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Good friends in high places: Politico-economic determinants of the expropriation and taxation of multinational firms

Luis Fernando Medina (), Marcelo Bucheli () and Minyoung Kim ()
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Luis Fernando Medina: Instituto Carlos III - Juan March, Universidad Carlos III - Madrid
Marcelo Bucheli: University of Illinois at Urbana-Champaign
Minyoung Kim: University of Kansas

Journal of International Business Policy, 2019, vol. 2, issue 2, 119-141

Abstract: Abstract Scholars explaining the conditions that lead governments to expropriate local operations of foreign multinational firms largely focus on how large sunk costs decrease the multinationals’ bargaining power vis-à-vis the host government and how some political regimes (dictatorships) are more inclined to expropriate than others (democracies). Those explanations miss important considerations related to the host-country technological and political environment. In response, we develop and analyze a game theoretical model suggesting that expropriation of multinational firm operations is more likely when: (1) the host-country government capability to monitor taxation of multinational firms is lower; (2) the host-country government capability to run said operations is higher; (3) the host-country government is relatively independent from the exports of the multinational firm-led exports, and (4) political competition is highly restricted. Perhaps paradoxically, we also find that multinational firms are more likely to “self-tax” when host-country governments are too lenient. We illustrate these model-based findings with matched case studies of host-country government interactions with multinational firms in the Venezuelan and Norwegian oil industries of the 20th century.

Keywords: multinational firms; foreign direct investment; political risk; expropriation; political economy (search for similar items in EconPapers)
Date: 2019
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