enclaves and prevent technology transfer to the local enterprises. Thus, rather than specific host country conditions – absorptive capacity, institutions, or culture – a general tendency toward enclaves among MNEs works against local technology transfer. We illustrate this tendency with three cases that a-priori should not be characterized by poor levels of technology transfer: the electronics clusters in Guadalajara, Mexico and Costa Rica and the automotive sector in Ontario, Canada. Recognizing the role of business networks in shaping MNE behavior has important analytical implications for scholars and underlines the importance of policymakers moving beyond FDI attraction to local network-building policy instruments.

Multinational enterprises, local firms, and employee human rights violation in the workplace

PurposeThis paper aims to investigate whether multinational enterprises (MNEs) are more or less likely than local firms to violate their employees’ human rights in emerging economies, whether regional institutional pressures influence the likelihood of violating employee human rights and whether the density of MNEs in a region affects the likelihood of employees’ human rights violation by local firms.Design/methodology/approachBuilding on neo-institutional theory, this paper hypothesizes that, in an emerging economy, MNEs violate their employees’ human rights significantly less than local firms do. Moreover, it is hypothesized that the quality of regional institutions only influences the social behavior of local firms toward their employees. In addition, it is hypothesized that the density of MNEs in a region has a positive effect on local firms’ attitudes toward employee human rights. These hypotheses are examined using a sample of 1,211,638 respondent–year observations in 32 Mexican regions between 2005 and 2014.FindingsThis paper shows that MNEs are less likely to violate their employees’ human rights than local firms are. It also provides evidence that regional institutions do not influence MNE behavior toward employee human rights violation, but affect local firms. Furthermore, contrary to what was hypothesized, the density of MNEs in a region has a negative rather than positive influence on local firms’ respect of employee human rights.Originality/valueThis paper advances understanding of the behavior of MNEs in an emerging economy setting and contributes to the ongoing debate in the literature on their social impact.

Host country experience, institutional distance and location choice of Chinese MNEs

PurposeThe conventional wisdom suggests that the lack of prior host country-specific experience and a higher institutional distance deter multinational enterprises (MNEs) from entering a foreign country. However, past studies report that Chinese MNEs show an unconventional risk-taking behavior choosing foreign locations, where they have no prior experience or there is an increased institutional distance. Drawing on the institutional theory, the purpose of this paper is to argue that Chinese Government official visits to the host country may act as a risk-reduction device, thus providing an explanation for such an unconventional behavior.Design/methodology/approachThe authors develop two hypotheses regarding how Chinese Government official visits moderate the impact of host country-specific experience and institutional distance on the location choice of Chinese MNEs. The authors test the hypotheses using a sample of investment location decisions by Chinese MNEs in Latin America.FindingsThe authors find that government official visits mitigate the lack of firm’s prior host country experience. However, only high-level government visits reduce institutional distance.Originality/valueThe authors contribute to the international business literature by analyzing how home country government diplomatic activities may pave the way of host country institutional environment for foreign MNEs from that home country. In addition, the authors provide an additional explanation for the unconventional risk-taking behavior of Chinese MNEs. Finally, the authors also contribute to a better understanding of the decision-making process of emerging-market MNEs entering other emerging economies.

Country-of-origin and CSR initiatives: a social dominance perspective

PurposeResearch on corporate social responsibility (CSR) continues to proliferate, but why and how multinational enterprises (MNEs) from different parts of the world engage in CSR is still unclear. The purpose of this study was to investigate whether there are differences in behavior based on the status of the MNE’s home country relative to the host country.Design/methodology/approachApplying a social dominance theory (SDT) framework, the authors explain variations in MNE behavior because of perceived hierarchical differences between a MNE’s home country and that of the host country. It is posited that these hierarchical differences trigger a country-of-origin bias that affects stakeholders’ expectations for the MNE, as well as that firm’s response to those expectations. In this integrative conceptual paper, we propose a testable framework derived from a deductive approach that applies the tenets of SDT to predict outcomes of CSR implementation by MNE’s subsidiaries.FindingsMNEs from less developed countries are subject to lower expectations and engage in self-debilitating behavior, which may hinder their attempts to implement CSR initiatives in more developed countries. Paradoxically, engaging in CSR initiatives could help reduce liability of foreignness and increase chances for competitive advantage.Practical implicationsMNEs from developing countries should be aware of a potential country-of-origin bias affecting decisions on CSR implementation and that could also be detrimental to their competitive advantage when operating in more developed countries. Conversely, MNEs from developed countries should be ready for higher expectations of their CSR initiatives in less developed countries.Originality/valueThis paper strives to contribute to two extant literatures. First, it contributes to the social dominance literature by applying the perspective in the international business context, specifically research on MNE liability of origin. Second, this perspective offers testable propositions on how perceived hierarchies and liability of origin affect firm decision-making, specifically in the context of developing country MNEs. Third, this paper seeks to expand the discussion of MNE subsidiary CSR behavior to account for the relative context of the home and host country.

Cross-Border Intra-Group Financial Transactions: Evidence from Germany

Literature provides evidence of profit shifting in multinational enterprises (MNEs), particularly with intercompany debt. Therefore, the authors conducted a broad empirical survey focusing on specific issues regarding cross-border intra-group financial transactions. This article aims to analyse empirical evidence of the behaviour of MNEs in Germany with regard to cross-border intra-group financial transactions, and introduces and evaluates the respective empirical results in order to provide the first significant insights regarding this (not only) tax-relevant issue.

