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

  • Dischinger, Matthias
  • Riedel, Nadine

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
Date of revision:
Handle: RePEc:lmu:muenec:10976
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  1. Dischinger, Matthias & Riedel, Nadine, 2008. "Corporate Taxes and the Location of Intangible Assets Within Multinational Firms," Discussion Papers in Economics 5294, University of Munich, Department of Economics.
  2. Jose Manuel Campa & Linda S. Goldberg, 1997. "The evolving external orientation of manufacturing: a profile of four countries," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 53-81.
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  4. John W. Budd & Jozef Konings & Matthew J. Slaughter, 2002. "Wages and International Rent Sharing in Multinational Firms," William Davidson Institute Working Papers Series 522, William Davidson Institute at the University of Michigan.
  5. Gordon H. Hanson & Raymond J. Mataloni & Matthew J. Slaughter, 2003. "Vertical Production Networks in Multinational Firms," NBER Working Papers 9723, National Bureau of Economic Research, Inc.
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  7. 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.
  8. Clausing, Kimberly A., 2003. "Tax-motivated transfer pricing and US intrafirm trade prices," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 2207-2223, September.
  9. Harry Huizinga & Luc Laeven, 2006. "International profit shifting within multinationals: a multi-country perspective," European Economy - Economic Papers 2008 - 2015 260, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  10. Rafael La Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, 04.
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  12. 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.
  13. Steven Brakman & Harry Garretsen (ed.), 2008. "Foreign Direct Investment and the Multinational Enterprise," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262026457, December.
  14. 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.
  15. David L. Hummels & Dana Rapoport & Kei-Mu Yi, 1998. "Vertical specialization and the changing nature of world trade," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 79-99.
  16. Johannes Becker & Clemens Fuest, 2007. "Quality versus Quantity – The Composition Effect of Corporate Taxation on Foreign Direct Investment," CESifo Working Paper Series 2126, CESifo Group Munich.
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