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What drives emerging economy firm acquisitions in tax havens?
JBR-08546; No of Pages 8 Journal of Business Research xxx (2015) xxx–xxx
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Journal of Business Research
What drives emerging economy firm acquisitions in tax havens? Murali Chari a,⁎, Senay Acikgoz b a b
Lally School of Management, Rensselaer Polytechnic Institute, 110 8th Street, Troy, NY 12180, USA Department of Econometrics, FEAS, Gazi University, 06500 Beşevler-Ankara, Turkey
a r t i c l e
i n f o
Article history: Received 5 February 2014 Received in revised form 20 August 2015 Accepted 21 August 2015 Available online xxxx Keywords: Emerging economy firms Cross-border acquisitions Tax havens Internationalization motivations Institutional weakness
a b s t r a c t We note that a non-trivial fraction of international acquisitions by emerging economy firms are in tax havens. We argue that such acquisitions are driven by different motivations than the four (market seeking, resource seeking, low cost seeking, and knowledge or strategic asset seeking) identified in the international business literature. Specifically, we argue that such acquisitions are driven by institutional weakness in the home country and lower taxes in the host country. Empirical tests using data on cross border acquisitions by firms from ten emerging economies with the most numbers of cross border acquisitions lend support to our arguments. © 2015 Elsevier Inc. All rights reserved.
1. Introduction International investments, including cross border acquisitions, were dominated by advanced economy (AE) firms until recently, and the international business literature evolved to explain such activity (Buckley et al., 2007; Dunning, 1998). The international business literature points to four motivations for the international expansion of firms, namely market seeking, efficiency seeking, natural resource seeking, and knowledge seeking (also referred to as strategic, or created, asset seeking) (Buckley et al., 2007; Dunning, 1998). Emerging economy (EE) firms have recently begun international expansion in a significant way. Foreign direct investments (FDI) from EEs, for example have grown sharply in the past decade (Buckley, Forsans, & Munjal, 2012). Cross border acquisitions (CBAs) by EE firms have also grown sharply in recent years, for example by 150% between 2001 and 2010 (SDC, 2011). This recent international expansion of EE firms deserves greater research attention since features of such expansion that are particularly prominent or different can help advance extant theory (Cuervo-Cazurra, 2012; Luo & Tung, 2007). We focus on one prominent feature in the international expansion behavior of EE firms. Specifically, countries and territories considered as tax havens are particularly prominent destinations for EE firm internationalization, including CBAs (Morck, Yeung, & Zhao, 2008; Peng & Parente, 2012). Expansion of firms into tax havens overall, and with respect to EE firms in particular, has received inadequate research attention (Peng & Parente, 2012). What drives EE firm acquisitions in tax havens? Addressing this research question, we first argue that tax ⁎ Corresponding author. E-mail addresses: [email protected] (M. Chari), [email protected] (S. Acikgoz).
havens do not share characteristics that are attractive for firms driven to internationalize by the traditional motivations. Our first contention therefore is that EE firm CBAs into tax havens are not driven by the traditional motivations. Second, we argue that tax havens offer other advantages, specifically, lower taxes and secrecy. We therefore contend that EE firm CBAs into tax havens are driven by lower taxes in these countries, and by the need to escape or take advantage of institutional weakness in their home country. We then test and find support for our contentions in a large sample of CBAs by EE firms. Our study makes four contributions. First, we highlight the importance of studying tax havens. Second, we enrich the institutions based view of international business with particular emphasis on institutional weakness at home as a driver of international expansion (Peng & Parente, 2012; Peng, Wang, & Yi, 2008). Third, we make a marginal contribution to the literature on tax havens by suggesting that tax havens may play a constructive role by providing refuge for potentially ‘good’ firms caught in a bad institutional situation at home. Finally, we provide what we believe is the first set of empirical evidence on the drivers of EE firm CBAs into tax havens. 2. Theory and background International business theories note four motivations for the international expansion of firms, namely market seeking, resource seeking, low-cost or efficiency seeking, and knowledge seeking (Buckley et al., 2007; Dunning, 1998). While other motivations, such as following a competitor, have found occasional mention in the literature, the four listed above are considered the “main” or “primary” motivations (Buckley et al., 2007: 501; Dunning, 1998: 10). One of the ways to grow a firm's sales and profits is to seek additional markets for the firm's products and
http://dx.doi.org/10.1016/j.jbusres.2015.08.034 0148-2963/© 2015 Elsevier Inc. All rights reserved.
Please cite this article as: Chari, M., & Acikgoz, S., What drives emerging economy firm acquisitions in tax havens?, Journal of Business Research (2015), http://dx.doi.org/10.1016/j.jbusres.2015.08.034
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services overseas. Since larger overseas markets offer greater potential in this regard, international expansion motivated by a search for new markets is likely to take firms into countries with larger markets (Buckley et al., 2007; Dunning, 1998). Overseas markets can either be serviced through exports or by investing to internalize the host country operation (Buckley & Casson, 1998). While exporting reduces investment commitment to the host country market, investing in the host country enhances the firm's ability to serve the market by facilitating greater understanding of consumer behavior and greater acceptance of the firm's products in the host country (Chari & Chang, 2009). Lending support to market seeking as an important motivation, a long line of research has shown that the size of a country market, typically measured as the country's GDP, is a significant factor attracting foreign firm investments (Buckley et al., 2007). Natural resources are location bound and the need to secure access to these resources is another important motivation for international expansion of firms (Buckley et al., 2007; Dunning, 1998). Given variation in the endowment and the efficient access to natural resources across countries, one can expect that firms seeking such location bound resources would invest in countries with a revealed comparative advantage in natural resources. Confirming this expectation, empirical studies have shown a positive association between countries' revealed comparative advantage in natural resources and foreign firm investments into the country (e.g., Buckley et al., 2007). A third motivation for international expansion is the opportunity to access lower labor costs in the host country, and thereby enhance the firm's profitability (Buckley et al., 2007; Dunning, 1998). Labor costs vary across countries, and firms seeking to lower their labor costs would invest in production and operations in countries with lower labor costs. Supporting this expectation, studies have found a negative association between greater labor costs and foreign investments (Bevan & Estrin, 2004). Earlier international business literature emphasized the need for firms to possess strong advantages especially in knowledge or created assets (typically referred to as ownership advantages) to overcome potential liabilities of being foreign in the host country (Dunning, 1980). More recent literature contends that firms may expand internationally not just to exploit firm specific assets (which tend to be of the created or knowledge variety), but also to gain access to such assets either as complements to what they already possess or to compensate for the lack of such assets (Luo & Tung, 2007). Knowledge assets tend to be embedded in employees and organizations, and as tacit assets they are less amenable to arms-length transfer (Kogut & Zander, 1993). Consequently, firms seeking knowledge as their motivation for international expansion typically access these assets by acquiring either parts or the whole of firms in host countries that possess these assets (Buckley et al., 2007). 2.1. CBAs by EE firms in tax havens International expansion by EE firms has grown rapidly in the past decade, and CBAs have been a prominent vehicle for such expansion (Luo & Tung, 2007; Peng, 2012). Empirical studies show that, similar to AE firms, traditional motivations also appear to drive EE firm internationalization (Buckley et al., 2007; Buckley et al., 2012). As mentioned in the introduction section, a notable feature of international expansion by EE firms, including CBAs, that has not received sufficient research attention is the high incidence of tax havens as host countries. Tax havens are a set of countries and territories with small economies and relatively affluent but small populations. They are distinguished by very low or zero corporate tax rates and by laws and regulations that facilitate high levels of opacity about the identities of firms and investors (Gravelle, 2013; Hines, 2010). Tax havens have been studied by economists focusing on capital and trade flow distortions, tax competition, and tax avoidance (Dharmapala & Hines, 2009; Gravelle, 2013; Hines, 2010; Hong & Smart, 2010; Palan, 2002). In the international business literature, in contrast, tax havens have not
received much attention (Buckley, Sutherland, Voss, & El-Gohari, 2015; Peng & Parente, 2012). Tax havens feature prominently as destinations for EE firm expansion. For example, tax havens are among the top destinations for investment from Brazil, Russia, India, and China (Buckley et al., 2015; Peng & Parente, 2012). The prominence of tax haven destinations is also reflected in CBAs by EE firms. Specifically, 18% of CBAs by firms from the top ten EEs (i.e., the ten EEs with the most number of CBAs) in 2010 were of target firms in tax havens. The corresponding number for AE firms was less than 7%. Tax havens therefore account for a nontrivial portion of EE firm investment, including CBAs. Differences in the motivation to acquire a firm in tax havens therefore merit attention. We argue that tax havens do not share characteristics of countries that attract international expansion associated with the traditional motivations. Consequently, we contend that while traditional motivations apply to EE firm CBAs into other countries, they do not motivate CBAs into tax havens. We then draw on recent notions of institutional weakness as a potential driver of international expansion of EE firms (Peng & Parente, 2012) and argue that CBAs into tax havens are motivated by institutional weakness in the home country, and by the opportunity to lower taxes. Fig. 1 shows our conceptual model. In what follows, we develop our arguments with respect to each motivation for international expansion and hypothesize the relationship between country characteristics implied by each motivation and the likelihood that an EE firm CBA will be in a tax haven rather than in other countries. 3. Hypotheses 3.1. Traditional motivations 3.1.1. Market seeking As noted in the theory section, search for new markets is an important motivation for international expansion, and firms seeking new markets will tend to expand into countries with larger market size. A positive association between host country market size and CBA into the country will therefore be consistent with a market seeking motive (Buckley et al., 2007). Tax haven countries however are very small in market size. The total GDP of all tax haven countries, for example, roughly adds up to that of New York State (Hines, 2010). We therefore argue that unlike CBAs into other countries, CBAs into tax havens are not motivated by a search for new markets. If one were considering the likelihood of CBA in one tax haven as opposed to other tax havens in a sample of just tax havens, our arguments suggest no systematic relationship between the likelihood of CBA and host country market size. If on the other hand the focus is on the likelihood of CBA in a tax haven relative to other countries (where a positive relationship between the likelihood of CBA and host country market size is expected), then our arguments imply a negative relationship between the likelihood of CBA in a tax haven and host country market size. Since our interest is on the likelihood of CBA in a tax haven relative to other countries, we hypothesize the following. Hypothesis 1. : There is a negative relationship between the likelihood of CBA in a tax haven relative to other countries and host country market size.
