There's no Place like Home: The Profitability Gap between Headquarters and their Foreign Subsidiaries

Matthias Dischinger and Nadine Riedel

No 2866, CESifo Working Paper Series from CESifo

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 (search for similar items in EconPapers)
JEL-codes: F23 H25 L25 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (7)

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Working Paper: There’s No Place Like Home: The Profitability Gap between Headquarters and their Foreign Subsidiaries (2009)
Working Paper: There's No Place Like Home: The Profitability Gap between Headquarters and their Foreign Subsidiaries (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_2866

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