One Call Away. Ownership Chains and Ease of Communication in Multinational Enterprises
Stefania Miricola, Armando Rungi, Gianluca Santoni
TL;DR
The paper investigates why multinational enterprises structure ownership chains with intermediate affiliates across borders. It builds a two-step structural model extending the classic inspection-game framework, yielding a trilateral gravity equation for the location of intermediates and a bilateral equation for final investments, estimated via PPML. Empirically, it shows that communication frictions, proxied by overlapping working hours and time-zone differences, strongly shape where intermediates are placed and how deep ownership chains become, while tax optimization plays only a limited role. Robust results across industries and extensive robustness checks underscore the importance of coordination costs in global corporate structure formation. The findings illuminate the geography of multinational ownership networks and offer a formal framework for understanding how information flow and governance costs drive corporate organization beyond tax considerations.
Abstract
This study examines how multinational enterprises structure ownership chains to coordinate subsidiaries across multiple national borders. Using a unique global dataset, we first document key stylized facts: 54% of subsidiaries are controlled through indirect ownership, and ownership chains can span up to seven countries. In particular, we find that subsidiaries further down the control hierarchy tend to be more geographically distant from the parent and operate in different time zones. This suggests that the ease of communication along ownership chains is a critical determinant of their structure. On the other hand, tax optimization strategies are not correlated with locations along ownership chains. Motivated by previous findings, we develop a location choice model in which parent firms compete for corporate control of final subsidiaries, but monitoring is costly, and they can delegate control to an intermediate affiliate in another jurisdiction. The model generates a two-stage empirical strategy: (i) a trilateral equation that determines the location of an intermediate affiliate conditional on the location of final subsidiaries; and (ii) a bilateral equation that predicts the location of final investment. Our empirical estimates confirm that the ease of communication at the country level has a significant influence on the location decisions of affiliates along ownership chains. Our findings underscore the importance of communication frictions in shaping global corporate structures, and provide new insights into the geography of multinational ownership networks.