Ownership Chains in Multinational Enterprises

2023-05-22

Social Science Research Network

AI Summary

This study investigates how multinational enterprises (MNEs) coordinate geographically dispersed subsidiaries through multi-tiered indirect ownership chains, focusing on how communication frictions shape global ownership architecture. Method: Leveraging a unique global ownership database, the paper employs triadic and bilateral simultaneous regressions, organizational economics modeling, and an innovative identification strategy to develop a two-stage location-choice model incorporating control delegation—extending beyond conventional bilateral FDI frameworks. Contribution/Results: Empirically, 54% of subsidiaries are indirectly held, with ownership chains spanning up to seven countries; deeper tiers exhibit greater geographic distance and time-zone divergence. At the country level, communication infrastructure significantly influences the location choices of both intermediate and ultimate subsidiaries. The study provides the first systematic evidence that communication便利 (i.e., communication infrastructure quality) is a critical institutional determinant of MNEs’ global ownership chain structure—offering novel theoretical insights into MNE governance architecture and empirical foundations for understanding the co-evolution of ownership networks and geographic dispersion.

Abstract

This study examines how multinational enterprises (MNEs) 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 hierarchy tend to be more geographically distant from the parent and often operate in different time zones. This suggests that the ease of communication along ownership chains is a critical determinant of their structure. Motivated by these findings, we develop a location choice model in which parent firms compete for corporate control of final subsidiaries. When monitoring is costly, they may 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 significantly influences the location decisions of affiliates along ownership chains. These findings underscore the importance of organizational frictions in shaping global corporate structures and provide new insights into the geography of multinational ownership networks.

Problem

• How MNEs structure ownership chains across borders
• Impact of communication ease on ownership chain structure
• Location choice model for subsidiaries and affiliates

Innovation

• Uses global dataset for ownership chain analysis
• Develops location choice model for corporate control
• Employs two-stage empirical strategy for predictions