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Volume 27 • 2020 • Number 2

TRANSNATIONAL CORPORATIONS

INVESTMENT AND DEVELOPMENT

Volume 27 • 2020 • Number 2

TRANSNATIONAL CORPORATIONS

INVESTMENT AND DEVELOPMENT

Geneva, 2020

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TRANSNATIONAL CORPORATIONS Volume 27, 2020, Number 2

© 2020, United Nations All rights reserved worldwide

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The designations employed and the presentation of material on any map in this work do not imply the expression of any opinion whatsoever on the part of the United Nations concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries.

This publication has been edited externally.

United Nations publication issued by the United Nations Conference on Trade and Development.

UNCTAD/DIAE/IA/2020/2

UNITED NATIONS PUBLICATION
Sales no.: ETN272
ISBN: 978-92-1-1129946 eISBN: 978-92-1-0052887
ISSN: 1014-9562 eISSN: 2076-099X

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Editorial Board

EDITORIAL BOARD

Editor-in-Chief James X. Zhan, UNCTAD Deputy Editors Richard Bolwijn, UNCTAD

Amelia U. Santos-Paulino, UNCTAD

Heinz Tüselmann, Manchester Metropolitan University, United Kingdom

Mathabo le Roux, UNCTAD

Managing Editor

Impact and Nick Papageorgiadis, University of Liverpool Management

Outreach Editor

School, United Kingdom
Board of Advisors Olivier Bertrand, Fundação Getulio Vargas – Brazilian School of Public and Business Administration, Brazil Peter Buckley, University of Leeds, United Kingdom Jeremy Clegg, Academy of International Business and Leeds University, United Kingdom Lorraine Eden, Texas A&M University, United States Xiaolan Fu, University of Oxford, United Kingdom Gary Gereffi, Duke University, United States Anabel Gonzáles, Former Minister of Trade, Costa Rica Robert Koopman, World Trade Organization, Switzerland Gabrielle Marceau, University of Geneva and World Trade Organization, Switzerland Theodore Moran, Georgetown University, United States Ram Mudambi, Temple University, United States Pierre Sauvé, World Bank Group, Switzerland Harsha V Singh, Former Deputy Director-General WTO and Executive Director Brookings India, India

Associate Editors Tony Addison, United Nations University, Finland
Carlo Altomonte, Bocconi University, Italy Pádraig Carmody, Trinity College Dublin, Ireland

Maria Alejandra Gonzalez-Perez, Universidad EAFIT, Colombia

Markus Krajewski, Friedrich-Alexander-Universität ErlangenNürnberg, Germany Grazia Santangelo, Copenhagen Business School, Denmark Rudolf Sinkovics, University of Auckland, New Zealand Ana Teresa Tavares-Lehmann, University of Porto, Portugal Tania Voon, University of Melbourne, Australia Hinrich Voss, University of Leeds, United Kingdom Habib Zitouna, University of Carthage, Tunisia

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TRANSNATIONAL CORPORATIONS Volume 27, 2020, Number 2

Review Board Ilan Alon, University of Agder, Norway
Ulf Andersson, Mälardalen University, Sweden Kazuhiro Asakawa, Keio University, Japan Ari Van Assche, University of Montreal, Canada Snehal Awate, Indian School of Business, India Elitsa Banalieva, Northeastern University, USA Helena Barnard, University of Pretoria, South Africa

Jonathan Beaverstock, University of Bristol, UK

Stephen Buzdugan, Manchester Metropolitan University, UK Huiping Chen, Xiamen University, China John Da Silva Luiz, University of Sussex, UK John Dilyard, St. Francis College, USA Stefano Elia, Politecnico di Milano, Italy Peter Enderwick, University of Auckland, New Zealand Despoina Filiou, Manchester Metropolitan University, UK Susan Franck, American University Washington, USA Caroline Henckels, Monash University, Australia Martin Hess, University of Manchester, UK Jenny Hillemann, Vrije University, Belgium Rory Horner, University of Manchester, UK