3.1.2. Natural resource seeking Firms that expand internationally to access natural resources, as reviewed earlier, are likely to invest in countries with a greater comparative advantage in natural resources. A positive association between measures of comparative advantage of a country in natural resources and CBAs into the country will therefore be consistent with a natural resource seeking motivation (Buckley et al., 2007). Tax haven countries have “substantially smaller natural resource endowments” than other countries (Dharmapala & Hines, 2009: 1060). We therefore argue that unlike CBAs into other countries, CBAs into tax havens are not
Please cite this article as: Chari, M., & Acikgoz, S., What drives emerging economy firm acquisitions in tax havens?, Journal of Business Research (2015), http://dx.doi.org/10.1016/j.jbusres.2015.08.034
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Fig. 1. The conceptual model.
motivated by the pursuit of natural resources. Since our interest is on the likelihood of CBA in a tax haven relative to other countries (where one can expect a positive relationship), our arguments imply the following hypothesis. Hypothesis 2. : There is a negative relationship between the likelihood of CBA in a tax haven relative to other countries and host country's comparative advantage in natural resources.
3.1.3. Low-cost/efficiency seeking Lowering costs by relocating labor intensive activities to countries with lower labor costs is another motivation to expand overseas. As mentioned earlier, firms seeking lower labor costs would expand to countries with lower wages. A negative association between wage level in a country and CBAs into the country will therefore lend support to the low-cost/efficiency seeking motivation. Tax haven countries have small populations, commonly below one million, and combined with their small geographic size are relatively less able to support labor intensive activities (Dharmapala & Hines, 2009). In addition, these countries are relatively more affluent, with correspondingly higher wage levels (Dharmapala & Hines, 2009). We therefore argue that unlike CBAs into other countries, CBAs into tax havens are not motivated by low cost/efficiency seeking. Since our interest is on the likelihood of CBA in a tax haven relative to other countries (where one can expect a negative relationship), our arguments imply the following hypothesis. Hypothesis 3. : There is a positive relationship between the likelihood of CBA in a tax haven relative to other countries and host country labor cost.
3.1.4. Knowledge seeking The pursuit of knowledge assets, both to complement such assets already owned by the firm and to compensate for the lack of such assets in the firm, is another important motivation for foreign investment. Firms seeking access to knowledge assets are likely to expand into countries with an abundance of such assets (Chen & Chen, 1998; Dunning, 1998; Makino, Lau, & Yeh, 2002). A positive association between
indicators of knowledge asset abundance and CBAs into the country will support the pursuit of knowledge assets as a motivation for international expansion (Buckley et al., 2007). Tax havens typically lack the national institutions considered important to support knowledge generation in an economy, and typically rank relatively low on indicators of knowledge assets such as patents. We therefore contend that unlike CBAs into other countries, CBAs into tax havens are not motivated by the pursuit of knowledge assets. Since our interest is on the likelihood of CBA in a tax haven relative to other countries (where one can expect a positive relationship), our arguments imply the following hypothesis. Hypothesis 4. : There is a negative relationship between the likelihood of CBA in a tax haven relative to other countries and knowledge assets availability in the host country.
3.2. Alternative motivations While tax havens do not share the characteristics of countries that attract foreign firms driven by the four traditional motivations as argued above, they have other characteristics that are of value to firms. The first is the low or zero tax rates for foreign firms investing in these countries. The second is the strong privacy protections covering the identity of firms and investors in these countries. We discuss these in detail below. 3.2.1. Lowering taxes Taxes are a charge on profits. As profit maximizing entities, therefore, firms would seek to reduce their taxes. Countries vary in their tax rates, and firms can lower their taxes by expanding into a country with lower tax rates. Tax havens have very low or zero tax rates, and hence provide firms with the opportunity to lower their taxes by shifting income away from their higher tax home countries to their tax haven operations. For example, by taking loans for the home country operation from a tax haven subsidiary, a firm can lower its income subject to the higher tax rate at home while the interest income for the tax haven subsidiary is subject to zero or a very low tax rate (Hines, 2010).
Please cite this article as: Chari, M., & Acikgoz, S., What drives emerging economy firm acquisitions in tax havens?, Journal of Business Research (2015), http://dx.doi.org/10.1016/j.jbusres.2015.08.034
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Second, by routing purchases and sales through tax haven operations, and increasing the price for purchases and reducing the price for sales relative to transactions with unrelated parties, a firm can transfer profits out of the home country to tax havens where they are subject to a lower or zero tax rate (Hines, 2010). Tax savings through expansion into a lower tax country is larger when the tax rate difference between home and host country is larger. A positive association between the tax rate difference between the home and host country and the likelihood of CBA in the host country would therefore be consistent with lowering taxes as a motive for CBA. Since tax havens have the lowest tax rates and do not offer other traditional benefits that firms seek, we argue that, relative to CBAs into other countries, lowering taxes is an important motive for CBAs in tax havens. We therefore hypothesize the following. Hypothesis 5. : There is a positive relationship between the likelihood of CBA in a tax haven relative to other countries and the corporate tax rate difference between the home country and the host country.
3.2.2. Institutional weakness Besides low tax rates, another feature of tax havens is the secrecy that their laws offer to firms and investors (Morck et al., 2008; Palan, 2002; Palan, Murphy, & Chavagneux, 2013). Laws and regulations in tax havens regarding confidentiality, and various arrangements such as trusts and special purpose vehicles available in these countries, enable firms to shroud the identities of investors (Murphy, 2011; Palan, 2002). Such laws are highly valued by firms from EEs that would like to put the firm's wealth outside the grabbing hands of their government. Grabbing hand refers to various forms of wealth expropriation by the government and can range from overt expropriation of a firm's assets to less severe forms such as demand for side payments to pursue economic activity and arbitrary changes in tax laws (Friedman, Johnson, Kaufmann, & Zoido-Lobaton, 2000; Frye & Shleifer, 1996; Shleifer & Vishny, 2002). A host of factors which reflect institutional weakness, i.e., weakness in the institutions through which economic activity is governed in the country (including corruption, ineffective government, and breakdown in the rule of law), enable the grabbing hand of government in many EEs (Kaufman, Kraay, & Massimo, 2009; North, 1990; Peng & Parente, 2012; Shleifer & Vishny, 2002). Acquiring a firm in a tax haven, because of the secrecy that tax havens offer firms and investors, is a viable means for EE firms to put their wealth beyond the reach of the grabbing hands of home governments. EE firms can then let their wealth accumulate in the tax haven, use the wealth to expand their operations further overseas, or use the wealth to buy back the firm's home country operations. The last option in effect makes the domestic operation a subsidiary of the firm's operation in the tax haven, and is an example of round tripping, where funds go out of a country as outward FDI and subsequently returns as inward FDI (Luo & Tung, 2007; Morck et al., 2008; Peng & Parente, 2012). Besides the grabbing hand, other manifestations of institutional weakness in EEs such as policy distortions also encourage round tripping via tax havens, and hence increase the attractiveness of tax havens as destinations for CBAs. Fung, Yau, and Zhang (2010) provide an example in the Chinese context where differential tax rates for foreign and domestic investments motivate Chinese firms to siphon funds to tax havens and then use the tax haven operations to invest back in China. Similar policy distortions are found in other EEs as well. In India for example, imperfections in tax law provisions that could dissuade round tripping through Mauritius has led to large levels of investments to and from this tax haven—levels that are vastly disproportionate to the size of Mauritius' economy (Peng & Parente, 2012). For the above reasons, we contend that institutional weakness at home, by enabling the grabbing hand of government and round tripping, motivates EE firm CBAs in tax havens. Our argument implies a
negative relationship between the likelihood of CBA in tax havens relative to other countries and the institutional strength of the firm's home country. Hypothesis 6. : There is a negative relationship between the likelihood of CBA in a tax haven relative to other countries and the institutional strength of the home country. 4. Empirical test 4.1. Data We obtain data on all cross border acquisitions from the year 2010 listed in SDC Platinum for our tests. SDC Platinum is a reputed source of data on both cross-border and domestic mergers and acquisitions. SDC Platinum has been described as the gold standard for data on mergers and acquisitions transactions (Affelt, 2005), and has been used extensively in prior research. CBA is defined as the acquisition of five percent or more equity in a firm in country j by a firm from another country i (findings do not change when we use alternatives to the five percent criteria). We begin with the total of 8898 CBAs from the year 2010 listed in SDC Platinum for which acquiring firm's country and the target firm's country are listed. We drop 7334 of these CBAs because they involve acquirers from countries identified by the International Monetary Fund as AEs. The remaining 1564 CBAs pertain to acquiring firms from 82 countries, including a number of countries that are not typically considered as EEs. Of these countries, the top ten countries account for 928 (about 59%) of the 1564 CBAs. These ten countries, which include all four BRIC countries, as well as South Africa, Malaysia, Thailand, United Arab Emirates, Poland, and Mexico, have been recognized as EEs by many sources and represent a wide range of geographic regions including Asia, Latin America, Middle East, Africa, and Central/ Eastern Europe. We therefore use CBAs by acquirers from these ten EEs to construct our sample (expanding the list of countries to all non AE countries does not change our findings). We drop acquisitions by firms from the public administration/government sector of the economy. All of these acquisitions were by government owned firms. This move also eliminated all government owned firms from the sample. We then match the remaining CBAs with data for our independent variables. The matching results in a sample of 775 CBAs pertaining to acquiring firms from the ten EEs, and target firms from 68 countries. A little over eighteen percent of the acquisitions are in tax havens. 4.2. Analysis We estimate a logistic regression model of the following general form to test our hypotheses. TH j;t ¼ b0 þ b1 Market size j;t−1 þ b2 Natural resources j;t−1 þ b3 Labor cost j;t−1 þ b4 Knowledge assets j;t−1 þ b5 Corporate tax rate differencei; j;t−1 þ b6 Institutional strengthi;t−1 þ b7−n controls þ e The subscript j represents the country of the target firm (i.e., the host country), and the subscript i represents the country of the acquiring firm (i.e., the home country). The subscript t represents year. The dependent variable THj,t indicates whether or not the country of the target firm (i.e., host country) is a tax haven, and takes a value of one if the target firm is in a tax haven country and zero otherwise. The variables market size, natural resources, labor cost, and knowledge assets, in the target firm's country are used to test hypotheses 1 through 4. Corporate tax rate difference between the acquiring firm's country and the target firm's country, and the institutional strength of the acquiring firm's country, are used to test hypotheses 5 and 6 respectively. The model includes controls for other variables that can influence the dependent variable. Specifically, to capture potential variability across
Please cite this article as: Chari, M., & Acikgoz, S., What drives emerging economy firm acquisitions in tax havens?, Journal of Business Research (2015), http://dx.doi.org/10.1016/j.jbusres.2015.08.034
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industries in the propensity to acquire in a tax haven, we control for the acquiring firm's industry. To account for potential differences in the propensity to use tax havens between publically traded firms and other firms (i.e., privately owned firms; our sample does not include government owned firms) we control for firm type. To capture unobserved variation across the EEs, we control for the acquiring firm's home country. In addition, we control for cultural difference and geographic distance between the acquiring and target firm countries. Furthermore, since the same acquiring firm may have more than one CBA in the year, to account for the non-independence of these observations belonging to the same firm, we cluster the standard errors by acquiring firm (Chari & Chang, 2009). We lag the independent variables by one year (i.e., they are measured in 2009) since acquisition decisions are likely made with prior year information. The one year lag also minimizes potential endogeneity (Chari, 2013; Elango & Pattnaik, 2007).
