The World Economy

The World Economy (2009)

doi: 10.1111/j.1467-9701.2009.01212.x

The Decentering of the Global Firm

Mihir A. Desai
Harvard University and NBER

1. INTRODUCTION

LMOST 20 years ago, Robert Reich questioned how firms are linked to
A nation states by posing a provocative question, ‘Who is Us?’. Reich argued
that a nation’s interests could be advanced by firms from various nations and,
indeed, that a firm’s national identity no longer guaranteed that it would
advance the economic interests of a particular country. For example, a foreign
firm with substantial investments in the United States may well be better for
America than an American firm with most of its operations abroad.
Reich’s question provoked considerable debate but the ability to ascribe
firms to nations was not contentious (Reich, 1990, 1991).1 By such logic, firms
such as Caterpillar are American companies by virtue of their history while
Honda, for example, is a Japanese company. Indeed, this presumption underlies
various policies and the oft-cited notion of ‘national competitiveness’ that links
firms to countries. Until recently, this presumption seemed reasonable. Even as
multinational firms dramatically increased the scale of their global operations,
relocating various activities around the world in response to value creation
opportunities, they largely retained their national identities and their headquar-
ter activities remained concentrated in their home countries. While production
or distribution might move abroad, the loci of critical managerial decision-
making and the associated headquarters functions were thought to remain
bundled and fixed.
Now, it appears that the center cannot hold. The archetypal multinational
firm with a particular national identity and a corporate headquarters fixed in
one country is becoming obsolete as firms continue to maximise the opportuni-
ties created by global markets. National identities can mutate with remarkable
ease and firms are unbundling critical headquarters functions and reallocating

This paper was prepared as a keynote speech for the CESifo Venice Summer Institute. I thank vari-
ous seminar participants for helpful comments, Kathleen Luchs for excellent research assistance,
and the Division of Research of Harvard Business School for generous financial support.
1
For a response to Reich see Tyson (1991).

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1272 MIHIR A. DESAI

them worldwide. The defining characteristics of what made a firm belong to a

country – where it was incorporated, where it was listed, the nationality of its
investor base, the location of its headquarters functions – are no longer unified
nor are they bound to one country.
For global companies today, there are many places that can feel just like
home. Consider several recent examples:
d In 2004, private equity firms noted the valuation discrepancy between Cel-
anese AG, a German chemicals business with worldwide activities, and
comparable American chemicals companies with worldwide operations.
After taking the company private, the investors transformed Celanese into
an American firm. By re-centering the corporation in the US, the sponsors
of the transaction capitalised on a sizeable opportunity created by valua-
tion discrepancies between American and German chemicals corporations.
Celanese AG remained the holding company for European and Asian busi-
nesses but Celanese Corporation, a Delaware corporation was created to
be the parent company. To enhance the American character of the com-
pany, a Dallas headquarters was established and a number of Americans
were appointed to the Board of Directors. In 2005, the firm was relisted
through the US holding company on the New York Stock Exchange
(NYSE) with a much higher valuation.
d A similar ‘re-potting’ transaction transformed Warner-Chilcott PLC, an
Irish pharmaceutical company listed in the United Kingdom with the
majority of its operations in the United States. After taking the firm pri-
vate in 2004, the sponsors took the firm public again in 2006, listing it on
the NYSE in 2006 through the use of a Bermuda-incorporated holding
company. In short order, an Irish pharmaceutical company listed in the
United Kingdom was transformed into a Bermuda holding company with
its corporate headquarters offices in the United States that was able to tap
US capital markets and also enjoy the higher valuation associated with
being perceived as an American pharmaceutical company.
d Nestlé, a Swiss incorporated and listed company, was the sole owner of
Alcon, a leading speciality ophthalmological pharmaceutical company that
was also incorporated in Switzerland but headquartered in Texas. When
Nestlé decided to publicly float a portion of Alcon in 2001, it wanted to
attract American investors already familiar with the company but also
retain Alcon’s Swiss identity for tax purposes. Investment bankers devised
a solution that changed Alcon AG into Alcon Inc. Alcon adapted corporate
by-laws and accounting standards to conform to US standards, featured
prominent Americans on its Board of Directors, and listed its shares directly
on the NYSE. This solution allowed Alcon to preserve tax benefits attendant
with being a Swiss corporation but allowed American institutional investors

