Investment agreements and the fragmentation of firms across countries

Abstract

We examine the global ownership structure of firms in the context of the investment regime. Investment agreements extend valuable privileges to firms invested abroad. But, these privileges only apply to firms whose assets are owned in a country that has signed an agreement with their host market; firms lack protections under investment agreements for many of their target markets. We argue that, by strategically locating subsidiaries in ‘transit’ countries, firms systematically expand their access to investment agreements. This firm-specific access to investment agreements through transit countries also has implications for investment flows: Transit countries receive more inflows and outflows of investment. Moreover, the impact of agreements declines over time and treaty partners, as seemingly newly protected firms have previously gained coverage through subsidiaries. Drawing on subsidiary location choices of the world’s largest firms, as well as data on firm ownership structures and aggregate investment flows, we present systematic evidence consistent with this argument. The paper highlights the importance of the global ownership structure of firms in an environment of heterogeneous international rules and discusses new distributional consequences of the investment regime.

Foreign lobbying through domestic subsidiaries

“…This idea is in line with recent studies in political science that recognize that MNCs may strategically locate their subsidiaries across countries with political considerations. For instance, firms can indirectly gain access to international investment and tax treaties through their subsidiaries incorporated in signatory countries (Betz et al, 2020; Thrall, 2021). In the context of this paper, subsidiaries of foreign MNCs can categorically avoid the onerous FARA and (whether intended or not) obscure foreign ownership under the LDA.…”

“…Among these are the many foreign‐owned, but domestically incorporated subsidiaries of foreign MNCs. A growing body of research suggests that these subsidiaries play a strategic role in serving the foreign headquarters’ interests in host countries (Betz et al, 2020; Thrall, 2021; Lee, 2023). For instance, global firms may indirectly gain access to investment treaties or tax privileges bestowed on a host state through their domestic subsidiaries.…”

“…Moreover, I provide descriptive and inferential evidence that U.S.‐based subsidiaries act as domestic agents for foreign MNCs in their efforts to influence U.S. governmental policies. By this, I build on the growing body of research investigating the strategic role of domestic subsidiaries in advancing political agendas of their foreign headquarters (Betz et al, 2020; Thrall, 2021; Lee, 2023). Finally, I connect with the literature on interest group politics more generally, and demonstrate how the current lobbying law may actually allow foreign intervention through the growing presence of domestically incorporated foreign firms.…”

Protection forestall: Offshore firms against tariffs in their own industry

“…13 Milner (1988b); ; Gulotty and Li (2020). 14 Antras and Helpman (2004); Grossman and Rossi-Hansberg (2008); Eckhardt and Lee (2018); Betz, Pond, and Yin (2021).…”

Politically Connected Owners

“…By emphasizing political influence through the owners of a firm’s assets, we contribute to a growing literature that examines the use of ownership structures for political influence, for example through partnerships with foreign owners (Betz & Pond, 2019; Gray, 2020; Markus, 2008), through the design of complex offshore ownership structures (Betz et al, 2021; Earle et al, 2019), or through the issue of stock market securities (Pond & Zafeiridou, 2020). While we view the issue from the perspective of the owners, rather than from the perspective of firms, our framework builds on a similar logic: we identify how the ownership structure of firms responds to political conditions, because owners differ in their political clout.…”