Foreign Affiliates Research Articles

Headquarters gravity: How multinationals shape international trade

Multinational firms, using their foreign affiliates as export platforms, are the largest players in international trade. The exporting behaviors of these multinationals differ systematically from those of local firms: Using the Chinese customs data, I find that the Chinese affiliates of foreign multinationals bias their exports towards the markets close to their headquarters. I incorporate this headquarters gravity into a general equilibrium model by, as in Head and Mayer (2019), allowing the export costs faced by multinational affiliates to depend on the proximity between headquarter and destination countries. To draw its aggregate implications, I calibrate my model to the Chinese customs data and perform counterfactual exercises, finding that (i) headquarters gravity accounts for about 20% of the Chinese exports in the early 2000s, and (ii) ignoring headquarters gravity would substantially bias our quantitative evaluation of trade shocks like the recent US-China trade war. I also consider the scenario in which the Chinese customs data on multinational sales is unavailable. I demonstrate the usefulness of my model in this scenario by constructing exact bounds on counterfactual results using only bilateral trade and multinational production (MP) data.

International Tax Planning: Subsection 15(2) and Partnerships in the Foreign Affiliate Context: Interpretive Arguments in the Absence of Legislative Amendments

The purpose of subsection 15(2) is to include in a shareholder's income amounts received from a corporation, either by the shareholder directly or by certain non-arm's-length persons and partnerships, in the guise of loans or other indebtedness. Specific exceptions exist for amounts owing by certain foreign affiliates, as well as for indebtedness between non-resident persons. Unfortunately, the broad language used in the relevant provisions can lead to anomalous results if those provisions are read and applied literally, without appropriate consideration being given to context and purpose. In particular, the manner in which partnerships have been incorporated into the shareholder loan rule can bring into question the potential application of subsection 15(2) in the foreign affiliate context. This article explores three examples of situations involving partnerships and foreign affiliates where a literal interpretation of the shareholder loan rule could lead to anomalous results. The article then outlines why it is reasonable to conclude, when considering the text, context, and purpose of subsection 15(2) and its related provisions, along with their legislative history, that the shareholder loan rule does not apply in the circumstances described in the examples.

Using MNE Foreign Affiliate Data to Estimate Foreign Direct Investment via Ultimate Investing Country: A New Methodology Developed for USAID in Vietnam

Official foreign direct investment (FDI) statistics track FDI via direct investing nation rather than ultimate investing country (UIC). If a FDI project is sourced through an overseas subsidiary, normal FDI metrics will register that investment as being from the third country, not the home country of the multinational. There is a growing awareness that the large amount of FDI channeled through special purpose vehicles and offshore financial centers therefore makes official statistics unreliable: investment from certain nations may be significantly under or over counted. According to official statistics, the United States ranks 11th in terms of total amount of foreign direct investment (FDI) in Vietnam. As Vietnam joins the ranks of lower middle-income countries, and becomes more integrated into global value chains, a more representative methodology for calculating FDI would help Vietnam thoughtfully engage with foreign investors and support Vietnam's development objectives. This report, commissioned by the United States Agency for International Development (USAID) in Hanoi includes: 1) A literature review of FDI databases and FDI tracking methods, 2) a comparative analysis of the existing methods for tracking FDI via UIC, 3) a discussion on the feasibility of implementing those methods for Vietnam, 4) a novel method for estimating Vietnam’s inward FDI via UIC, 6) recommendations to USAID for further research and analysis.

Information related service trade within firms: evidence from firm-level data in Germany

Multi-unit firms have productivity advantages over competitors because of their use of a non-rival asset—firm-specific knowledge—in several units. Using knowledge-intensive services leads to economies of scope in production by multi-unit firms. Such headquarter are usually supplied by parent companies and serve to link different firm units. Headquarter services are difficult to quantify in statistics or surveys, except when they cross-borders and the exchange of services between MNEs and their offshore subsidiaries becomes apparent. This study therefore focuses on IT service imports to explain productivity differences among foreign affiliates of multinational firms in Germany. The authors base the analysis on the population of foreign multinational firms active in Germany and analyze what effect the import of IT services has on their productivity. They find that IT headquarter service flows have significant impacts on foreign affiliates’ productivity in general and US affiliates in particular. As the average IT-service flows (per firm and partner) from parent countries are significantly higher for US affiliates than non-US affiliates, they conclude that the import of IT services from the parent-company is a source of the productivity advantages of US affiliates in Germany.

