Int'l Accounts - Multinational Firms

Strategic behavior by U.S. multinational enterprises (MNEs) to shift profits between countries to reduce their worldwide tax burden has been well studied. Much of the existing research has focused on the use of debt payments and intrafirm intellectual property licensing agreements to explain why and how MNEs shift income across national borders. Although these tax strategies may become less important following the U.S. Tax Reform Act of 2017, there is evidence they have had a large impact on measures of economic activity in recent years. This paper explores how U.S. MNEs have used cost sharing agreements between U.S. parent companies and their foreign affiliates to shift ownership of intangible assets to lower tax jurisdictions at less-than-arm’s-length prices. These transactions reduce measured U.S. GDP and raise measured GDP in the host countries of foreign affiliates. Our empirical results are consistent with this behavior. They provide a microeconomic view of how strategic movement of intellectual property affects key measures in the national and international economic accounts, such as GDP and the trade balance.

An aspect of globalization that has attracted increased attention in recent years is trade in intermediate inputs associated with the fragmentation of production across national borders. This trade takes the form of intrafirm transactions when production stages in different countries are performed by vertically integrated units of a multinational firm. Using firm-level data on U.S. multinational companies collected by the U.S. Bureau of Economic Analysis, this paper examines intrafirm shipments of intermediate inputs from U.S. parent companies to their foreign manufacturing affiliates. We relate the propensity of affiliates to source intermediate inputs from their parents to characteristics of the parent company, of the affiliate, and of the affiliate’s host country and industry that we hypothesize will influence the volume of intrafirm trade associated with fragmentation. Our results indicate that this trade is positively related to industry and affiliate characteristics that suggest fragmented production, to host-country characteristics that offer cost advantages, and to parent and affiliate characteristics that favor internalized transactions and the active coordination of different stages of the production process. The signs on the coefficients for a number of variables suggest a division of labor between higher-skilled, or more technologically advanced, activities performed by the parent and lower-skilled, or more rudimentary, activities performed by the affiliate.

The passage of the American Jobs Creation Act of 2004 (AJCA) provided U.S. tax incentives for U.S. multinational companies that receive large dividends from their foreign affiliates. In 2005, dividends paid by foreign affiliates to their U.S. parents were 4 times as large as in 2004. With most international financial transactions, it is usually difficult for an observer to determine whether tax considerations were a primary factor in motivating the transactions versus just one of many important factors. However, given Congress’ stated motivation for passing the AJCA and the substantial increase in dividends received by U.S. parent companies after enactment, there certainly does appear to be a causal relationship (with tax considerations playing a primary role) in at least this instance.

Despite an extensive literature on the determinants of the foreign location choices by multinational companies, researchers have only recently begun to systematically examine how these companies form their location consideration sets. When considering new foreign locations, do firms evaluate the attributes of the alternatives at the national level, the sub-national regional level, at some other level of geographical aggregation, or using some combination of these? This paper employs discrete choice models to examine how U.S. multinational companies form their location consideration sets and to identify some of the relevant location attributes. The results indicate that U.S. firms tend to employ a sequential, or hierarchical, decision-making process in which a host country is first chosen based on one set of attributes and then a region within that country is chosen based on another set of attributes. The relevant location attributes include industrial agglomeration and labor market conditions.