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 DECENTERING OF THE GLOBAL FIRM 1273

to invest in Alcon as a speciality pharmaceutical company rather than as

a foreign stock. Today, Alcon Inc. is a Swiss corporation sanitised of its
Swiss identity, headquartered in America, listed on the NYSE, with a global
investor base.
In other high-profile examples, Rupert Murdoch uprooted News Corporation
from Australia and reincorporated it in the United States in 2004, to access more
readily American investors that might better appreciate media companies. Bunge,
a large global agribusiness company, left Brazil for White Plains, New York,
prior to going public to avoid being perceived as an emerging market company.
Stanley Works (in)famously tried to lower its worldwide tax rate by leaving the
United States for Bermuda, a move already made by its competitors, Ingersoll
Rand and Cooper Industries. As explained in Appendix A, Stanley’s proposed
move required it to change its corporate structure but had no impact on its opera-
tions. In a similar move, Shire Pharmaceuticals relocated its headquarters in
2008 from the UK to Ireland after proposed changes in the UK’s corporate tax
and many other firms are considering similar moves. James Hardie, previously
an Australian corporation listed in Australia but with headquarters in the United
States, migrated to the Netherlands. The firm now adheres to Dutch corporate
law but has kept its headquarters in the United States while its primary listing
remains in Australia. Many Israeli technology companies routinely undertake
so-called ‘reverse sleeve’ transactions whereby an Israeli firm becomes the sub-
sidiary of a newly-created US parent company to secure financing and contracts
while retaining its Israeli identity for most other purposes.
There are many other examples of firms with homes outside their country of
origin. Forty per cent of Chinese red-chip companies listed in Hong Kong are
legally domiciled in the Caribbean. New firms, too, no longer routinely estab-
lish themselves in their founders’ country of birth. When Accenture, the global
consulting division of Arthur Andersen, became an independent firm in 2000, it
incorporated in Bermuda and listed its shares in New York. The founder of the
start-up business Pixamo, a photo-sharing website based in Cambridge, Massa-
chusetts, considered Delaware, Switzerland and the Ukraine as corporate domi-
ciles prior to the firm’s first round financing. Today, firms do not automatically
establish a legal identity, locate their headquarters and list their shares in a
single country.
As it turns out, if you cannot decide where home is, you can have multiple
homes, even multiple national identities. Two global mining concerns, BHP and
Billiton, wanted to merge but did not want to choose one incorporated home so
they entered into a ‘contractual merger’. The resulting dual-listed company is a
single economic entity that can be invested in through the pre-existing Australian
or UK companies. While one economic entity, each part of the firm has retained
its local identity for its local investors, allowing for significant gains to their

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investors. The publishing firm Reed Elsevier has preserved its separate British
and Dutch identities. Reed Elsevier PLC is incorporated in the United Kingdom
and listed on the London Stock Exchange while Reed Elsevier NV is headquar-
tered in the Netherlands and listed in Amsterdam. Each company also has its own
listing on the New York Stock Exchange. Although they have separate legal and
national identities, cross-ownership makes the firm an economic entity. The dual-
listed company, historically associated with mergers from the beginning of the
twentieth century (such as Royal Dutch Shell and Unilever), is enjoying a renais-
sance as firms no longer feel compelled to have one home. The structure of dual
listed firms is described in more detail in Appendix B.
Such dramatic transactions and mergers are just one sign of how global firms
are redefining their homes. Another sign is the unbundling of headquarters
activities within global firms. Many firms with global activities have created
regional headquarters. The natural next step has been to relocate traditional
headquarters activities to the regional headquarters best suited for the purpose.
For example, an American multinational firm headquartered in Chicago might
find itself with a European regional headquarters in Brussels and an Asian
regional headquarters in Singapore. Shortly thereafter, the global treasury and
financing function might usefully migrate to Brussels and the global informa-
tion technology function might usefully migrate to Singapore. In short, firms
are becoming decentered. With these changes, the idea of firms as national
actors rooted in their home countries is becoming outdated.
Why are these changes taking place and what are their consequences? In this
paper, I place the increasing mobility of corporate identities within the broader
setting of transformations to the ‘shape’ of global firms over the last half cen-
tury. I argue that these varied transactions are of a piece and are responses to
secular changes. Responding to these changes requires a reconceptualisation of
what a corporate home is. I outline a potential reconceptualisation, describing
how managers will make conscious choices about how to unbundle activities
that have traditionally been centered in a home country headquarters. Policy-
makers in countries around the world have to understand how to create attrac-
tive homes for firms, and researchers have to devise ways to incorporate these
changes in their empirical and theoretical work.