4.3. Measures Whether the target firm is in a tax haven or in other countries is our dependent variable. We code this variable 1 if the target firm is in one of the 48 countries and territories widely regarded as a tax haven in the literature and zero otherwise (see Dharmapala & Hines, 2009 p1067 for the list of tax havens). Ten of the 68 host countries in our sample are tax havens. We measure host country market size as the gross domestic product of the country in trillions of US dollars, using data from the World Development Indicators (WDI) database (Buckley et al., 2007). The variable natural resources, which represents the host country's comparative advantage in natural resources, is measured as the ratio of ore and metal exports to merchandise exports of the host country using data from WDI (Buckley et al., 2007). Labor cost in the host country is measured as the minimum wage in the host country in PPP$ using data from the International Labor Organization (ILO, 2010). Knowledge assets in the host country are measured as the number of US patents in thousands granted to entities from the host Country, with data from the US Patent Office (Chang, Chung, & Mahmood, 2006). We use the number of US patents rather than patent filings in the host country to control for variability in patent laws across countries (Chang, Chung, & Mahmood, 2006). We measure corporate tax rate difference as the corporate tax rate in the home country minus the same in the host country, using data from KPMG (KPMG, 2013). We measure institutional strength using data on country governance collected by the World Bank (Kaufman et al., 2009). The country governance data pertain to six areas of formal institutions—voice and accountability, political stability and absence of violence/terrorism, government effectiveness, regulatory quality, rule of law, and control of corruption—and have been used extensively to measure a country's institutional strength (Slangen & Beugelsdijk, 2010). Following prior literature, we average the scores on the six areas as our measure of institutional strength (Slangen & Beugelsdijk, 2010). Higher values on the measure indicate greater institutional strength. As for the control variables, cultural distance is measured as 1 if the home and host countries shared a common language (Mayer & Zignago, 2011). Language is among the strongest features of a country's culture. We do not use measures such as the Kogut and Singh (1988) index because of the unavailability of such data for a number of countries in our sample. Geographic distance between the home and host country is measured in thousands of kilometers with data from CEPII (Mayer & Zignago, 2011). We use a dummy variable that takes a value of 1 if the firm is a public firm and zero otherwise to measure acquiring firm type. We also use dummy variables for acquirer firm's industry and country. Specifically, we use a dummy variable for each of the seven industries in the sample, namely (1) agriculture, forestry, and fishing, (2) manufacturing, (3) financial services, (4) mining and construction, (5) utilities and transportation, (6) wholesale and retail, and (7) other services. Similarly, we use a dummy variable for each of the ten countries.
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4.4. Results Table 1 shows the distribution of CBAs by acquirer industry, and country. China, India, and Malaysia are the three countries with the most numbers of CBAs in the sample. Similarly, manufacturing, financial services, and mining & construction, are the three industries with the most numbers of CBAs. Table 2 shows means, standard deviations, and correlations. The correlation between host country market size and host country knowledge assets is very high. We therefore do not use the two variables together in the same model. The rest of the correlations are fairly low. To ensure that our results are not biased by multicollinearity, we test consistency of our results when our independent variables are entered separately and when they are entered together (taking care not to include the correlated variables host country market size and knowledge assets in the same model). The results are consistent. The variance inflation factors are also within norms (Belsley, Kuh, & Welsch, 1980). Multicollinearity, therefore, is unlikely to bias our results. Table 3 shows hypotheses test results. Model 1 is the base model and only includes the control variables. Models 2 to 7 show results when we add each independent variable of interest to model 1. Model 8 shows results when we add all independent variables except host country knowledge assets to model 1. Model 9 shows results when we add all independent variables except host country market size to model 1. All of the models have significant chi2 values, and a likelihood ratio test shows that including the variables of interest significantly enhances model fit. The coefficient of host country market size is significant and negative in models 2 and 8, supporting hypothesis 1. The coefficient of host country natural resources is significant and negative in models 3, 8 and 9, supporting hypothesis 2. The coefficient of host country labor cost is significant and positive in models 4, 8, and 9. Hypothesis 3 is therefore supported. Supporting hypothesis 4, the coefficient of host country knowledge assets is significant and negative in models 5 and 9. Supporting hypothesis 5, the coefficient of corporate tax rate difference is positive and significant in models 6, 8, and 9. Finally, the coefficient of home country institutional strength is negative and significant in models 7, 8 and 9, supporting hypothesis 6. With respect to the control variables, the coefficient of acquirer firm type is not significant. There is, therefore, no support for a different likelihood of acquisition in a tax haven relative to other countries by firm type. The coefficient of the cultural distance variable is positive and significant indicating that cultural similarity enhances the likelihood of acquisition in a tax haven relative to other countries, much as it influences international location choice in general. Geographic distance on the other hand is not significant in models that include the independent variables together. 5. Discussion Our findings show that EE firm acquisitions in tax havens are not driven by traditional motivations of market seeking, resource seeking, low cost seeking, and strategic asset/knowledge seeking. Moreover, EE firm acquisitions in tax havens, our findings show, are driven by lower tax rates in the host country and by institutional weakness in the home country. Our study and its findings make four contributions and also hold implications for policy makers. 5.1. Contributions Although they comprise about one fifth of the countries and territories of the world, tax havens have largely been ignored and sometimes even deliberately excluded from theoretical and empirical analyses of the drivers of internationalization in the international business literature (Luo & Tung, 2007; Peng & Parente, 2012). Since tax havens are prominent destinations for EE firm internationalization, we argued
Please cite this article as: Chari, M., & Acikgoz, S., What drives emerging economy firm acquisitions in tax havens?, Journal of Business Research (2015), http://dx.doi.org/10.1016/j.jbusres.2015.08.034
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Table 1 Sample CBAs by acquirer industry and country.
