A comparative analysis of institutional arbitrage strategies in emerging and developed market MNEs: exploring tax haven subsidiary incorporation

Hurst, Jamie ORCID: https://orcid.org/0000-0002-0589-095X and Sutherland, Dylan (2024) A comparative analysis of institutional arbitrage strategies in emerging and developed market MNEs: exploring tax haven subsidiary incorporation. International Journal of Business and Emerging Markets, 16 (3). pp. 335-366. ISSN 1753-6219

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Abstract

This paper explores: 1) the extent to which emerging market MNEs, owing to their generally fragile and weaker domestic institutional environments, are more predisposed towards institutional arbitrage related FDI than developed market MNEs; 2) identifies whether their institutional arbitrage behaviours are less responsive to domestic institutional change than those of developed market MNEs. We consider these questions by using the number of offshore tax haven-based subsidiaries as a proxy for institutional arbitrage activity in 10,892 publicly listed developed market MNEs and 7,243 listed emerging market MNEs. Our results show EMNEs, other things being equal, do indeed have a higher propensity for offshore incorporation. At the same time, however, EMNEs appear less responsive to institutional change than DMNEs. We consider implications for extant mainstream EMNE related IB theory, such as the 'springboard theory', which predicts differences between these MNE types with regards to institutional arbitrage orientation and strategy.