German Multinationals Research Articles

Corporate social responsibility mandates within German multinational enterprises in Sub-Saharan Africa

Multinational enterprises operating in Sub-Saharan Africa (SSA) exist within an environment marked by complexity, inequality and socio-economic challenges, yet also sustained economic growth. This research focuses on how German multinationals define a Corporate Social Responsibility (CSR) mandate that is relevant to the local context and responds to the demands of stakeholders in their host countries within SSA. We find that the broad CSR mandate is defined at headquarters but that it contains a discretionary and a non-discretionary component. This is to ensure that, while global standards are adhered to, the local CSR engagements remain relevant and impactful. CSR in SSA tends to focus on activities that aim for long-term development which indicates a high level of local embeddedness and recognition of the meaningful impact that CSR can have in developing countries. We find that, organisationally, subsidiaries can extend their autonomy in pursuing CSR by building capacities that can be leveraged in the corporations globally. The study contributes to our understanding of multinationals operating in emerging markets and adapting to unique environments, and more specifically to CSR engagement in developing countries.

Debt Shifting and Thin-Capitalization Rules – German Experience and Alternative Approaches

Abstract This paper presents the general design of thin-capitalization rules and summarizes the economic effects of such rules as identified in theoretical models. We review empirical studies providing evidence on the experience with (German) thin-capitalization rules as well as on the adjustment of German multinationals to foreign thin-capitalization rules. Special emphasis is given to the development in Germany, because Germany went a long way in limiting interest deductibility by enacting a drastic change in its thin-capitalization rules in 2008, and because superb German data on multinational finance allows for testing several aspects consistently. We then discuss the experience of the Nordic countries with thin-capitalization rules. Briefly reviewing potential alternatives as well, we believe that the arm’s-length principle is administratively too costly and impracticable, whereas we argue that controlled-foreign-company rules might be another promising avenue for limiting internal debt shifting. Fundamental tax reforms towards a system with either "allowance for corporate equity" (ACE) or a "comprehensive business income tax" (CBIT) should also eliminate any thin-capitalization incentive.

Impacts of adopting corporate social responsibility activities in the organizational structure: a study of german multinationals in Brazil

This study is based on the following questions: what are the impacts of adopting CSR activities in a companyorganizational structure, as well as the decision making process in an international context, especially in Braziliancompanies with German capital? This survey was conducted on 76 German companies, operating in the transformationindustry in Brazil. Therefore the research was a descriptive theoretical-empirical study with a qualitative andquantitative approach to characterize the impacts of the adoption of CSR practices in the organizational structure ofcompanies. However, it presents quantitative data collection and analysis tools in order to map the largest possiblenumber of companies for the study, ensuring the standardization of responses and facilitating the understanding of CSRinsertion process in Brazil. It was also observed that in the coordination of CSR activities, the companies participatingin this study were in an embryonic stage of inserting CSR in their structures. Concerning the system of decision making,the Brazilian subsidiaries of German multinationals are considered as ‘active agents’ of CSR management in their localcontext. It is important to mention that CSR is relevant to these companies according to the profile of the CSR activitiesmanager and his or her position in the organizational structure. Therefore, this present study contributes to thediscussion of CSR as part of company strategy and not as specific and isolated actions that could be simply used aspromotional actions.

What Do We Know About the Tax Planning of GermannBased Multinational Firms?

Abundant anecdotal evidence is in accord with rigorous research results confirming the existence of various forms of international tax planning by multinational firms. Increasing availability of administrative data for research purposes has enabled researchers to study not only behavioural responses of US‐based firms to taxation, but also of European and other multinationals. The present paper summarizes what we can learn from recent studies on tax avoidance strategies by multinational firms in general and by German multinationals in particular.

CFC Legislation, Passive Assets and the Impact of the ECJ's Cadbury-Schweppes Decision

In its Cadbury-Schweppes decision of 12 September 2006 (C-196/04), the ECJ decided that the UK CFC rules, which were implemented to subject low taxed passive income of foreign affiliates to UK corporate tax, implied an infringement of the freedom of establishment. Consequently, many EU countries including Germany changed their legislation. The paper discusses to which extent the ECJ ruling has impacted on the allocation of passive assets in German multinationals. Using firm level data we find evidence for an increased preference for low-tax European countries compared to non-European countries.