Offshoring of white-collar jobs: theory and evidence1

Abstract Foreign direct investment (FDI) in advanced business services (ABSs), referred to here as the offshoring of white-collar jobs, has become one of the major developments in the operations of multinational corporations (MNCs). However, a specific theoretical approach to this phenomenon has not been adequately defined. In this article, we have two objectives. The first objective is to outline the key elements of the theoretical framework and introduce a simple formal model for business services within MNCs. The second objective is to verify the assumptions of the model in the empirical part. We use the sample of the largest European companies having foreign affiliates. Special attention is paid to Visegrád economies (i.e. Czech Republic, Hungary, Poland, and Slovakia) as host economies. We applied here a multinomial logistic model, which indicates the probability of having an ABS subsidiary taking into consideration the characteristics of MNCs.

The Role of Chinese Small and Medium TNCs in the Modernization of the National Economy

Why does the Chinese economic modernization strategy include transnationalization of Chinese enterprises, the creation of numerous Small and Medium Foreign Affiliates (SMFAs)? The research hypothesis suggests that in the context of globalization, modernization requires influencing other participants in the global economy beyond national borders. SMFAs are able to transform the structure of the economy of the PRC and host countries to ensure demand for national innovations and highly skilled labor. The literature review highlights the challenges of modernizing the national economy in the context of globalization, as well as the advantages of TNCs and participation in global value chains (GVCs). However, the question of the connection between catchup development and transnationalization of local business, especially small and medium-sized ones, has been understudied. The novelty of the study is in the analysis of the sectoral and geographical structure of the foreign activities of Chinese TNCs and the analysis of the problems of the participation of Chinese TNCs in Western global value chains (GVCs). The main findings reveal that the creation of SMFAs is a response to the challenges of globalization, which impede the modernization of the Chinese economy. Powerful state support to SMFAs makes them dependent, and thus the government is able to direct the goals of private enterprises in accordance with the national interests. The major field of Chinese SMFAs is the promotion of products manufactured in the PRC in the American and European markets, and it contributes to the development of the national innovation system, redistributes the added value in favor of national manufacturers, and stimulates the development of hightech industries of the PRC. In developing countries SMFAs are represented by trade and manufacturing outlets within the “Belt and Road Initiative” They come after the infrastructural projects of large business, grouped in clusters, have strong coordination with other Chinese TNCs, and create Chinese GVCs. The main role of Chinese SMFAs in the modernization of the PRC economy is to ensure national interests, including industrial sovereignty and the growth of wellbeing of citizens as the basis of innovative demand. In the modern international labor division, this is achieved by a shift to high valueadded operations, accompanied by a struggle for the markets of developed countries and for sites for the low valueadded operations inside Chinese GVCs in developing countries.

Expatriate Staffing and Foreign Affiliate’s Labor Productivity: Contingent on Foreign Production Intensity and Cultural Distance

Expatriate Staffing and Foreign Affiliate’s Labor Productivity: Contingent on Foreign Production Intensity and Cultural Distance

Foreign entry in the services sector and gender workforce composition

ABSTRACT The services sector and multinational corporations have played an increasingly essential role in promoting gender equality and women’s empowerment in labour markets. This paper examines whether the entry of foreign firms into the services sector can affect the gender workforce composition of their domestic counterparts, and to what extent. The empirical analyses utilise a large panel dataset of firms in the labour-abundant economy of Vietnam. The data show a higher proportion of women employed in foreign firms than local ones across two-digit industries and regions. The estimations indicate that foreign entry induces domestic firms to hire women more intensively. Large, state-owned and less capital-intensive firms tend to employ men at a higher rate. Further analyses reveal divergent effects of foreign affiliates. While increased foreign entry strongly stimulates the hiring of women among local firms in male-intensive industries, it exerts an insignificant impact on gender workforce composition in the female-intensive group.

