Outbound Profit Shifting and the Propensity to Engage in Cross‐Border Acquisitions

Abstract

AbstractAccountability‐avoiding foreign direct investment (FDI) is a category of financial motives explaining where firms invest and how, yet our grasp of this phenomenon is incomplete. In contrast with tax‐haven FDI, where multinational enterprises (MNEs) invest in a host country to pursue inbound profit shifting, we consider a novel motive – FDI attracted by low host country financial transparency that enables outbound profit shifting (OPS). Cross‐border acquisitions (CBAs) are a takeover route to achieving OPS and global tax optimization. Our empirical context is 39,951 CBAs by 315 acquirers from 26 countries in the 1996–2015 period. We hypothesize and empirically show a positive relationship between OPS and CBAs and the probability that equity ownership of CBAs will be high. We find that the relationship between OPS and CBAs is stronger the more attractive or income unequal the host market, or when the multinational's industry is vertically or horizontally integrated. We attribute the lack of support for our hypothesis that MNEs require in‐house capability to conduct OPS to tax planning consultancies’ services. These findings highlight the role of low financial transparency as a novel locational determinant of OPS‐pursuing FDI and emphasize the distinction between inbound and outbound profit shifting as manifestations of accountability‐avoiding FDI.