Brazil China India Malaysia Mexico Poland Russia South Africa Thailand U.A.E Total
Agriculture, forestry, & fishing
Mining & construction
Manufacturing
Utilities & transportation
Financial services
Other services
Wholesale & retail
Total
2 2 0 8 0 0 0 1 1 0 14
6 30 23 5 1 6 16 8 4 5 104
22 50 78 28 11 8 37 3 18 6 261
2 10 14 10 5 3 8 4 4 5 65
7 66 17 44 6 7 34 11 2 16 210
6 20 43 8 1 7 2 5 3 2 97
1 8 3 2 2 1 3 2 0 2 24
46 186 178 105 26 32 100 34 32 36 775
that tax havens can no longer be ignored. Moreover, our study shows that CBAs into tax havens are not driven by the traditional motivations considered in the international business literature, but are driven by two alternative motives. We thus highlight the need to bring tax havens from the periphery to the forefront of scholarship in international business. Active inquiry into tax havens can also advance our understanding of many other aspects of international business. For example, since operations in tax havens appear to be important nodes in the crossborder routing of capital within firms and important conduits for the pricing of intra-firm product flows (Gravelle, 2013), studying tax havens can contribute to developing a fuller picture of how multinational firms operate as a network. This is our first contribution. Second, we contribute to the institutions based view of international business strategy by examining the role of institutional weakness in driving EE firm CBAs. Peng and Parente (2012) recently argued that the typical treatment of institutional environments has focused on institutional strengths, and that a focus on institutional weakness as a driver of international investment is necessary. We address this need by showing that a significant fraction of CBAs by EE firms can be explained by institutional weakness at home, along with lower taxes in the host country. There has been a surge in CBAs overall, and especially by EE firms in the past decade. Much of this has been attributed to EE firms seeking to upgrade their competitiveness and catchup with AE firms (Chari, 2015; Luo & Tung, 2007; Mathews, 2002, 2006). By showing that a significant fraction of EE firm CBAs cannot be explained by the pursuit of traditional assets that help firms catchup, our study also highlights the need to study if and how investments in tax havens help or hinder the process of EE firm upgrading and catchup. Third, we make a marginal contribution to the literature on tax havens. Typical studies of tax havens focus on whether tax havens distort trade and capital flows, whether they create tax competition, and on how tax havens enable tax planning and tax avoidance (Dharmapala & Hines, 2009; Gravelle, 2013; Hines, 2010; Hong & Smart, 2010; Palan, 2002). Our arguments show that institutional weakness in the home country can motivate firms to invest in tax havens to escape the grabbing hand of governments. In this sense, our study suggests that tax havens may serve as a refuge for ‘good’ firms
caught in a bad institutional situation, and thereby play a rather constructive role. This is in contrast to the destructive effects typically (although not exclusively) attributed to tax havens in the literature. Many EEs have continued to struggle with high levels of corruption and other symptoms of institutional weakness despite liberalizing their economies. Large numbers of firms from these economies may therefore continue to invest in tax havens to escape the grabbing hands of their governments. The implication of our study that tax havens may play a constructive role in this regard, therefore, is important and deserves further investigation. Fourth, while there is an existing body of empirical evidence on what drives CBAs, there is none to date in the extant literature about the drivers of EE firm CBAs into tax havens. We contribute to the body of empirical evidence on the drivers of international investments by providing the first set of empirical results on the drivers of EE firm CBAs into tax havens. 5.2. Policy implications EEs are enacting policies to attract capital investments and promote the competitiveness of their firms and markets. EE firm investments in tax havens erode the tax base and contribute to capital flight/out-flow from the EEs (Arezki, Rota-Graziosi, & Senbet, 2013). Such investments, therefore, are a concern to policy makers (Bahree & Ball, 2012). Our study suggests that lowering corporate tax rates and strengthening institutions at home are two levers available to EE governments seeking to stem the outflow of investments destined for tax havens. With respect to the tax rate lever, lowering the tax rates would also result in a loss of tax revenue, and hence policy makers should seek an optimal balance. Some measures that would help in this respect are: taxing income from the more mobile factors and activities at a lower rate, maintaining tax rates at a level just below that of major trade partners, and differentiating taxes for income from domestic versus foreign operations (Desai & Hines, 2004; Hines, 1999). With respect to strengthening institutions, our study adds to the accumulating evidence on the benefits that policy makers can expect from strengthening their institutions. The process of strengthening
Table 2 Means, standard deviations, and correlations.
1 2 3 4 5 6 7 8 9 10
TH Market size Natural resources Labor cost Knowledge assets Corp. tax rate difference Institutional strength Cultural distance Geographic distance Acquirer firm type dummy
Means
Std.dev
1
2
3
4
5
6
7
8
9
0.18 2.22 8.06 943.96 15.95 0.79 −0.21 0.37 6.22 0.45
0.38 3.85 10.52 513.66 33.29 10.22 0.40 0.48 4.40 0.50
−0.25 −0.14 0.19 −0.22 0.44 −0.04 0.35 −0.33 −0.04
−0.22 0.29 0.99 −0.48 −0.07 0.08 0.45 0.11
−0.04 −0.20 0.06 −0.05 −0.07 0.20 −0.04
0.28 −0.10 −0.13 0.15 0.28 −0.04
−0.48 −0.08 0.09 0.43 0.11
0.32 0.21 −0.20 −0.00
0.09 −0.13 0.06
−0.07 0.06
0.10
N = 775. Correlations larger (smaller) than 0.07 (−0.07) are significant at p b 0.05. Independent variables are lagged one year.
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Table 3 Hypothesis test results1. Model 1
Model 2 −7.299*** (5.36)
Market size Natural resources
Model 3
Model 4
Model 5
Model 6
0.002*** (5.91) −0.621*** (5.13)
Knowledge assets Corp. tax rate difference
0.500*** (8.07)
Institutional strength
Geographic distance Acquirer firm type dummy Acquirer industry dummies Acquirer country dummies Constant Chi2 Log likelihood
Model 8 −16.35+ (1.75) −0.063+ (1.75) 0.007⁎⁎ (3.18)
−0.057⁎⁎ (2.98)
Labor cost
Cultural distance
Model 7
2.541*** (6.91) −0.211*** (3.39) 0.283 (0.98) Yes Yes −5.243*** (3.84) 137.9 −239.7
2.534*** (6.36) −0.028 (0.55) 0.191 (0.60) Yes Yes −4.644⁎⁎ (3.28) 100.9 −185.2
2.486*** (6.75) −0.195*** (3.37) 0.251 (0.90) Yes Yes −4.818*** (3.61) 156.9 −235.6
2.376*** (5.73) −0.360*** (3.81) 0.396 (1.47) Yes Yes −5.831*** (5.36) 155.9 −207.3
2.540*** (6.83) −0.089 (1.40) 0.222 (0.71) Yes Yes −5.437*** (3.75) 142.5 −217
3.157*** (4.16) 0.034 (0.44) −0.018 (0.04) Yes Yes −21.01*** (8.19) 164.2 −88.9
−2.757⁎ (2.04) 2.541*** (6.91) −0.211*** (3.39) 0.283 (0.98) Yes Yes −3.867⁎⁎ (3.11) 137.9 −239.7
Model 9
−0.114*** (3.87) 0.005*** (5.69) −1.224⁎⁎
0.390*** (3.82) −12.97*** (4.72)
(3.17) 0.506*** (6.44) −15.74*** (5.61)
2.666⁎⁎ (2.85) 0.142 (0.86) 0.235 (0.37) Yes Yes −13.83*** (5.27) 184.9 −43.24
2.951⁎⁎ (3.28) 0.144 (0.94) −0.083 (0.14) Yes Yes −16.18*** (7.03) 188.7 −51.54
1 Logistic regressions with standard errors clustered by acquiring firm. N = 775. Independent variables are lagged one year. All Chi2 values are significant at p b 0.001. Absolute t statistics in parentheses. Likelihood ratio tests comparing models 2–7 with model 1, and models 8 and 9 with models 1–7 are all significant. + p b .10. ⁎ p b .05. ⁎⁎ p b .01. ⁎⁎⁎ p b .001.
institutions, however, tends to be rather slow and incremental. This is because successful institutional change depends not only on changes to formal rules which, at least in theory, can be enacted quickly, but also on the evolution of informal norms that complement and extend the new formal rules and on the efficiency of supervisory agencies that enforce the new formal rules (North, 1990). Informal norms evolve through repeated interaction between organizations within the new formal rules and hence take time. Supervisory agencies become efficient only through a process of learning by doing, which also takes time. Policy makers seeking to strengthen their institutions, therefore, must expect and prepare for the incremental and slow process (Chari & Banalieva, 2015). 5.3. Limitations and future research directions There are limitations to our study that can be addressed by future research. First, while we focused on CBAs, EE firms also pursue investments through other modes such as green field. Further research can show whether the same factors that we identified in this study also drive EE firm investments into tax havens through the green field mode. Such research can also compare whether EE firms prefer one mode over the other when investing in tax havens. Finally, although we highlighted the importance of strengthening institutions to stem the outflow of capital to tax havens and shore up the tax base, we had little to say about how institutions can be strengthened beyond observing that institutional change tends to be slow. This is a weakness that our study shares with much of the international business literature on institutions. An important direction for future research, therefore, would be to study how policy makers can shape successful institutional change. 5.4. Conclusion So, what drives EE firm acquisitions in tax havens? Our study shows that (1) they are not driven by the traditional motivations of market
seeking, resource seeking, low cost seeking, and strategic asset or knowledge seeking, and that (2) they are driven by lower taxes in the host country and by institutional weakness in the home country. These findings show that investments in tax havens are an important aspect of international business that needs to be brought to the forefront of international business scholarship. An important implication of our findings is that policy makers in emerging economies must strengthen their institutions to avoid erosion in their tax base and prevent investments from flowing-out to tax havens. The need for institutional strengthening highlighted here and elsewhere in the literature suggests that a useful next step for research on institutions in international business would be to identify initiatives and processes by which policy makers can successfully change and strengthen their country's institutions. Acknowledgements The authors thank Jaya Dixit of the Indian School of Business for her comments on earlier drafts of the paper. The authors also thank the journal's editors and reviewers for their constructive reviews of the paper. References Affelt, A. (2005). The riches of niche databases for merger & acquisition transactions: date range, search flexibility, nations of parties involved, and deal value all come in to play in making a database decision. Online, 29(6). Arezki, R., Rota-Graziosi, G., & Senbet, L.W. (2013). Capital flight risk. Finance & Development, 50(3), 27. Bahree, M., & Ball, D. (2012). Island tax haven roils India's ways. Wall Street Journal August 29. Belsley, D.A., Kuh, E., & Welsch, R.E. (1980). Regression diagnostics: Identifying influential data and sources of collinearity. New York: Wiley. Bevan, A.A., & Estrin, S. (2004). The determinants of foreign direct investments into European transition economies. Journal of Comparative Economics, 32(4), 775–787. Buckley, P.J., & Casson, M.C. (1998). Analyzing foreign market entry strategies: extending the internalization approach. Journal of International Business Studies, 29(3), 539–561. Buckley, P.J., Clegg, L.J., Cross, A.R., Xin, L., Voss, H., & Ping, Z. (2007). The determinants of Chinese outward foreign direct investment. Journal of International Business Studies, 38(4), 499–518.