How large is the corporate tax base erosion and profit shifting? A general equilibrium approach

The paper uses the computable general equilibrium model CORTAX to analyse the extent of base erosion and profit shifting (BEPS) in the EU, Japan and the US. Our approach estimates the direct fiscal losses of BEPS and accounts for the second round effects, in particular on the cost of capital and corporate investment. Our central estimates show that the net corporate tax revenue losses in the EU are €36.0 billion per year (7.7% of CIT revenues), €24.0 billion in Japan and €100.8 billion in the US (in both cases representing 10.7% of corporate tax revenues). Our estimates are comparable in size to the global tax revenue losses found using newly reported statistics on foreign affiliates. Our macroeconomic results suggest that eliminating profit shifting would slightly reduce investment and GDP and rise corporate tax revenues, which would positively affect welfare.

MNE divestments of foreign affiliates: Does the strategic role of the affiliate have an impact?

Divestments by multinational enterprises (MNEs) of their foreign affiliates are an increasingly important phenomenon in the contemporary global economy. We investigate what determines the likelihood that a foreign affiliate will be divested emphasising, in particular, the strategic roles played by the affiliates within their parent MNEs’ global value chains, and hence the degree of relatedness between the affiliate and the parent firm. We find that poor parent performance and poor affiliate performance are key determinants of affiliate divestment, but that the magnitude of these effects varies significantly depending upon whether the affiliates are in related or unrelated sectors, are horizontal or vertical affiliates, and are located upstream or downstream in the global value chain of their parent MNE.

Does FDI in Upstream and Downstream Sectors Facilitate Quality Upgrading? Evidence from Russian Exporters*

AbstractThis study examines whether foreign direct investment inflows facilitate upgrading of export quality in host countries. The analysis focuses on the Russian Federation and uses customs data merged with firm‐level information from ORBIS. The results show a positive relationship between the quality of products exported by domestic firms and the presence of foreign affiliates in the upstream (input‐supplying) industries. This relationship is present irrespective of export destination or FDI origin. The results are robust to using different proxies to measure product quality.

What shapes industrial relations in foreign affiliates? Comparative case study results from Germany

PurposeThe purpose of this paper is to develop an analytical framework to categorize the quality of industrial relations in foreign affiliates. Using the case of foreign affiliates in Germany, this paper further explores what factors shape the quality of industrial relations in foreign affiliates.Design/methodology/approachGiven the scarcity of research on industrial relations in foreign affiliates, this paper is based on conceptual work as well as on a comparative case investigation of 21 foreign affiliates in Germany, involving informants from both labor and management.FindingsIndustrial relations in foreign affiliates in Germany can take four different qualities, based on the following: social partnership; conflict partnership; latently adversarial; and adversarial relations. While previous literature focused on country-of-origin effects, the authors’ case-based investigation further revealed that both affiliate effects and multinational corporation (MNC) effects have a strong impact on the quality of industrial relations in foreign affiliates in Germany.Originality/valueThis paper provides systematic evidence on the presumption that micro-organizational and MNC-specific factors are necessary to gain a deeper understanding of industrial relations in MNCs. Moreover, this paper contributes to the discussion on the quality of industrial relations in foreign affiliates in Germany, by placing results from both single-case studies and management surveys into perspective.

The Impact of Foreign Direct Investment on Productivity of Domestic Firms: The Case of Sudanese Banking Industry

The research expands existing international business literature by exploring the impact of Foreign Direct Investment (FDI) on domestic banks. It investigates how FDI affects the productivity of domestic banks in Sudan. Many countries strive to attract foreign direct investment (FDI) hoping that knowledge brought by FDI will spillover to domestic industries and increase their productivity. In contrast with earlier literature that tried to find positive interindustry spillovers from multinationals, this study focuses on effects operating in banking industry. The analysis, based on firm-level data from Sudan , the results show evidence consistent with positive productivity spillovers from FDI taking place through contacts between foreign affiliates and their local counterparts . The data indicate that productivity spillovers are associated with foreign owned banks.

Bilateral investment treaties and backward linkages in Sub-Saharan Africa

This article is an original contribution to the understanding of the impact of bilateral investment treaties in developing countries. By exploiting a unique sample of foreign affiliates in nineteen Sub-Saharan Africa countries, we show that the presence of a bilateral investment treaty between FDI origin and destination countries is positively related to the propensity of foreign investors to generate linkages to local suppliers. In addition, we find evidence that such relationship is stronger for countries with lower institutional quality and that bilateral investment treaties become more effective the larger the difference in levels of development between source and host. The estimation technique we use is a two-limit Tobit model. Our results are of high importance from a political point of view. They support the argument that bilateral investment treaties can help countries with low levels of governance quality, as several Sub-Saharan African countries, to credibly remedy local institutional inefficiencies and, therefore, the participation in an international treaty make the opportunities for local sourcing more likely. These potential gains can justify the decision of policymakers in developing countries to sign BITs, despite such agreements impinging on their national sovereignty.

