Foreign Competitive Pressure and Inversions By U.S. Multinational Enterprises

Abstract

An inversion is a strategy used by multinational enterprises (MNEs) to avoid high corporate taxes in their home countries, by changing their domicile to foreign countries with lower taxes. While prior studies have focused primarily on firm-level and country-level determinants of inversions, we explore how an industry-level factor – foreign competitive pressure from industry rivals based in low-tax countries – has influenced U.S. MNEs’ propensity to pursue inversions. We frame inversions as an extreme MNE response to the institutional pressure of high corporate taxes in the United States. We hypothesize that competitive pressure from industry rivals based in low-tax countries leads to value erosion for U.S. MNEs and increases their propensity to resort to inversions. Our analyses of a longitudinal dataset of U.S. firms between 1982 and 2017 offer robust support for our hypotheses. Our study draws attention to the tax and competitive implications of location choice, as well as to the use of inversions by U.S. MNEs to arbitrage institutional differences (in this case, corporate tax rates). A key implication is that U.S. policy makers should seek a viable balance between the generation of adequate revenues from corporate taxes and the sustenance of U.S. MNEs’ global competitiveness and performance.

Keywords: Institutional theory, industry competitive dynamics, location choice, cross-border mergers and acquisitions (M&As), tax inversions, tax planning/avoidance

JEL Classification: F23, F38, G28, H26