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Journal of Business Research
What drives emerging economy firm acquisitions in tax havens? Murali Chari a,⁎, Senay Acikgoz b a b
Lally School of Management, Rensselaer Polytechnic Institute, 110 8th Street, Troy, NY 12180, USA Department of Econometrics, FEAS, Gazi University, 06500 Beşevler-Ankara, Turkey
a r t i c l e
i n f o
Article history: Received 5 February 2014 Received in revised form 20 August 2015 Accepted 21 August 2015 Available online xxxx Keywords: Emerging economy firms Cross-border acquisitions Tax havens Internationalization motivations Institutional weakness
a b s t r a c t We note that a non-trivial fraction of international acquisitions by emerging economy firms are in tax havens. We argue that such acquisitions are driven by different motivations than the four (market seeking, resource seeking, low cost seeking, and knowledge or strategic asset seeking) identified in the international business literature. Specifically, we argue that such acquisitions are driven by institutional weakness in the home country and lower taxes in the host country. Empirical tests using data on cross border acquisitions by firms from ten emerging economies with the most numbers of cross border acquisitions lend support to our arguments. © 2015 Elsevier Inc. All rights reserved.
1. Introduction International investments, including cross border acquisitions, were dominated by advanced economy (AE) firms until recently, and the international business literature evolved to explain such activity (Buckley et al., 2007; Dunning, 1998). The international business literature points to four motivations for the international expansion of firms, namely market seeking, efficiency seeking, natural resource seeking, and knowledge seeking (also referred to as strategic, or created, asset seeking) (Buckley et al., 2007; Dunning, 1998). Emerging economy (EE) firms have recently begun international expansion in a significant way. Foreign direct investments (FDI) from EEs, for example have grown sharply in the past decade (Buckley, Forsans, & Munjal, 2012). Cross border acquisitions (CBAs) by EE firms have also grown sharply in recent years, for example by 150% between 2001 and 2010 (SDC, 2011). This recent international expansion of EE firms deserves greater research attention since features of such expansion that are particularly prominent or different can help advance extant theory (Cuervo-Cazurra, 2012; Luo & Tung, 2007). We focus on one prominent feature in the international expansion behavior of EE firms. Specifically, countries and territories considered as tax havens are particularly prominent destinations for EE firm internationalization, including CBAs (Morck, Yeung, & Zhao, 2008; Peng & Parente, 2012). Expansion of firms into tax havens overall, and with respect to EE firms in particular, has received inadequate research attention (Peng & Parente, 2012). What drives EE firm acquisitions in tax havens? Addressing this research question, we first argue that tax ⁎ Corresponding author. E-mail addresses: [email protected] (M. Chari), [email protected] (S. Acikgoz).
havens do not share characteristics that are attractive for firms driven to internationalize by the traditional motivations. Our first contention therefore is that EE firm CBAs into tax havens are not driven by the traditional motivations. Second, we argue that tax havens offer other advantages, specifically, lower taxes and secrecy. We therefore contend that EE firm CBAs into tax havens are driven by lower taxes in these countries, and by the need to escape or take advantage of institutional weakness in their home country. We then test and find support for our contentions in a large sample of CBAs by EE firms. Our study makes four contributions. First, we highlight the importance of studying tax havens. Second, we enrich the institutions based view of international business with particular emphasis on institutional weakness at home as a driver of international expansion (Peng & Parente, 2012; Peng, Wang, & Yi, 2008). Third, we make a marginal contribution to the literature on tax havens by suggesting that tax havens may play a constructive role by providing refuge for potentially ‘good’ firms caught in a bad institutional situation at home. Finally, we provide what we believe is the first set of empirical evidence on the drivers of EE firm CBAs into tax havens. 2. Theory and background International business theories note four motivations for the international expansion of firms, namely market seeking, resource seeking, low-cost or efficiency seeking, and knowledge seeking (Buckley et al., 2007; Dunning, 1998). While other motivations, such as following a competitor, have found occasional mention in the literature, the four listed above are considered the “main” or “primary” motivations (Buckley et al., 2007: 501; Dunning, 1998: 10). One of the ways to grow a firm's sales and profits is to seek additional markets for the firm's products and
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services overseas. Since larger overseas markets offer greater potential in this regard, international expansion motivated by a search for new markets is likely to take firms into countries with larger markets (Buckley et al., 2007; Dunning, 1998). Overseas markets can either be serviced through exports or by investing to internalize the host country operation (Buckley & Casson, 1998). While exporting reduces investment commitment to the host country market, investing in the host country enhances the firm's ability to serve the market by facilitating greater understanding of consumer behavior and greater acceptance of the firm's products in the host country (Chari & Chang, 2009). Lending support to market seeking as an important motivation, a long line of research has shown that the size of a country market, typically measured as the country's GDP, is a significant factor attracting foreign firm investments (Buckley et al., 2007). Natural resources are location bound and the need to secure access to these resources is another important motivation for international expansion of firms (Buckley et al., 2007; Dunning, 1998). Given variation in the endowment and the efficient access to natural resources across countries, one can expect that firms seeking such location bound resources would invest in countries with a revealed comparative advantage in natural resources. Confirming this expectation, empirical studies have shown a positive association between countries' revealed comparative advantage in natural resources and foreign firm investments into the country (e.g., Buckley et al., 2007). A third motivation for international expansion is the opportunity to access lower labor costs in the host country, and thereby enhance the firm's profitability (Buckley et al., 2007; Dunning, 1998). Labor costs vary across countries, and firms seeking to lower their labor costs would invest in production and operations in countries with lower labor costs. Supporting this expectation, studies have found a negative association between greater labor costs and foreign investments (Bevan & Estrin, 2004). Earlier international business literature emphasized the need for firms to possess strong advantages especially in knowledge or created assets (typically referred to as ownership advantages) to overcome potential liabilities of being foreign in the host country (Dunning, 1980). More recent literature contends that firms may expand internationally not just to exploit firm specific assets (which tend to be of the created or knowledge variety), but also to gain access to such assets either as complements to what they already possess or to compensate for the lack of such assets (Luo & Tung, 2007). Knowledge assets tend to be embedded in employees and organizations, and as tacit assets they are less amenable to arms-length transfer (Kogut & Zander, 1993). Consequently, firms seeking knowledge as their motivation for international expansion typically access these assets by acquiring either parts or the whole of firms in host countries that possess these assets (Buckley et al., 2007). 2.1. CBAs by EE firms in tax havens International expansion by EE firms has grown rapidly in the past decade, and CBAs have been a prominent vehicle for such expansion (Luo & Tung, 2007; Peng, 2012). Empirical studies show that, similar to AE firms, traditional motivations also appear to drive EE firm internationalization (Buckley et al., 2007; Buckley et al., 2012). As mentioned in the introduction section, a notable feature of international expansion by EE firms, including CBAs, that has not received sufficient research attention is the high incidence of tax havens as host countries. Tax havens are a set of countries and territories with small economies and relatively affluent but small populations. They are distinguished by very low or zero corporate tax rates and by laws and regulations that facilitate high levels of opacity about the identities of firms and investors (Gravelle, 2013; Hines, 2010). Tax havens have been studied by economists focusing on capital and trade flow distortions, tax competition, and tax avoidance (Dharmapala & Hines, 2009; Gravelle, 2013; Hines, 2010; Hong & Smart, 2010; Palan, 2002). In the international business literature, in contrast, tax havens have not
received much attention (Buckley, Sutherland, Voss, & El-Gohari, 2015; Peng & Parente, 2012). Tax havens feature prominently as destinations for EE firm expansion. For example, tax havens are among the top destinations for investment from Brazil, Russia, India, and China (Buckley et al., 2015; Peng & Parente, 2012). The prominence of tax haven destinations is also reflected in CBAs by EE firms. Specifically, 18% of CBAs by firms from the top ten EEs (i.e., the ten EEs with the most number of CBAs) in 2010 were of target firms in tax havens. The corresponding number for AE firms was less than 7%. Tax havens therefore account for a nontrivial portion of EE firm investment, including CBAs. Differences in the motivation to acquire a firm in tax havens therefore merit attention. We argue that tax havens do not share characteristics of countries that attract international expansion associated with the traditional motivations. Consequently, we contend that while traditional motivations apply to EE firm CBAs into other countries, they do not motivate CBAs into tax havens. We then draw on recent notions of institutional weakness as a potential driver of international expansion of EE firms (Peng & Parente, 2012) and argue that CBAs into tax havens are motivated by institutional weakness in the home country, and by the opportunity to lower taxes. Fig. 1 shows our conceptual model. In what follows, we develop our arguments with respect to each motivation for international expansion and hypothesize the relationship between country characteristics implied by each motivation and the likelihood that an EE firm CBA will be in a tax haven rather than in other countries. 3. Hypotheses 3.1. Traditional motivations 3.1.1. Market seeking As noted in the theory section, search for new markets is an important motivation for international expansion, and firms seeking new markets will tend to expand into countries with larger market size. A positive association between host country market size and CBA into the country will therefore be consistent with a market seeking motive (Buckley et al., 2007). Tax haven countries however are very small in market size. The total GDP of all tax haven countries, for example, roughly adds up to that of New York State (Hines, 2010). We therefore argue that unlike CBAs into other countries, CBAs into tax havens are not motivated by a search for new markets. If one were considering the likelihood of CBA in one tax haven as opposed to other tax havens in a sample of just tax havens, our arguments suggest no systematic relationship between the likelihood of CBA and host country market size. If on the other hand the focus is on the likelihood of CBA in a tax haven relative to other countries (where a positive relationship between the likelihood of CBA and host country market size is expected), then our arguments imply a negative relationship between the likelihood of CBA in a tax haven and host country market size. Since our interest is on the likelihood of CBA in a tax haven relative to other countries, we hypothesize the following. Hypothesis 1. : There is a negative relationship between the likelihood of CBA in a tax haven relative to other countries and host country market size.