International Knowledge Spillovers and Capital Structure of Multinational Affiliates

This paper investigates how knowledge transferred within multinational corporations affects capital structure decisions of foreign affiliates. Employing the unique dataset on Korean multinationals and their employment structure of foreign affiliates, we measure the knowledge transfer through human interactions using the ratio of expatriate managers to total employees. We document that affiliates with more expatriate managers tend to maintain lower leverage, suggesting the affiliates with high level of intangible assets passed to through expatriate managers opt for low debt financing. We further show that the negative effect on leverage is more pronounced when parents/affiliates are involved with greater intangible assets and the host countries have less knowledge assets in place. Our two stage least square estimation also confirms the negative relation between expatriate managers and financial leverage in foreign affiliates.

Information Frictions, Investment Promotion, and Multinational Production: Firm-Level Evidence

While countries make use of a wide range of policies to attract multinational firms, identifying the effect of such policies is difficult. Combining firm-level data on both the location of these firms’ foreign affiliates and detailed service-specific information from Costa Rica’s investment promotion agency (IPA) over time, we find that IPA support significantly increases the probability that a multinational firm establishes its first affiliate in the country, but has generally no impact on the expansion of its presence thereafter. We then show that this effect is primarily driven by the resolution of information asymmetries. It is stronger for IPA information services and on multinational firms from countries and in sectors facing more severe information frictions.

Dynamics of Large Multinationals

We develop a model of large multinational enterprises, each one producing a continuum of products. These outsized firms compete as oligopolists in a domestic and foreign market, facing competitive pressure from single-product firms that engage in monopolistic competition. The multinational enterprises invest in R&D in order to expand the span of their products and in foreign direct investment (FDI) in order to expand the range of products manufactured by their foreign affiliates. We study the dynamic evolution of these markets and characterize transition dynamics and steady states. In addition to the evolution of product spans, we characterize the evolution of prices, markups, market shares, and exports relative to subsidiary sales. Furthermore, we study comparative dynamics that result from changes in trade costs, R&D costs, the cost of FDI and productivity changes of the multinational firms.

Japanese multinational corporations and corporate tax change

This paper examines the impact of the recent changes in Japanese taxation polices before and after the shift from a global taxation system to a territorial taxation system in 2009 on the income shifting activities of Japanese multinationals. The study aims to investigate whether the territorial taxation system accelerated aggressive transfer pricing and shifting of domestic income overseas, in line with recent studies. Moreover, this research identifies the factors that encouraged intrafirm trade within listed Japanese non-financial transnational corporations and their income shifting behaviour in response to various taxation policies in different jurisdictions. The two-stage least squares random estimation techniques are used to examine the level of income shifting behaviour before and after the taxation system reform, using a pooled sample of 460 foreign affiliates of Japanese manufacturing corporations during the period of 2000 to 2016. The empirical results provide evidence supporting the hypothesis of that income shifting between territorial jurisdictions done by Japanese multinationals is more effective in terms of profit repatriation.

Foreign interfirm networks and internationalization: Evidence from sub-Saharan Africa

Abstract This study investigates how buyer-supplier interfirm networks with foreign affiliates affect the internationalization of local firms in developing countries. In a study of 1601 sub-Saharan African manufacturing firms, we find that foreign supply linkages positively influence firm internationalization, but this does not relate to marketing linkages. We further examine the role of absorptive capacity and find that both potential and realized absorptive capacity has positive and independent effects on firm internationalization. However, potential absorptive capacity has no moderating effect and realized absorptive capacity negatively moderates the relationship between foreign supplying networks and internationalization. Finally, implications for public policy and managerial practice are discussed.

Location decisions of heterogeneous European firms

We analyze empirically how firms’ characteristics affect the foreign affiliates location decisions of heterogeneous firms in different markets. Using a European firm-level data and estimating the marginal effects for the multinomial logit model, the results corroborate the relevance of firms’ characteristics in their investment decisions, particularly the productivity level.