On the genesis of multinational foreign affiliate networks

Multinational enterprises (MNEs) develop their networks of foreign affiliates gradually over time. Instead of exploring all profitable opportunities immediately, they first establish themselves in their home countries and then enter new markets stepwise. We argue that this behavior is driven by uncertainty concerning a firm's success in new markets. After entry, the firm collects information which is used to update its beliefs about its performance in a market. As conditions in different markets are correlated, the information gathered in one of them can also be used to update beliefs elsewhere – with the degree of correlation depending on issues such as the geographical or cultural distance between markets. This correlated learning may render it optimal to enter markets sequentially – investment in market A is only followed by entry in market B if the firm was sufficiently successful in A. The prediction that firms start their expansion in markets that are closer to their home base and then proceed step by step is supported by our empirical analysis, which features the universe of foreign affiliates held by German multinationals. Based on a rich set of benchmark estimates and sensitivity checks, we identify correlated learning across markets beyond alternative explanations as a key driver of gradualism in the genesis of MNEs' foreign affiliate networks.

Steuerflucht und Steueroasen

Die Debatte uber Offshore-Leaks und die sehr geringen Steuerzahlungen groser multinationaler Konzerne haben das offentliche Interesse auf das Problem „Steueroasen“ gelenkt. Wenn Konzerne Steuersatzunterschiede zwischen verschiedenen Landern ausnutzen, kann Steuergestaltung durchaus legal sein. Werden aber steuerpflichtige Einkommen von Privatpersonen nicht deklariert, ist das illegal. Masnahmen dagegen konnen neben der Aufdeckung von Straftaten an verschiedenen Stellen ansetzen: bei den Steuersatzen, der Regulierungsintensitat, der Bemessungsgrundlage und den Informationspflichten. Werden die bestehenden Steueroasen ausgetrocknet, kann dies allerdings dazu fuhren, dass sich in grosen Staaten neue Steueroasen herausbilden.

INTERNAL DEBT AND MULTINATIONAL PROFIT SHIFTING: EMPIRICAL EVIDENCE FROM FIRM-LEVEL PANEL DATA

This paper explores the role of internal debt as a vehicle for shifting profits to low-tax countries. Using data on German multinationals, it exploits differences in taxes in more than 100 countries over 10 years. The results confirm that internal debt is used more by multinationals with affiliates in low-tax countries and increases with the spread between the host-country tax rate and the lowest tax rate among all affiliates. However, tax effects are small, suggesting that profit shifting by means of internal debt is rather unimportant for German firms. Further testing indicates that this is partly due to the German controlled foreign corporation (CFC) rule.

BITs Bite: An Anatomy of the Impact of Bilateral Investment Treaties on Multinational Firms*

AbstractBilateral investment treaties (BITs) are one of the few policy instruments that countries can use to directly attract foreign investment. Previous research has aimed at a quantification of the impact of BITs on foreign direct investment (FDI) at aggregated levels only. In contrast, in this paper, we deliver an anatomy of the effects of BITs on multinational activity at the micro level. We hope that this strategy will improve our understanding of the precise channels through which BITs determine aggregate investment. Using data on the foreign activity of the universe of German multinationals, we provide descriptive evidence on changes in the intensive and extensive margins of multinational firm activity around the adoption of BITs. The results of multivariate empirical models broadly support the hypotheses derived from a parsimonious model of heterogeneous firms on the effects of BITs on different margins of investment: BITs raise the number of multinational firms that are active in a particular host country and they have a positive effect on the number of plants per firm, as well as on FDI stocks and fixed assets per firm.