3.1.2. Natural resource seeking Firms that expand internationally to access natural resources, as reviewed earlier, are likely to invest in countries with a greater comparative advantage in natural resources. A positive association between measures of comparative advantage of a country in natural resources and CBAs into the country will therefore be consistent with a natural resource seeking motivation (Buckley et al., 2007). Tax haven countries have “substantially smaller natural resource endowments” than other countries (Dharmapala & Hines, 2009: 1060). We therefore argue that unlike CBAs into other countries, CBAs into tax havens are not
Please cite this article as: Chari, M., & Acikgoz, S., What drives emerging economy firm acquisitions in tax havens?, Journal of Business Research (2015), http://dx.doi.org/10.1016/j.jbusres.2015.08.034
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Fig. 1. The conceptual model.
motivated by the pursuit of natural resources. Since our interest is on the likelihood of CBA in a tax haven relative to other countries (where one can expect a positive relationship), our arguments imply the following hypothesis. Hypothesis 2. : There is a negative relationship between the likelihood of CBA in a tax haven relative to other countries and host country's comparative advantage in natural resources.
3.1.3. Low-cost/efficiency seeking Lowering costs by relocating labor intensive activities to countries with lower labor costs is another motivation to expand overseas. As mentioned earlier, firms seeking lower labor costs would expand to countries with lower wages. A negative association between wage level in a country and CBAs into the country will therefore lend support to the low-cost/efficiency seeking motivation. Tax haven countries have small populations, commonly below one million, and combined with their small geographic size are relatively less able to support labor intensive activities (Dharmapala & Hines, 2009). In addition, these countries are relatively more affluent, with correspondingly higher wage levels (Dharmapala & Hines, 2009). We therefore argue that unlike CBAs into other countries, CBAs into tax havens are not motivated by low cost/efficiency seeking. Since our interest is on the likelihood of CBA in a tax haven relative to other countries (where one can expect a negative relationship), our arguments imply the following hypothesis. Hypothesis 3. : There is a positive relationship between the likelihood of CBA in a tax haven relative to other countries and host country labor cost.
3.1.4. Knowledge seeking The pursuit of knowledge assets, both to complement such assets already owned by the firm and to compensate for the lack of such assets in the firm, is another important motivation for foreign investment. Firms seeking access to knowledge assets are likely to expand into countries with an abundance of such assets (Chen & Chen, 1998; Dunning, 1998; Makino, Lau, & Yeh, 2002). A positive association between
indicators of knowledge asset abundance and CBAs into the country will support the pursuit of knowledge assets as a motivation for international expansion (Buckley et al., 2007). Tax havens typically lack the national institutions considered important to support knowledge generation in an economy, and typically rank relatively low on indicators of knowledge assets such as patents. We therefore contend that unlike CBAs into other countries, CBAs into tax havens are not motivated by the pursuit of knowledge assets. Since our interest is on the likelihood of CBA in a tax haven relative to other countries (where one can expect a positive relationship), our arguments imply the following hypothesis. Hypothesis 4. : There is a negative relationship between the likelihood of CBA in a tax haven relative to other countries and knowledge assets availability in the host country.
3.2. Alternative motivations While tax havens do not share the characteristics of countries that attract foreign firms driven by the four traditional motivations as argued above, they have other characteristics that are of value to firms. The first is the low or zero tax rates for foreign firms investing in these countries. The second is the strong privacy protections covering the identity of firms and investors in these countries. We discuss these in detail below. 3.2.1. Lowering taxes Taxes are a charge on profits. As profit maximizing entities, therefore, firms would seek to reduce their taxes. Countries vary in their tax rates, and firms can lower their taxes by expanding into a country with lower tax rates. Tax havens have very low or zero tax rates, and hence provide firms with the opportunity to lower their taxes by shifting income away from their higher tax home countries to their tax haven operations. For example, by taking loans for the home country operation from a tax haven subsidiary, a firm can lower its income subject to the higher tax rate at home while the interest income for the tax haven subsidiary is subject to zero or a very low tax rate (Hines, 2010).
Please cite this article as: Chari, M., & Acikgoz, S., What drives emerging economy firm acquisitions in tax havens?, Journal of Business Research (2015), http://dx.doi.org/10.1016/j.jbusres.2015.08.034
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Second, by routing purchases and sales through tax haven operations, and increasing the price for purchases and reducing the price for sales relative to transactions with unrelated parties, a firm can transfer profits out of the home country to tax havens where they are subject to a lower or zero tax rate (Hines, 2010). Tax savings through expansion into a lower tax country is larger when the tax rate difference between home and host country is larger. A positive association between the tax rate difference between the home and host country and the likelihood of CBA in the host country would therefore be consistent with lowering taxes as a motive for CBA. Since tax havens have the lowest tax rates and do not offer other traditional benefits that firms seek, we argue that, relative to CBAs into other countries, lowering taxes is an important motive for CBAs in tax havens. We therefore hypothesize the following. Hypothesis 5. : There is a positive relationship between the likelihood of CBA in a tax haven relative to other countries and the corporate tax rate difference between the home country and the host country.
3.2.2. Institutional weakness Besides low tax rates, another feature of tax havens is the secrecy that their laws offer to firms and investors (Morck et al., 2008; Palan, 2002; Palan, Murphy, & Chavagneux, 2013). Laws and regulations in tax havens regarding confidentiality, and various arrangements such as trusts and special purpose vehicles available in these countries, enable firms to shroud the identities of investors (Murphy, 2011; Palan, 2002). Such laws are highly valued by firms from EEs that would like to put the firm's wealth outside the grabbing hands of their government. Grabbing hand refers to various forms of wealth expropriation by the government and can range from overt expropriation of a firm's assets to less severe forms such as demand for side payments to pursue economic activity and arbitrary changes in tax laws (Friedman, Johnson, Kaufmann, & Zoido-Lobaton, 2000; Frye & Shleifer, 1996; Shleifer & Vishny, 2002). A host of factors which reflect institutional weakness, i.e., weakness in the institutions through which economic activity is governed in the country (including corruption, ineffective government, and breakdown in the rule of law), enable the grabbing hand of government in many EEs (Kaufman, Kraay, & Massimo, 2009; North, 1990; Peng & Parente, 2012; Shleifer & Vishny, 2002). Acquiring a firm in a tax haven, because of the secrecy that tax havens offer firms and investors, is a viable means for EE firms to put their wealth beyond the reach of the grabbing hands of home governments. EE firms can then let their wealth accumulate in the tax haven, use the wealth to expand their operations further overseas, or use the wealth to buy back the firm's home country operations. The last option in effect makes the domestic operation a subsidiary of the firm's operation in the tax haven, and is an example of round tripping, where funds go out of a country as outward FDI and subsequently returns as inward FDI (Luo & Tung, 2007; Morck et al., 2008; Peng & Parente, 2012). Besides the grabbing hand, other manifestations of institutional weakness in EEs such as policy distortions also encourage round tripping via tax havens, and hence increase the attractiveness of tax havens as destinations for CBAs. Fung, Yau, and Zhang (2010) provide an example in the Chinese context where differential tax rates for foreign and domestic investments motivate Chinese firms to siphon funds to tax havens and then use the tax haven operations to invest back in China. Similar policy distortions are found in other EEs as well. In India for example, imperfections in tax law provisions that could dissuade round tripping through Mauritius has led to large levels of investments to and from this tax haven—levels that are vastly disproportionate to the size of Mauritius' economy (Peng & Parente, 2012). For the above reasons, we contend that institutional weakness at home, by enabling the grabbing hand of government and round tripping, motivates EE firm CBAs in tax havens. Our argument implies a
negative relationship between the likelihood of CBA in tax havens relative to other countries and the institutional strength of the firm's home country. Hypothesis 6. : There is a negative relationship between the likelihood of CBA in a tax haven relative to other countries and the institutional strength of the home country. 4. Empirical test 4.1. Data We obtain data on all cross border acquisitions from the year 2010 listed in SDC Platinum for our tests. SDC Platinum is a reputed source of data on both cross-border and domestic mergers and acquisitions. SDC Platinum has been described as the gold standard for data on mergers and acquisitions transactions (Affelt, 2005), and has been used extensively in prior research. CBA is defined as the acquisition of five percent or more equity in a firm in country j by a firm from another country i (findings do not change when we use alternatives to the five percent criteria). We begin with the total of 8898 CBAs from the year 2010 listed in SDC Platinum for which acquiring firm's country and the target firm's country are listed. We drop 7334 of these CBAs because they involve acquirers from countries identified by the International Monetary Fund as AEs. The remaining 1564 CBAs pertain to acquiring firms from 82 countries, including a number of countries that are not typically considered as EEs. Of these countries, the top ten countries account for 928 (about 59%) of the 1564 CBAs. These ten countries, which include all four BRIC countries, as well as South Africa, Malaysia, Thailand, United Arab Emirates, Poland, and Mexico, have been recognized as EEs by many sources and represent a wide range of geographic regions including Asia, Latin America, Middle East, Africa, and Central/ Eastern Europe. We therefore use CBAs by acquirers from these ten EEs to construct our sample (expanding the list of countries to all non AE countries does not change our findings). We drop acquisitions by firms from the public administration/government sector of the economy. All of these acquisitions were by government owned firms. This move also eliminated all government owned firms from the sample. We then match the remaining CBAs with data for our independent variables. The matching results in a sample of 775 CBAs pertaining to acquiring firms from the ten EEs, and target firms from 68 countries. A little over eighteen percent of the acquisitions are in tax havens. 4.2. Analysis We estimate a logistic regression model of the following general form to test our hypotheses. TH j;t ¼ b0 þ b1 Market size j;t−1 þ b2 Natural resources j;t−1 þ b3 Labor cost j;t−1 þ b4 Knowledge assets j;t−1 þ b5 Corporate tax rate differencei; j;t−1 þ b6 Institutional strengthi;t−1 þ b7−n controls þ e The subscript j represents the country of the target firm (i.e., the host country), and the subscript i represents the country of the acquiring firm (i.e., the home country). The subscript t represents year. The dependent variable THj,t indicates whether or not the country of the target firm (i.e., host country) is a tax haven, and takes a value of one if the target firm is in a tax haven country and zero otherwise. The variables market size, natural resources, labor cost, and knowledge assets, in the target firm's country are used to test hypotheses 1 through 4. Corporate tax rate difference between the acquiring firm's country and the target firm's country, and the institutional strength of the acquiring firm's country, are used to test hypotheses 5 and 6 respectively. The model includes controls for other variables that can influence the dependent variable. Specifically, to capture potential variability across
Please cite this article as: Chari, M., & Acikgoz, S., What drives emerging economy firm acquisitions in tax havens?, Journal of Business Research (2015), http://dx.doi.org/10.1016/j.jbusres.2015.08.034
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industries in the propensity to acquire in a tax haven, we control for the acquiring firm's industry. To account for potential differences in the propensity to use tax havens between publically traded firms and other firms (i.e., privately owned firms; our sample does not include government owned firms) we control for firm type. To capture unobserved variation across the EEs, we control for the acquiring firm's home country. In addition, we control for cultural difference and geographic distance between the acquiring and target firm countries. Furthermore, since the same acquiring firm may have more than one CBA in the year, to account for the non-independence of these observations belonging to the same firm, we cluster the standard errors by acquiring firm (Chari & Chang, 2009). We lag the independent variables by one year (i.e., they are measured in 2009) since acquisition decisions are likely made with prior year information. The one year lag also minimizes potential endogeneity (Chari, 2013; Elango & Pattnaik, 2007).
