Subsidiary Types, Activities, and Location: An Empirical Investigation
Subsidiary Types, Activities, and Location: An Empirical Investigation Subsidiary Types, Activities, and Location: An Empirical Investigation
• Hypothesis 7: The level of the openness of the economy will have a positive influence onthe likelihood that subsidiaries will be differentiated in terms of activities and roleswithin the multinational firm.High tax rates on corporate profits should have a negative impact on a firm’s willingness to sellinto a given market and thus would be expected to have a negative influence on the tendency toinvest in tax sensitive sales activities (Grubert & Mutti, 1991, 2000). Ghemawat (2007) arguesthat this is one of the country-specific factors that can influence the location of specific activitiessuch as management. Multinational firms employ the arbitrage possibilities offered by varyingtax rates through internal transfer pricing policies. On the other hand, incentives in the form oflower tax rates for firms that locate research and development, production and corporate supportactivities may encourage investments. However, tax breaks are likely to be more valuable in hightax environments. The hypotheses are then as follows:• Hypothesis 8: Corporate tax rates will have a positive influence on the likelihood thatsubsidiaries will be differentiated in terms of activities and roles within the multinationalfirm.Other VariablesNumerous other variables were originally included in the analysis. These included measures ofinfrastructure, managerial capabilities, technological capabilities, transparency, capital marketdevelopment, among others that proxy local factors on customers, competition, institutions, andinfrastructure development. Unfortunately, the fact that the current dataset has only 12 hosteconomies meant that all of these additional measures were highly correlated (0.70 or greater)with one or more of the variables listed above (mostly the correlations were with measures of15
levels of development). Thus these additional variables were excluded from the analysis asdescribed below. In addition, in the modeling of firm- and location-specific factors, we includedrandomized firm- and location-specific effects to reflect the effect of any factors that may have aneffect on subsidiary roles (more details on this in the methods section). Figure 1 shows the overallconceptual model and the resulting hypotheses.DATA, SAMPLE AND MEASURESTo learn more about the roles of multinational subsidiaries, data was extracted from a large studyof multinational corporation activities in the Asia-Pacific region. The Asia-Pacific is a majordestination for multinational investment, as well as a region with economies that exhibit greatvariety in terms of size, levels of development, openness, tax rates, institutional factors, andcapabilities. Despite this variety, multinational companies tend to manage the Asia-Pacific as asingle region, as evidenced by the number of regional headquarters established in the regionpartly to coordinate region-wide activities (Enright, 2005b). In addition, since much of the foreigninvestment in the region is relatively recent, subsidiary types may be less bound by history than inNorth America or Western Europe (Enright, 2002, 2005a). Since the largest sources of foreigndirect investment, both globally and in the Asia-Pacific region, are North America, WesternEurope, and Japan, it was decided to focus on the foreign investment behavior of firms from thesehome locations.Over 8,000 North American, European, and Japanese firms were surveyed about the nature andlocation of their activities in the region, their organization and management structures, and aseries of related issues. The mailing list was compiled from business directories and chamber ofcommerce lists. After three mailings, 1,100 usable responses were obtained, representing aresponse rate of 13.8 percent. Data from the 450 of these firms, which identified themselves as16
- Page 1: Academy of International BusinessBe
- Page 4 and 5: that the suggested strategy types w
- Page 6 and 7: effect, what this process literatur
- Page 8 and 9: theory building, suffer from some w
- Page 10 and 11: identifies several factors that mig
- Page 12 and 13: Firm size is often used as a proxy
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- Page 20 and 21: METHODS AND RESULTSThe results repo
- Page 22 and 23: model with multiple response levels
- Page 24 and 25: A restricted maximum likelihood est
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- Page 30 and 31: ReferencesAgarwal, S., & Ramaswami,
- Page 32 and 33: Enright, M. J. 2005a. Regional mana
- Page 34 and 35: Johanson, J., & Vahlne, J-E. 1977.
- Page 36 and 37: shops and networks. Strategic Manag
- Page 38 and 39: Table 1. Empirical Studies of Subsi
- Page 40 and 41: Table 2. Cluster StatisticsVariable
• Hypothesis 7: The level of the openness of the economy will have a positive influence onthe likelihood that subsidiaries will be differentiated in terms of activities <strong>and</strong> roleswithin the multinational firm.High tax rates on corporate profits should have a negative impact on a firm’s willingness to sellinto a given market <strong>and</strong> thus would be expected to have a negative influence on the tendency toinvest in tax sensitive sales activities (Grubert & Mutti, 1991, 2000). Ghemawat (2007) arguesthat this is one of the country-specific factors that can influence the location of specific activitiessuch as management. Multinational firms employ the arbitrage possibilities offered by varyingtax rates through internal transfer pricing policies. On the other h<strong>and</strong>, incentives in the form oflower tax rates for firms that locate research <strong>and</strong> development, production <strong>and</strong> corporate supportactivities may encourage investments. However, tax breaks are likely to be more valuable in hightax environments. The hypotheses are then as follows:• Hypothesis 8: Corporate tax rates will have a positive influence on the likelihood thatsubsidiaries will be differentiated in terms of activities <strong>and</strong> roles within the multinationalfirm.Other VariablesNumerous other variables were originally included in the analysis. These included measures ofinfrastructure, managerial capabilities, technological capabilities, transparency, capital marketdevelopment, among others that proxy local factors on customers, competition, institutions, <strong>and</strong>infrastructure development. Unfortunately, the fact that the current dataset has only 12 hosteconomies meant that all of these additional measures were highly correlated (0.70 or greater)with one or more of the variables listed above (mostly the correlations were with measures of15
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