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

34 Pages Posted: 12 Dec 2009

See all articles by Matthias Dischinger

Matthias Dischinger

University of Munich

Nadine Riedel

Oxford University CBT; University of Hohenheim

Date Written: December 2009

Abstract

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.

Keywords: profit distribution, multinational enterprise, corporate taxes

JEL Classification: F23, H25, L25

Suggested Citation

Dischinger, Matthias and Riedel, Nadine, There's No Place Like Home: The Profitability Gap between Headquarters and their Foreign Subsidiaries (December 2009). CESifo Working Paper Series No. 2866, Available at SSRN: https://ssrn.com/abstract=1521408 or http://dx.doi.org/10.2139/ssrn.1521408

Matthias Dischinger

University of Munich ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

Nadine Riedel (Contact Author)

Oxford University CBT ( email )

Park End Street
Oxford, Oxfordshire OX1 1HP
United Kingdom

University of Hohenheim ( email )

Stuttgart
Germany

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