Corporate Taxes and Internal Borrowing within Multinational Firms

This study develops a theoretical model of a multinational firm with an internal capital market. Hypotheses regarding the role of local versus foreign characteristics such as profit tax rates, lack of institutional quality, financial underdevelopment, and productivity for internal debt financing at the level of foreign affiliates are derived and assessed empirically in a panel dataset covering the universe of German multinationals. We show that differences in nontax incentives given by fundamentals in local and foreign markets can offset or reinforce tax incentives. The results point at a many times higher tax-sensitivity of internal debt financing compared to previous research. (JEL F23, G32, H25)

The Impact of Corporate Taxes on Investment - An Explanatory Empirical Analysis for Interested Practitioners

The scientific literature provides evidence for an impact of company taxes on investments. Practitioners, however, have a skeptical view on the meaning of this effect. This paper builds the bridge between research and the interested practice by providing detailed descriptives and clearly showing how the effects are derived. It analyzes the development of German multinationals’ direct investments abroad and of foreign multinationals’ investments in Germany from 1996 till 2008. A split along federal states is applied. Starting from the analysis of the basic tax effect, the paper also covers current research topics when analyzing the impact of existing loss carryforwards and when tracing holding structures. The descriptive statistics already show that cross-border investments have increased strongly. The development of Baden-Wurttemberg mainly corresponds to that of Germany. The impact of taxation on investments is negative. A ten percentage points higher corporate tax rate leads to about five percent lower investments, measured by fixed assets. This effect is smaller for those companies which show loss carryforwards. A lower tax rate at a specific location especially seems to attract holding companies, which are applied for tax efficient group structuring.

Investment impact of tax loss treatment—empirical insights from a panel of multinationals

We analyze the impact of tax loss treatment on multinational investment. Basically, two effects of tax loss treatment can be expected. First, firms make their investment decisions considering potential future losses. Then, the various types of conceivable loss offset provisions affect investment decisions. Secondly, existing loss carryforwards resulting from losses in the past affect the tax rate elasticity of current investment decisions. Our empirical analysis is based on data of German multinationals. We pay particular attention to industries having a high probability to make losses. Our regression results suggest that a short carryforward time limit lowers investment in particular for firms with a high loss probability. We only find mixed evidence that group loss offsetting provisions foster investment. Concerning the effects of existing losses carried forward, we find a reduced tax rate elasticity of investment for companies shielded by loss carryforwards.

Knowledge Benefits of Social Capital upon Repatriation: A Longitudinal Study of International Assignees

abstractThis study integrates social resources theory and social exchange theory arguments to examine the knowledge benefits that international assignees' host‐unit social capital entails upon repatriation. Specifically, I hypothesize that assignees' host‐unit social capital, operationalized as their number of work group contacts and their proportion of trusted ties at the host unit, positively relates to two specific knowledge benefits upon repatriation: continued access to host‐unit knowledge; and continued transfer of host‐unit knowledge to colleagues in assignees' new positions. Assignees' perceptions of career and repatriation support are expected to moderate these relationships. The hypotheses are tested with a longitudinal sample of 85 inpatriate assignees in 10 German multinationals. I contribute to the literatures on international assignments, social capital, and MNC knowledge flows by explaining how and under what conditions assignees' host‐unit social capital entails knowledge benefits upon repatriation.

Corporation taxes and the debt policy of multinational firms

This paper analyzes the impact of corporate taxes on the capital structure of foreign subsidiaries of multinational firms. The empirical investigation employs a large micro-level panel dataset of German multinationals covering 31 countries over a 10-year period. A special feature of this dataset is that it allows us to distinguish between internal and external debt financing. Our results confirm a positive effect of local tax rates on both types of debt. Moreover, while adverse local credit market conditions are found to reduce external borrowing, internal debt is increasing, supporting the view that the two channels of debt finance are substitutes. Our findings suggest that internal credit markets give rise to significant advantages and enhance multinationals’ opportunities to use debt as a tax shield.

Foreign (in)direct investment and corporate taxation

Abstract Foreign investments of multinational firms are often complex in that they involve conduit entities. In particular, a multinational can pursue either a direct or an indirect investment strategy, where the latter involves an intermediate corporate entity and is associated with enhanced opportunities for international tax planning. As a consequence, in the case of indirect investments, the role of corporate taxation in destination countries may change. This paper investigates the effects of corporate taxation on foreign investment decisions of German multinationals, taking explicitly into account that firms choose in a first stage the investment regime (direct vs. indirect). The empirical findings, consistent with theoretical predictions, suggest that tax effects differ according to whether the investment is direct or indirect.