4.3. Measures Whether the target firm is in a tax haven or in other countries is our dependent variable. We code this variable 1 if the target firm is in one of the 48 countries and territories widely regarded as a tax haven in the literature and zero otherwise (see Dharmapala & Hines, 2009 p1067 for the list of tax havens). Ten of the 68 host countries in our sample are tax havens. We measure host country market size as the gross domestic product of the country in trillions of US dollars, using data from the World Development Indicators (WDI) database (Buckley et al., 2007). The variable natural resources, which represents the host country's comparative advantage in natural resources, is measured as the ratio of ore and metal exports to merchandise exports of the host country using data from WDI (Buckley et al., 2007). Labor cost in the host country is measured as the minimum wage in the host country in PPP$ using data from the International Labor Organization (ILO, 2010). Knowledge assets in the host country are measured as the number of US patents in thousands granted to entities from the host Country, with data from the US Patent Office (Chang, Chung, & Mahmood, 2006). We use the number of US patents rather than patent filings in the host country to control for variability in patent laws across countries (Chang, Chung, & Mahmood, 2006). We measure corporate tax rate difference as the corporate tax rate in the home country minus the same in the host country, using data from KPMG (KPMG, 2013). We measure institutional strength using data on country governance collected by the World Bank (Kaufman et al., 2009). The country governance data pertain to six areas of formal institutions—voice and accountability, political stability and absence of violence/terrorism, government effectiveness, regulatory quality, rule of law, and control of corruption—and have been used extensively to measure a country's institutional strength (Slangen & Beugelsdijk, 2010). Following prior literature, we average the scores on the six areas as our measure of institutional strength (Slangen & Beugelsdijk, 2010). Higher values on the measure indicate greater institutional strength. As for the control variables, cultural distance is measured as 1 if the home and host countries shared a common language (Mayer & Zignago, 2011). Language is among the strongest features of a country's culture. We do not use measures such as the Kogut and Singh (1988) index because of the unavailability of such data for a number of countries in our sample. Geographic distance between the home and host country is measured in thousands of kilometers with data from CEPII (Mayer & Zignago, 2011). We use a dummy variable that takes a value of 1 if the firm is a public firm and zero otherwise to measure acquiring firm type. We also use dummy variables for acquirer firm's industry and country. Specifically, we use a dummy variable for each of the seven industries in the sample, namely (1) agriculture, forestry, and fishing, (2) manufacturing, (3) financial services, (4) mining and construction, (5) utilities and transportation, (6) wholesale and retail, and (7) other services. Similarly, we use a dummy variable for each of the ten countries.
5
4.4. Results Table 1 shows the distribution of CBAs by acquirer industry, and country. China, India, and Malaysia are the three countries with the most numbers of CBAs in the sample. Similarly, manufacturing, financial services, and mining & construction, are the three industries with the most numbers of CBAs. Table 2 shows means, standard deviations, and correlations. The correlation between host country market size and host country knowledge assets is very high. We therefore do not use the two variables together in the same model. The rest of the correlations are fairly low. To ensure that our results are not biased by multicollinearity, we test consistency of our results when our independent variables are entered separately and when they are entered together (taking care not to include the correlated variables host country market size and knowledge assets in the same model). The results are consistent. The variance inflation factors are also within norms (Belsley, Kuh, & Welsch, 1980). Multicollinearity, therefore, is unlikely to bias our results. Table 3 shows hypotheses test results. Model 1 is the base model and only includes the control variables. Models 2 to 7 show results when we add each independent variable of interest to model 1. Model 8 shows results when we add all independent variables except host country knowledge assets to model 1. Model 9 shows results when we add all independent variables except host country market size to model 1. All of the models have significant chi2 values, and a likelihood ratio test shows that including the variables of interest significantly enhances model fit. The coefficient of host country market size is significant and negative in models 2 and 8, supporting hypothesis 1. The coefficient of host country natural resources is significant and negative in models 3, 8 and 9, supporting hypothesis 2. The coefficient of host country labor cost is significant and positive in models 4, 8, and 9. Hypothesis 3 is therefore supported. Supporting hypothesis 4, the coefficient of host country knowledge assets is significant and negative in models 5 and 9. Supporting hypothesis 5, the coefficient of corporate tax rate difference is positive and significant in models 6, 8, and 9. Finally, the coefficient of home country institutional strength is negative and significant in models 7, 8 and 9, supporting hypothesis 6. With respect to the control variables, the coefficient of acquirer firm type is not significant. There is, therefore, no support for a different likelihood of acquisition in a tax haven relative to other countries by firm type. The coefficient of the cultural distance variable is positive and significant indicating that cultural similarity enhances the likelihood of acquisition in a tax haven relative to other countries, much as it influences international location choice in general. Geographic distance on the other hand is not significant in models that include the independent variables together. 5. Discussion Our findings show that EE firm acquisitions in tax havens are not driven by traditional motivations of market seeking, resource seeking, low cost seeking, and strategic asset/knowledge seeking. Moreover, EE firm acquisitions in tax havens, our findings show, are driven by lower tax rates in the host country and by institutional weakness in the home country. Our study and its findings make four contributions and also hold implications for policy makers. 5.1. Contributions Although they comprise about one fifth of the countries and territories of the world, tax havens have largely been ignored and sometimes even deliberately excluded from theoretical and empirical analyses of the drivers of internationalization in the international business literature (Luo & Tung, 2007; Peng & Parente, 2012). Since tax havens are prominent destinations for EE firm internationalization, we argued
Please cite this article as: Chari, M., & Acikgoz, S., What drives emerging economy firm acquisitions in tax havens?, Journal of Business Research (2015), http://dx.doi.org/10.1016/j.jbusres.2015.08.034
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Table 1 Sample CBAs by acquirer industry and country.
