Arbitrage spaces in the offshore world: Layering, ‘fuses’ and partitioning of the legal structure of modern firms

Abstract

In this article, we discuss the way offshore financial centres are used by the multi-subsidiary, multi-jurisdictional group structure known as the ‘multinational enterprise’ to arbitrage between social geographies of political jurisdictions. We define arbitrage as the use of corporate legal entities located in diverse jurisdictions to arbitrate a third country's rules and regulations. Using a new method to categorize firm-level data from Van Dijk’s Orbis, we operationalize the notion of arbitrage to systematically detail and compare the structural sequencing choices firms are making, likely in part for reasons of arbitrage. We base our techniques on legal theory of the firm, acknowledging the underpinning of social technologies of law and accounting by which business enterprises are constructed and maintained. We conclude that two specific types of entities, ‘standalones’ versus ‘in-betweeners’, are qualitatively different from others in the activities they perform. We also highlight the existence of liability structures, or ‘fuses’, which typically take the form of a split ownership arrangement. Ultimately, we demonstrate that the position of a firm’s subsidiary within the overall network ecology of that firm is as important as its jurisdictional registration location.