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There's No Place Like Home: The Profitability Gap between Headquarters and their Foreign Subsidiaries

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Author Info
Dischinger, Matthias
Riedel, Nadine
Abstract

Using a large panel data set for European firms, this paper provides evidence that operations at multinational headquarters are significantly more profitable than perations at their foreign subsidiaries. The effect turns out to be robust and quantitatively large. Our findings suggest that the profitability gap is partly driven by agency costs which arise if value-driving functions are managed by a subsidiary that is geographically separated from the headquarters management. In line with falling communication and travel costs over the last decade, the profitability gap is shown to decline over time. Apart from that, our results indicate that a higher competitiveness of multinational firms in their home markets also contributes to the profitability gap. We discuss various implications of our findings.

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Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 10976.

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Date of creation: 28 Aug 2009
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Handle: RePEc:lmu:muenec:10976

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Related research
Keywords: profitability distribution; multinational enterprise; corporate taxes;

Find related papers by JEL classification:
L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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  3. Gordon H. Hanson & Raymond J. Mataloni & Matthew J. Slaughter, 2005. "Vertical Production Networks in Multinational Firms," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 664-678, November. [Downloadable!] (restricted)
    Other versions:
  4. Luigi Zingales, 2000. "In Search of New Foundations," CRSP working papers 515, Center for Research in Security Prices, Graduate School of Business, University of Chicago. [Downloadable!]
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  9. Caroline Freund & Diana Weinhold, 2002. "The Internet and International Trade in Services," American Economic Review, American Economic Association, vol. 92(2), pages 236-240, May. [Downloadable!]
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    Other versions:
  11. Gordon H. Hanson & Raymond J. Mataloni, Jr. & Matthew J. Slaughter, 2001. "Expansion Strategies of U.S. Multinational Firms," NBER Working Papers 8433, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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