Cultural distance, political risk and location decisions of emerging-market multinationals: a comparison between Chinese and Indian firms

ABSTRACTThe international expansion of emerging-market multinational enterprises (MNEs) is becoming a research topic of increasing interest among international business scholars. One of the specific research questions arising is whether conventional theoretical arguments originated in studies on developed-country MNEs are still valid for explaining the international behavior of emerging-market MNEs. Drawing on the institutional theory, this paper argues that the influence of host country institutional factors on location decisions differs between Chinese and Indian MNEs. We hypothesize that the negative impact of both cultural distance and political risk on location decisions is lower for Chinese MNEs as compared to Indian MNEs. From a sample of 832 outward foreign direct investments (OFDIs) we obtain empirical support for these hypotheses.

The Life-Cycle Dynamics of Exporters and Multinational Firms

This paper studies the life-cycle dynamics of exporters and multinational enterprises (MNEs). We present a dynamic model of trade and MNE activity in which the mode of serving a market depends on the well-known proximity-concentration tradeoff. We show that the option of performing MNE activities in the model produces life-cycle patterns for exporters that differ from those in an export-only model. Calibrating our model to rich firm-level data from France and Norway, our main quantitative finding is that a reduction in trade costs triggers much larger responses in growth rates and exit rates, for young exporters, in the model with MNEs than in the model without MNEs. We also show that the model is largely consistent with a set of new facts on the joint life-cycle dynamic behavior of exporters and MNEs.

Reshaping Malaysian Subsidiaries in the Wake of China’s Rise as the Preferred Location for Foreign Production

This article examines the locational behavior of multinational enterprises, particularly the role of Malaysian subsidiaries in relation to other subsidiaries in the region. Survey results showed that rising wage costs have led to low cost, labor-intensive, and mature technology production being moved to China. Concurrently, Malaysian subsidiaries, particularly the export oriented, have taken on production of more sophisticated goods. They play regional coordination roles, are sources of ethnic Chinese managerial talent for the region, and they provide “back-up” production for less reliable plants in China. Their strategic role appears to have evolved from being “export platforms” toward “regional mandated hubs.”

The Impact of Informal Institutions on MNE Strategy: Innovation Investments in Emerging Markets

This paper investigates how differences in the informal institutions prevailing in the home and host countries influence the foreign entry strategies of multinational enterprises (MNEs). While the relationship between formal institutions and MNE strategy has been the subject of considerable academic scrutiny, less is known about the role of informal institutions. Our theory contends that the type of uncertainty precipitated by informal institutions is critical to understanding the strategic behavior of foreign-investing MNEs. More specifically, we dis-aggregate the informal institutions construct and develop two new, more explicit, latent constructs – behaviorally-oriented informal institutions and technology-oriented informal institutions. Our theory posits that increased behavioral informal institutional distance will precipitate a preference for full ownership (WOS) and a greater proportion of expatriates in subsidiary investments. Conversely, heightened technological informal institutional distance will predict the opposite outcome – a preference for shared ownership (JV), host country partners rather than home country partners and a smaller proportion of expatriate employees. We test our theory using a longitudinal sample of subsidiary investments that were established in emerging markets for the purpose of engaging in innovation–related activities. The results provide support for our conceptualization of informal institutions and the construct’s relationship with the entry strategies of foreign-investing MNEs.

Tax competition for foreign direct investment under information uncertainty

The relation between taxation states and foreign direct investment (FDI) has been studied from several perspectives and with states at different levels of development. Most previous studies, however, have only considered the impact of tax level on FDI volume. This paper enhances this view by assuming that multinational enterprises (MNEs) can use transfer prices systems and have investment timing flexibility. Thus, it evaluates the impact of the use of international transfer pricing systems on state policy and on the investment timings of MNEs. In uncertain business environments (with the periodic releases of news), investment can increase if MNEs delay investment decisions. This paper shows how tax differentials can attract FDI and can influence MNE behavior. The equilibrium is set in a global environment where MNEs can shift their profits between states depending on local corporate tax rates. Assuming the use of transfer pricing schemes, this paper confirms the relationship between MNE behavior and the release of business news.

A Review of Empirical Studies on Transfer Pricing Manipulation

This research surveys the recent surge of empirical studies on transfer pricing manipulation by multinational enterprises (MNEs), tax-motivated transfer pricing, particularly from the year 1990 to present. The review tackles transfer pricing income shifting behavior of MNEs from three different perspectives: taxation relationship with profitability, intrafirm trade, and foreign direct investment (FDI). There have been significant developments and contributions in this field, despite many limitations, mainly concerning the availability of micro-data in general, (specifically intrafirm trade data which allows capturing much of the heterogeneity which is dangling within inter-sectors), and the tax measurement issue. Yet, this area of study is still developing and promises more achievements.

A Review of Empirical Studies on Transfer Pricing Manipulation

This research surveys the recent surge of empirical studies on transfer pricing manipulation by multinational enterprises (MNEs), tax-motivated transfer pricing, particularly from the year 1990 to present. The review tackles transfer pricing income shifting behavior of MNEs from three different perspectives: taxation relationship with profitability, intrafirm trade, and foreign direct investment (FDI). There have been significant developments and contributions in this field, despite many limitations, mainly concerning the availability of micro-data in general, (specifically intrafirm trade data which allows capturing much of the heterogeneity which is dangling within inter-sectors), and the tax measurement issue. Yet, this area of study is still developing and promises more achievements.