Kevin Ibeh, Birkbeck, University of London, UK

Kathryn Lavelle, Cape Western Reserve University, USA Andrew Mitchell, University of Melbourne, Australia Sinead Monaghan, Rutgers University, USA Mike Morris, University of Cape Town, South Africa Khalid Nadvi, University of Manchester, UK Quyen Nguyen, Henley Business School, UK Bent Petersen, Copenhagen Business School, Denmark John Ravenhill, University of Waterloo, Canada Stephan Schill, University of Amsterdam, Netherlands Noemi Sinkovics, University of Auckland, New Zealand Gabrielle Suder, University of Melbourne, Australia Marjan Svetličič, University of Ljubljana, Slovenia Xiaowen Tian, Murdoch University, Australia Henry Yeung, National University of Singapore, Singapore Stefan Zagelmeyer, University of Manchester, UK Ivo Zander, University of Stockholm, Sweden

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Editorial Statement

EDITORIAL STATEMENT

Transnational Corporations1 is a longstanding policy-oriented refereed research journal on issues related to investment, multinational enterprises and development. It is an official journal of the United Nations, managed by the United Nations Conference on Trade and Development (UNCTAD). As such it has a global reach, a strong development policy imprint, and high potential for impact beyond the scholarly community.

Objectives and central terrain

The journal aims to advance academically rigorous research to inform policy dialogue among and across the business, civil society and policymaking communities. Its central research question – feeding into policymaking at subnational, national and international levels – is how to make international investment and multinational enterprises contribute to sustainable development. It invites contributions that provide state-of-theart knowledge and understanding of the activities conducted by, and the impact of multinational enterprises and other international investors, considering economic, legal, institutional, social, environmental or cultural aspects. Only contributions that draw clear policy conclusions from the research findings will be considered.

Grand challenges and the need for multiple lenses

The scale and complexities of the “grand challenges” faced by the international community, such as climate change, poverty, inequality, food security, health crises, and migration – as embodied in the United Nations’ Sustainable Development Goals (SDGs) – are enormous. These challenges, combined with the impact of disruptive technologies on business, rapidly evolving trends in international production and global value chains, new emerging-market players and new types of investors and investment, make it imperative that policymakers tap a wide range of research fields. Therefore, the journal welcomes submissions from a variety of disciplines, including international business, innovation, development studies, international law, economics, political science, international finance, political economy and economic geography. However, submissions should be accessible across disciplines (as a non-specialized journal idiosyncratic research should be avoided); interdisciplinary work is especially welcomed. The journal embraces both quantitative and qualitative research methods, and multiple levels of analyses at macro, industry, firm or individual/group level.

Inclusive: multiple contributors, types of contributions and angles

Transnational Corporations aims to provide a bridge between academia and the policymaking community. It publishes academically rigorous, research-underpinned

1

Previously: The CTC Reporter. In the past, the Programme on Transnational Corporations was carried out by the United Nations Centre on Transnational Corporations (1975–1992) and by the Transnational Corporations and Management Division of the United Nations Department of Economic and Social Development (1992–1993).

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TRANSNATIONAL CORPORATIONS Volume 27, 2020, Number 2

and impactful contributions for evidence-based policymaking, including lessons learned from experiences in different societies and economies, both in developed and developing-country contexts. It welcomes contributions from the academic community, policymakers, research institutes, international organizations, and others. Contributions to the advancement and revision of theories, frameworks and methods are welcomed as long as they are relevant for shedding new light on the investigation of investment for development, such as advancing UNCTAD’s Investment Policy Framework for

Sustainable Development.

The journal publishes original research articles, perspective papers, state-of-the art review articles, point-counterpoint essays, research notes and book reviews. All papers are double blind reviewed and, in line with the aims and mission of the journal, each paper is reviewed by academic experts and experts from the policymaking community to ensure high-quality impactful publications that are both academically rigorous and policy relevant. In addition, the journal features synopses of major UN reports on investment, and periodic reviews of upcoming investment-related issues of interest to the policy and research community.

Unique benefits for authors: direct impact on policymaking processes

Through UNCTAD’s wider development community and its global network of investment stakeholders, the journal reaches a large audience of academics, business leaders and, above all, policymakers. UNCTAD’s role as the focal point in the United Nations system for investment issues guarantees that its contents gain significant visibility and contribute to debates in global conferences and intergovernmental meetings, including

the biennial World Investment Forum and the Investment and Enterprise Commission.

