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

Journal of International Business Studies

Posted: 24 Dec 2022

See all articles by Robinson Reyes-Peña

Robinson Reyes-Peña

Florida International University

Arun Upadhyay

Florida International University (FIU)

Arun Kumaraswamy

Florida International University (FIU) - Department of Management & International Business

Date Written: December 14, 2022

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

Suggested Citation

Reyes-Peña, Robinson and Upadhyay, Arun and Kumaraswamy, Arun, Foreign Competitive Pressure and Inversions By U.S. Multinational Enterprises (December 14, 2022). Journal of International Business Studies, Available at SSRN: https://ssrn.com/abstract=4304809

Robinson Reyes-Peña (Contact Author)

Florida International University ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Arun Upadhyay

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Arun Kumaraswamy

Florida International University (FIU) - Department of Management & International Business ( email )

University Park
Miami, FL 33199
United States

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