Brazil China India Malaysia Mexico Poland Russia South Africa Thailand U.A.E Total
Agriculture, forestry, & fishing
Mining & construction
Manufacturing
Utilities & transportation
Financial services
Other services
Wholesale & retail
Total
2 2 0 8 0 0 0 1 1 0 14
6 30 23 5 1 6 16 8 4 5 104
22 50 78 28 11 8 37 3 18 6 261
2 10 14 10 5 3 8 4 4 5 65
7 66 17 44 6 7 34 11 2 16 210
6 20 43 8 1 7 2 5 3 2 97
1 8 3 2 2 1 3 2 0 2 24
46 186 178 105 26 32 100 34 32 36 775
that tax havens can no longer be ignored. Moreover, our study shows that CBAs into tax havens are not driven by the traditional motivations considered in the international business literature, but are driven by two alternative motives. We thus highlight the need to bring tax havens from the periphery to the forefront of scholarship in international business. Active inquiry into tax havens can also advance our understanding of many other aspects of international business. For example, since operations in tax havens appear to be important nodes in the crossborder routing of capital within firms and important conduits for the pricing of intra-firm product flows (Gravelle, 2013), studying tax havens can contribute to developing a fuller picture of how multinational firms operate as a network. This is our first contribution. Second, we contribute to the institutions based view of international business strategy by examining the role of institutional weakness in driving EE firm CBAs. Peng and Parente (2012) recently argued that the typical treatment of institutional environments has focused on institutional strengths, and that a focus on institutional weakness as a driver of international investment is necessary. We address this need by showing that a significant fraction of CBAs by EE firms can be explained by institutional weakness at home, along with lower taxes in the host country. There has been a surge in CBAs overall, and especially by EE firms in the past decade. Much of this has been attributed to EE firms seeking to upgrade their competitiveness and catchup with AE firms (Chari, 2015; Luo & Tung, 2007; Mathews, 2002, 2006). By showing that a significant fraction of EE firm CBAs cannot be explained by the pursuit of traditional assets that help firms catchup, our study also highlights the need to study if and how investments in tax havens help or hinder the process of EE firm upgrading and catchup. Third, we make a marginal contribution to the literature on tax havens. Typical studies of tax havens focus on whether tax havens distort trade and capital flows, whether they create tax competition, and on how tax havens enable tax planning and tax avoidance (Dharmapala & Hines, 2009; Gravelle, 2013; Hines, 2010; Hong & Smart, 2010; Palan, 2002). Our arguments show that institutional weakness in the home country can motivate firms to invest in tax havens to escape the grabbing hand of governments. In this sense, our study suggests that tax havens may serve as a refuge for ‘good’ firms
caught in a bad institutional situation, and thereby play a rather constructive role. This is in contrast to the destructive effects typically (although not exclusively) attributed to tax havens in the literature. Many EEs have continued to struggle with high levels of corruption and other symptoms of institutional weakness despite liberalizing their economies. Large numbers of firms from these economies may therefore continue to invest in tax havens to escape the grabbing hands of their governments. The implication of our study that tax havens may play a constructive role in this regard, therefore, is important and deserves further investigation. Fourth, while there is an existing body of empirical evidence on what drives CBAs, there is none to date in the extant literature about the drivers of EE firm CBAs into tax havens. We contribute to the body of empirical evidence on the drivers of international investments by providing the first set of empirical results on the drivers of EE firm CBAs into tax havens. 5.2. Policy implications EEs are enacting policies to attract capital investments and promote the competitiveness of their firms and markets. EE firm investments in tax havens erode the tax base and contribute to capital flight/out-flow from the EEs (Arezki, Rota-Graziosi, & Senbet, 2013). Such investments, therefore, are a concern to policy makers (Bahree & Ball, 2012). Our study suggests that lowering corporate tax rates and strengthening institutions at home are two levers available to EE governments seeking to stem the outflow of investments destined for tax havens. With respect to the tax rate lever, lowering the tax rates would also result in a loss of tax revenue, and hence policy makers should seek an optimal balance. Some measures that would help in this respect are: taxing income from the more mobile factors and activities at a lower rate, maintaining tax rates at a level just below that of major trade partners, and differentiating taxes for income from domestic versus foreign operations (Desai & Hines, 2004; Hines, 1999). With respect to strengthening institutions, our study adds to the accumulating evidence on the benefits that policy makers can expect from strengthening their institutions. The process of strengthening
Table 2 Means, standard deviations, and correlations.
1 2 3 4 5 6 7 8 9 10
TH Market size Natural resources Labor cost Knowledge assets Corp. tax rate difference Institutional strength Cultural distance Geographic distance Acquirer firm type dummy
Means
Std.dev
1
2
3
4
5
6
7
8
9
0.18 2.22 8.06 943.96 15.95 0.79 −0.21 0.37 6.22 0.45
0.38 3.85 10.52 513.66 33.29 10.22 0.40 0.48 4.40 0.50
−0.25 −0.14 0.19 −0.22 0.44 −0.04 0.35 −0.33 −0.04
−0.22 0.29 0.99 −0.48 −0.07 0.08 0.45 0.11
−0.04 −0.20 0.06 −0.05 −0.07 0.20 −0.04
0.28 −0.10 −0.13 0.15 0.28 −0.04
−0.48 −0.08 0.09 0.43 0.11
0.32 0.21 −0.20 −0.00
0.09 −0.13 0.06
−0.07 0.06
0.10
N = 775. Correlations larger (smaller) than 0.07 (−0.07) are significant at p b 0.05. Independent variables are lagged one year.
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Table 3 Hypothesis test results1. Model 1
Model 2 −7.299*** (5.36)
Market size Natural resources
Model 3
Model 4
Model 5
Model 6
0.002*** (5.91) −0.621*** (5.13)
Knowledge assets Corp. tax rate difference
0.500*** (8.07)
Institutional strength
Geographic distance Acquirer firm type dummy Acquirer industry dummies Acquirer country dummies Constant Chi2 Log likelihood
Model 8 −16.35+ (1.75) −0.063+ (1.75) 0.007⁎⁎ (3.18)
−0.057⁎⁎ (2.98)
Labor cost
Cultural distance
Model 7
2.541*** (6.91) −0.211*** (3.39) 0.283 (0.98) Yes Yes −5.243*** (3.84) 137.9 −239.7
2.534*** (6.36) −0.028 (0.55) 0.191 (0.60) Yes Yes −4.644⁎⁎ (3.28) 100.9 −185.2
2.486*** (6.75) −0.195*** (3.37) 0.251 (0.90) Yes Yes −4.818*** (3.61) 156.9 −235.6
2.376*** (5.73) −0.360*** (3.81) 0.396 (1.47) Yes Yes −5.831*** (5.36) 155.9 −207.3
2.540*** (6.83) −0.089 (1.40) 0.222 (0.71) Yes Yes −5.437*** (3.75) 142.5 −217
3.157*** (4.16) 0.034 (0.44) −0.018 (0.04) Yes Yes −21.01*** (8.19) 164.2 −88.9
−2.757⁎ (2.04) 2.541*** (6.91) −0.211*** (3.39) 0.283 (0.98) Yes Yes −3.867⁎⁎ (3.11) 137.9 −239.7
Model 9
−0.114*** (3.87) 0.005*** (5.69) −1.224⁎⁎
0.390*** (3.82) −12.97*** (4.72)
(3.17) 0.506*** (6.44) −15.74*** (5.61)
2.666⁎⁎ (2.85) 0.142 (0.86) 0.235 (0.37) Yes Yes −13.83*** (5.27) 184.9 −43.24
2.951⁎⁎ (3.28) 0.144 (0.94) −0.083 (0.14) Yes Yes −16.18*** (7.03) 188.7 −51.54
1 Logistic regressions with standard errors clustered by acquiring firm. N = 775. Independent variables are lagged one year. All Chi2 values are significant at p b 0.001. Absolute t statistics in parentheses. Likelihood ratio tests comparing models 2–7 with model 1, and models 8 and 9 with models 1–7 are all significant. + p b .10. ⁎ p b .05. ⁎⁎ p b .01. ⁎⁎⁎ p b .001.
institutions, however, tends to be rather slow and incremental. This is because successful institutional change depends not only on changes to formal rules which, at least in theory, can be enacted quickly, but also on the evolution of informal norms that complement and extend the new formal rules and on the efficiency of supervisory agencies that enforce the new formal rules (North, 1990). Informal norms evolve through repeated interaction between organizations within the new formal rules and hence take time. Supervisory agencies become efficient only through a process of learning by doing, which also takes time. Policy makers seeking to strengthen their institutions, therefore, must expect and prepare for the incremental and slow process (Chari & Banalieva, 2015). 5.3. Limitations and future research directions There are limitations to our study that can be addressed by future research. First, while we focused on CBAs, EE firms also pursue investments through other modes such as green field. Further research can show whether the same factors that we identified in this study also drive EE firm investments into tax havens through the green field mode. Such research can also compare whether EE firms prefer one mode over the other when investing in tax havens. Finally, although we highlighted the importance of strengthening institutions to stem the outflow of capital to tax havens and shore up the tax base, we had little to say about how institutions can be strengthened beyond observing that institutional change tends to be slow. This is a weakness that our study shares with much of the international business literature on institutions. An important direction for future research, therefore, would be to study how policy makers can shape successful institutional change. 5.4. Conclusion So, what drives EE firm acquisitions in tax havens? Our study shows that (1) they are not driven by the traditional motivations of market
seeking, resource seeking, low cost seeking, and strategic asset or knowledge seeking, and that (2) they are driven by lower taxes in the host country and by institutional weakness in the home country. These findings show that investments in tax havens are an important aspect of international business that needs to be brought to the forefront of international business scholarship. An important implication of our findings is that policy makers in emerging economies must strengthen their institutions to avoid erosion in their tax base and prevent investments from flowing-out to tax havens. The need for institutional strengthening highlighted here and elsewhere in the literature suggests that a useful next step for research on institutions in international business would be to identify initiatives and processes by which policy makers can successfully change and strengthen their country's institutions. Acknowledgements The authors thank Jaya Dixit of the Indian School of Business for her comments on earlier drafts of the paper. The authors also thank the journal's editors and reviewers for their constructive reviews of the paper. References Affelt, A. (2005). The riches of niche databases for merger & acquisition transactions: date range, search flexibility, nations of parties involved, and deal value all come in to play in making a database decision. Online, 29(6). Arezki, R., Rota-Graziosi, G., & Senbet, L.W. (2013). Capital flight risk. Finance & Development, 50(3), 27. Bahree, M., & Ball, D. (2012). Island tax haven roils India's ways. Wall Street Journal August 29. Belsley, D.A., Kuh, E., & Welsch, R.E. (1980). Regression diagnostics: Identifying influential data and sources of collinearity. New York: Wiley. Bevan, A.A., & Estrin, S. (2004). The determinants of foreign direct investments into European transition economies. Journal of Comparative Economics, 32(4), 775–787. Buckley, P.J., & Casson, M.C. (1998). Analyzing foreign market entry strategies: extending the internalization approach. Journal of International Business Studies, 29(3), 539–561. Buckley, P.J., Clegg, L.J., Cross, A.R., Xin, L., Voss, H., & Ping, Z. (2007). The determinants of Chinese outward foreign direct investment. Journal of International Business Studies, 38(4), 499–518.
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Please cite this article as: Chari, M., & Acikgoz, S., What drives emerging economy firm acquisitions in tax havens?, Journal of Business Research (2015), http://dx.doi.org/10.1016/j.jbusres.2015.08.034