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

  • Matthias Dischinger


    (University of Munich)

  • Nadine Riedel


    (Oxford University Centre for Business Taxation, CESifo Munich)

Using a large data set of European firms, this paper provides evidence that operations at multinational headquarters are significantly more profitable than operations 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 Oxford University Centre for Business Taxation in its series Working Papers with number 0923.

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Date of creation: 2009
Date of revision:
Handle: RePEc:btx:wpaper:0923
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  7. Dischinger, Matthias & Riedel, Nadine, 2011. "Corporate taxes and the location of intangible assets within multinational firms," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 691-707, August.
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  16. Michael P Devereux, 2007. "The Impact of Taxation on the Location of Capital, Firms and Profit: a Survey of Empirical Evidence," Working Papers 0702, Oxford University Centre for Business Taxation.
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