The innovative performance of German multinationals abroad: evidence from the European community innovation survey

This article analyzes cross-country differences in innovation behavior of subsidiaries of German multinational enterprises. The analysis is based on data from community innovation survey (CIS4) and covers 16 European countries. We find considerable differences in innovation input intensity and innovation output intensity between German subsidiaries located in different European countries. Multivariate analysis reveals that these differences are largely related to firm characteristics. A significant relationship between firm-level innovation and host country characteristics can only be found for innovation output. Copyright 2011 The Author 2011. Published by Oxford University Press on behalf of Associazione ICC. All rights reserved., Oxford University Press.

Why do international assignees stay? An organizational embeddedness perspective

We apply an organizational embeddedness perspective to examine international assignees’ retention with the organization. Specifically, we hypothesize that assignees’ social ties within and their perceived fit with the host unit positively relate to two sacrifices on leaving the organization: their firm-specific learning during the assignment, and their perceived career prospects in the organization. Perceived career prospects are expected to predict subsequent retention, moderated by firm-specific learning. These hypotheses are tested using a sample of 143 inpatriates in 10 German multinationals, with retention measured 2 and 4 years later. We show that inpatriates’ trusting ties with HQ staff and their fit with the HQ positively relate to their firm-specific learning and their perceived career prospects, and that the latter predicts their retention 2 and 4 years later. Perceived career prospects mediate the direct relationship between inpatriates’ fit with the HQ and inpatriate retention, and the indirect relationship between inpatriates’ trusting ties with HQ staff and their retention. Furthermore, inpatriates’ firm-specific learning mitigates the effect of perceived career prospects on retention decisions 2 years later. We contribute to the organizational embeddedness, careers, and international business literatures by explaining when and how facets of organizational embeddedness relate to assignee retention.

Cultural and Institutional Sources of Conflict in Foreign Subsidiaries of Multinational Corporations

This paper investigates the importance of culturally and institutionally induced conflicts between home and host country nationals in foreign subsidiaries of multinational corporations (MNCs). our comprehensive investigation of 617 foreign subsidiaries of US, Japanese and german multinationals firstly demonstrates that subsidiary managers attribute such conflicts to both cultural and institutional sources. We also find that cultural sources have a higher conflict potential compared to institutional sources. Further, we demonstrate that with increasing cultural and institutional distances between home and host countries, culturally induced conflicts become relatively more important than institutionally induced conflicts. these results indicate that although institutional differences matter as sources of conflicts between home and host country nationals in foreign subsidiaries, cultural differences matter somewhat more. nevertheless, the paper stresses that both, cultural and institutional sources of conflicts should be considered in conjunction and in an integrative way.

Tax Status and Tax Response Heterogeneity of Multinationals' Debt Finance

This paper analyzes how corporate taxation affects the capital structure of subsidiaries of multinational companies. The emphasis is on firm characteristics that proxy for the tax status of a subsidiary, which is crucial for the tax responsiveness of firms. Based on a comprehensive panel of German multinationals, we find that the tax sensitivity of the capital structure is significantly affected by several firm characteristics. Our results imply that well-known non-debttax shields such as depreciation allowances and loss carryforwards reduce the tax sensitivity of the debt-to-capital ratio. We also find that a higher probability of experiencing losses reduces the tax-rate sensitivity of debt financing.

International Debt Shifting: Do Multinationals Shift Internal or External Debt?

We examine the capital structures of multinational companies. Multinational companies can exploit the tax advantage of debt more aggressively than national companies by shifting debt from affiliates in low-tax countries to affiliates in high-tax countries. Previous papers have omitted either internal debt or external debt from the analysis. We are the first to model the companies’ choice between internal and external debt shifting, and show that it is optimal to use both types of debt in order to save taxes. Using a large panel of German multinationals, we find strong empirical support for our model. The estimated coefficients suggest that internal and external debt shifting are of about equal relevance.