The work published in Transnational Corporations feeds directly into UNCTAD’s various programmes related to investment for development, including its flagship product, the annual World Investment Report, and its technical assistance work (investment policies reviews, investment promotion and facilitation and investment treaty negotiations) in over 160 countries and regional organizations. The journal thus provides a unique venue for authors’ academic work to contribute to, and impact on, national and international policymaking.

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Contents

CONTENTS

ARTICLES

Ali Ahmed, Chris Jones and Yama Temouri

1

The relationship between MNE tax haven use and FDI into developing economies characterized by capital flight

Uros Delevic

31

Employment and state incentives in transition economies: are subsidies for FDI ineffective? The case of Serbia

Dominic Npoanlari Dagbanja

65

The intersection of public procurement law and policy, and international investment law

FOCUSED SECTION Perspectives on COVID-19 and International Production

James X. Zhan, Richard Bolwijn, Amelia U. Santos-Paulino and Heinz Tüselmann

Introduction to the focused section: COVID-19 and international production

93 99

Peter Enderwick and Peter Buckley

Rising regionalization: will the post-COVID-19 world see a retreat from globalization?

Hinrich Voss

113 127 143

Implications of the COVID-19 pandemic for human rights and modern slavery vulnerabilities in global value chains

Ismail Gölgeci, Harun Emre Yildiz and Ulf Andersson

The rising tensions between efficiency and resilience in global value chains in the post-COVID-19 world

Pádraig Carmody

Meta-trends in global value chains and development: interacting impacts with COVID-19 in Africa

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TRANSNATIONAL CORPORATIONS Volume 27, 2020, Number 2

Xiaolan Fu

157

Digital transformation of global value chains and sustainable post-pandemic recovery

Kevin I. N. Ibeh

Promoting African digital multinationals for a more inclusive post-pandemic future

167 183

UNCTAD INSIGHTS

S. Selsah Pasali and Arslan Chaudhary

Assessing the impact of foreign ownership on firm performance by size: evidence from firms in developed and developing countries

1

The relationship between MNE tax haven use and FDI into developing economies characterized by capital flight

By Ali Ahmed, Chris Jones and Yama Temouri*

The use of tax havens by multinationals is a pervasive activity in international business. However, we know little about the complementary relationship between tax haven use and foreign direct investment (FDI) in the developing world. Drawing on internalization theory, we develop a conceptual framework that explores this relationship and allows us to contribute to the literature on the determinants of tax haven use by developed-country multinationals. Using a large, firm-level data set, we test the model and find a strong positive association between tax haven use and FDI into countries characterized by low economic development and extreme levels of capital flight. This paper contributes to the literature by adding an important dimension to our understanding of the motives for which MNEs invest in tax havens and has important policy implications at both the domestic and the international level.

Keywords: capital flight, economic development, institutions, tax havens, wealth extraction

1. Introduction

Multinational enterprises (MNEs) from the developed world own different types of subsidiaries in increasingly complex networks across the globe. Some of the foreign host locations are characterized by light-touch regulation and secrecy, as well as low tax rates on financial capital. These so-called tax havens have received widespread media attention in recent years. In this paper, we explore the relationship between tax haven use and foreign direct investment (FDI) in developing countries, which are often characterized by weak institutions, market imperfections and a propensity for significant capital flight. This relationship is of critical importance because tax

  • *
  • Ali Ahmed is with the Leadership, Work and Organisation Group, Newcastle University London,

London; Chris Jones is with the Aston Business School, Aston University, Birmingham; and Yama Temouri (y.[email protected]) is at Khalifa University, School of Humanities and Social Sciences, Abu Dhabi and with the Aston Business School, Aston University, Birmingham.

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TRANSNATIONAL CORPORATIONS Volume 27, 2020, Number 2

havens are increasingly being characterized as wealth extractors that undermine economic development and contribute to rising inequality in developed nations (Torslov, Wier and Zucman, 2018).

Recent research has begun to shed light on this phenomenon. Andersen et al. (2017) show that 15 per cent of the windfall gains in petroleum-producing countries with autocratic rulers is diverted to accounts in tax havens. A recent World Bank report (Andersen, Johannesen and Rijkers, 2020) shows that aid disbursements to highly aid-dependent countries are strongly associated with an increase in bank deposits to tax havens. Coupled with the disclosures in the Panama Papers, the Paradise Papers and the Luanda Leaks (Ndikumana, 2020), this research shows a clear pattern of abuse by elites in the developing world to amass wealth by using tax havens. Indeed, Ndikumana (2020) argues that capital flight has had a negative impact on the citizens of developing countries in Africa, depriving governments of the resources to invest in public services such as education, clean drinking water, health care, childcare services and sanitation systems.

The use of tax havens by the world’s leading MNEs is not a new phenomenon. Tax havens serve as financial hubs that handle enormous amounts of capital and trade. In conjunction with the world’s leading financial centres – London, New York, Frankfurt and Tokyo – they have become the nerve centres of global trading networks and a permanent feature of international business. A significant share of all MNEs own tax haven subsidiaries or, in some cases, are owned by parent MNEs that are registered in tax havens. These countries offer low tax rates or beneficial fiscal treatment of cross-border financial transactions, extensive bilateral investment and double taxation treaty networks, and access to international financial markets, which make them attractive to companies, large and small (UNCTAD, 2016). Enormous amounts of capital flow in and out of tax havens each year. The UNCTAD World Investment Reports of 2013 and 2016 report detailed FDI trends and amounts of investments to offshore financial centres by so-called special purpose entities, which are foreign subsidiaries created with the purpose of exploiting tax benefits in countries that offer low or zero corporate taxation. UNCTAD (2013, 2016) clearly shows how offshore financial centres account for an increasing share of global FDI flows emanating from important investor developed countries.

Zucman (2013) also finds significant flows and estimates that close to 40 per cent of the world’s FDI is routed through tax havens. Almost exclusively, this type of investment is not used for productive economic activity in the tax haven location. Instead, it is held there to avoid corporate tax levied at higher rates in countries across an MNE’s global network. Consequently, it deprives locations that create the economic value added of revenues that could be used to finance public investment, and it may increase taxes on less mobile forms of income, such as wages and salaries paid to workers.

The relationship between MNE tax haven use and FDI into developing economies characterized by capital flight

3

Using panel data for a sample of MNEs from 19 developed economies, we find that MNEs that have subsidiaries in developing countries with a high degree of capital flight also have a much stronger propensity to own tax haven subsidiaries than other MNEs who have only conventional subsidiaries in developed economies. This suggests that when MNEs extend their networks to regions of the world characterized by weak institutions and a high degree of capital flight, this leads to more tax haven activity. For example, in one of our specifications, we show that developed-country MNEs that own a subsidiary in Africa are 5 per cent more likely to own a tax haven subsidiary in a highly secretive location.

This is an important finding and contributes to the literature both conceptually and empirically. First, our findings extend our conceptual understanding of how institutional voids affect developing countries. Buckley et al. (2015) apply internalization theory and the economic geography of FDI to tax havens and offshore financial centres with a particular emphasis on Chinese MNEs. They argue that capital market imperfections and poor institutional environments create significant transaction costs that can be alleviated by the use of tax havens. Our findings test this theory but extend the model to a specific phenomenon – countries that experience significant capital flight.

Our empirical contribution lies in the large panel data set that allows us to test the relationship between MNEs from 19 developed countries and their FDI locations around the world, including tax havens. This enables us to undertake a crosscountry comparison that is rare in the literature on tax havens, which mostly focuses on single-country analysis. We also contribute to the literature by drawing out a number of policy recommendations based on our main empirical results.

The rest of the paper is set out as follows: in the second section we outline our conceptual framework and generate two testable hypotheses. In the third section we describe the firm-level data used in this study. The fourth section lays out the empirical methodology and in the fifth section we report our results. The sixth section concludes with a discussion of our findings and policy implications.

2. Conceptual framework and hypotheses

Our conceptual framework is illustrated in figure 1, which shows the complementary relationship between investing in tax havens and investing in overseas non-taxhaven subsidiaries. The framework draws on the traditional internalization theory (see Rugman, 1980, 2010) and combines with it insights from the work by Buckley et al. (2015), who apply internalization theory to offshore FDI with respect to Chinese capital flows. We build and extend the framework of Buckley et al. (2015), which uses a case-based empirical approach, by developing a conceptual framework

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that enables us to generate testable hypotheses that can be estimated with firmlevel data using panel data. The benefit of this larger-scale empirical analysis lies in capturing cross-country evidence for a set of heterogeneous developed-country MNEs that have subsidiary structures across the world.

The profit-shifting activity of MNEs is a complex process (Holtzblatt, Jermakowicz and Epstein, 2015; Pun, 2017). MNEs that choose to undertake this type of activity need to employ well-qualified legal advisors, accountants and tax experts to take advantage of hybrid mismatch opportunities that result from differences in tax codes across countries (Kemme, Parikh and Steigner, 2017; OECD, 2013). In general, tax avoidance schemes are not difficult for MNEs to set up but do carry risks. Nevertheless, a number of firms are willing to supply firms with these types of schemes, Panamanian law firm Mossack Fonseca being a famous example. Furthermore, many enablers of tax avoidance, such as the Big Four, are ready to meet the demands of MNEs to undertake this type of activity (see Jones, Temouri and Cobham, 2018; Sikka, 2015; Sikka and Willmott, 2010). This can be observed from the recent Panama Papers and Paradise Papers scandals, which generated widespread media attention across the world.

At present, countries across the world are signatories to more than 3,000 bilateral international tax treaties. Hence, the tax landscape is constantly changing (Kleist, 2018), and this complexity allows MNEs to use transfer pricing techniques to shift profits out of high-tax jurisdictions and into low-tax jurisdictions (Eden, 1998; Eden and Kudrle, 2005).1 Some argue that the ability of MNEs to exploit differences in corporate tax rules across the jurisdictions in which they operate is a key competitive advantage over firms that choose not to take such extreme measures (Picciotto, 2018).

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    REALITY OF AID 2018 REPORT The Changing Faces of Development Aid and Cooperation: Encouraging Global Justice or Buttressing Inequalities? The Reality of Aid The Changing Faces of Development Aid and Cooperation The Reality of Aid 2018 Report Published in the Philippines in 2018 by IBON International IBON Center, 114 Timog Avenue, Quezon City 1103, Philippines Copyright © 2018 by The Reality of Aid International Coordinating Committee Writer/Editor: Brian Tomlinson Copy editor: Erin Ruth Palomares Layout and Cover Design: Jennifer Padilla Cover Photos: UN Photo/Igor Rugwiza UN Photo/Arpan Munier UN Photo/Marco Dormino Printed and Bound in the Philippines by Zoom Printing Co. Published with the assistance of: Coalition of the Flemish North-South Movement All rights reserved ISBN: 978-971-9657-15-6 i Contents 1 The Reality of Aid Network 3 Acknowledgments 5 Preface 7 Political Overview The Changing Faces of Aid: Encouraging Global Justice or Buttressing Inequalities? The Reality of Aid Network International Coordinating Commitee 29 Part 1: Reports 31 Chapter 1: ODA and the Private Sector to role in achieving the SDGs 33 Development Finance Institutions: The (in)coherence of their investments in private healthcare companies Benjamin M. Hunter, King’s College London; Anna Marriott, Oxfam GB 45 ODA and private sector resources to achieve the SDGs: The Ugandan case Juliet Akello, Uganda Debt Network 53 The Shortcoming of Blended Financing in Development Cooperation within the Energy Sector in Cameroon: Show-casing the Dibamba Thermal Power Project
  • Preventing Deglobalization: an Economic and Security Argument for Free Trade and Investment in ICT Sponsors

    Preventing Deglobalization: an Economic and Security Argument for Free Trade and Investment in ICT Sponsors

    Preventing Deglobalization: An Economic and Security Argument for Free Trade and Investment in ICT Sponsors U.S. CHAMBER OF COMMERCE FOUNDATION U.S. CHAMBER OF COMMERCE CENTER FOR ADVANCED TECHNOLOGY & INNOVATION Contributing Authors The U.S. Chamber of Commerce is the world’s largest business federation representing the interests of more than 3 million businesses of all sizes, sectors, and regions, as well as state and local chambers and industry associations. Copyright © 2016 by the United States Chamber of Commerce. All rights reserved. No part of this publication may be reproduced or transmitted in any form—print, electronic, or otherwise—without the express written permission of the publisher. Table of Contents Executive Summary ............................................................................................................. 6 Part I: Risks of Balkanizing the ICT Industry Through Law and Regulation ........................................................................................ 11 A. Introduction ................................................................................................. 11 B. China ........................................................................................................... 14 1. Chinese Industrial Policy and the ICT Sector .................................. 14 a) “Informatizing” China’s Economy and Society: Early Efforts ...... 15 b) Bolstering Domestic ICT Capabilities in the 12th Five-Year Period and Beyond ................................................. 16 (1) 12th Five-Year
  • From Digital Divide to Digital Opportunities? a Critical Perspective on the Digital Divide in South African Schools

    From Digital Divide to Digital Opportunities? a Critical Perspective on the Digital Divide in South African Schools

    From digital divide to digital opportunities? A critical perspective on the digital divide in South African schools Greta Björk Gudmundsdottir Dissertation submitted for the degree of Ph.D. Faculty of Educational Sciences UNIVERSITY OF OSLO 2010 © Greta Björk Gudmundsdottir, 2011 Series of dissertations submitted to the Faculty of Education, University of Oslo No. 136 ISSN 1501-8962 All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means, without permission. Cover: Inger Sandved Anfinsen. Printed in Norway: AIT Oslo AS, 2011. Produced in co-operation with Unipub AS. The thesis is produced by Unipub AS merely in connection with the thesis defence. Kindly direct all inquiries regarding the thesis to the copyright holder or the unit which grants the doctorate. Unipub AS is owned by The University Foundation for Student Life (SiO) Acknowledgements This study has been funded by the Department of Educational Research at the University of Oslo and by additional grants from the Icelandic Development Agency and the Icelandic Research Council grant for graduate students. Moreover, Umntu ngumntu ngabantu The isiXhosa proverb above includes the essence of the African concept of Ubuntu and translates as “a person is a person through other persons”. Needless to say, I would never have been able to finish this work without the support of many special persons. First of all, my grateful acknowledgements go to all the learners, teachers, principals, Khanya officials and other South Africans who welcomed me in their beautiful country. I humbly thank you – dankie – enkosi. In particular, I would like to extend my gratitude to my good friends and colleagues at the UWC: the dean of the Faculty of Education, Professor Zubeida Desai, the isiXhosa specialist Dr.
  • History of Global Economy

    History of Global Economy

    HISTORY OF GLOBAL ECONOMY We begin our discussion of the history of the global economy with the following question. What has led to such strong differences across regions of the world? The quick and dirty answer is simply that the "West" developed first. Birth of Capitalism1 One can find examples of sustained economic growth throughout history, for example in the woolen industry in 13th century Flanders, and in 14th century Florence. Starting with the 11th century long distance trading flourished connecting thriving pockets of growth, between Venice and the Netherlands. However, by and large, living standards remained at subsistence levels for the majority of the world's population until the middle of the 18th century. Over the centuries as commerce grew, albeit slowly, the power of the vassals of the feudal system declined being replaced by merchants and incipient capitalists. Innovations in sailing led to long distance trading. The opportunities and challenges of sending a vessel abroad for years at a time brought about the institutions which facilitated the growth of the modern capitalist system. Institutions which spurred the growth of capitalism Principle of Private Property Joint Stock Companies Deposit Banking Insurance Formal Contracts International Financial Markets Craft Guilds Government Support of Opening Markets Merchant Associations At the same time burgeoning industrialization and urbanization further weakened the feudal economy changing both the political as well as the economic structure of Europe. The question remains why in the “west”? Some of the factors contributing to these changes were: 1) The Protestant Reformation - note that industrialization began in northern Europe. Protestant work ethic - fostered hard work, frugality, sobriety and efficiency, virtues which facilitated capitalism.