2. THE CHANGING SHAPE OF THE MULTINATIONAL FIRM

The unbundling of the headquarters of the multinational firm follows a series

of significant changes in the shape of multinational firms over the last half cen-
tury. Figure 1 presents a schematic of these changes for a paradigmatic multi-
national firm. While oversimplified, the changes depicted in Figure 1 presage
the current changes affecting the headquarters function.

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FIGURE 1
The Changing Shape of the Global Firm
1960s–1980s 1990s–2000s 2000s
Self Replication to Specialisation Ownership based
Avoid Tariffs and High and Fragmentation outsourcing decisions
Transport Costs through Offshoring

Final Goods
& Services
(G&S) MNC HQ MNC HQ
US MNC HQ
customers Intellectual Intellectual
Property Property
Ca
pi Ca Unrelated
tal pi Austrian
tal Austrian
Sub Company
Capital

Intermediate Intermediate
G&S G&S
Austrian Brazilian Canadian Brazilian Brazilian
Sub Sub Sub Sub Sub

Final G&S Final G&S

Austrian Brazilian Canadian

customers customers customers Worldwide customers Worldwide customers

Initial forays abroad, particularly in the 1950s and 1960s, took the form of
self-replication, or so-called horizontal foreign direct investment. In this stage,
multinational firms sought to overcome high tariffs and transport costs by
recreating themselves around the world to serve customers around the world.
Such a strategy was an appropriate response to these high costs and also allowed
investors in these firms to gain an exposure to various economies by investing
in multinational firms. The headquarters remained in the firm’s home country as
most of the firm’s activities were still there and critical decisions about which
markets to invest in and how to invest were all made in the headquarters.
This self-replication came at a sizeable cost. Specifically, the duplication of
capital investment in this model was only reasonable in a world of high trans-
port costs and high tariffs. With the rapid decline of these costs, multinational
firms reshaped themselves, becoming more vertically specialised. In the 1990s,
offshoring of activities became much more prominent as global production
chains began to be fragmented around the world. Capital efficiency was greatly
improved through this so-called vertical foreign direct investment. While the
home market no longer solely supported headquarters activities, headquarters
remained critical for many of the higher value-added functions of the firm,
such as research and development and product design.
The fragmentation of the global production chain through offshoring led to a
key question that preoccupies firms today: if my activities are spread around
the world in this way, do I need to own all of them? With outsourcing, firms
contract with outside firms for some activities and only the most central activi-
ties remain within the ownership chain. In the 1990s, the shift to offshoring

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occurred when activities were specialised in the countries best suited to them.
Today, outsourcing represents a similar specialisation of activities across firms
so that not every firm undertakes all activities.

3. THE DECENTERING OF THE GLOBAL FIRM

Throughout the phases depicted in Figure 1, a firm’s national identity

remained immutable. As described above, national identities today are mutating
and it has become difficult to ascribe firms to individual countries. These incip-
ient changes can be conceptualised through Figure 2. Figure 2 depicts the three
distinct functions of a corporate headquarters: a home for managerial talent, a
financial home and a legal home. Until recently, multinational firms have
located their legal home, their financial home and their home for managerial
talent in the country in which they originated and this home country has deter-
mined the firm’s national identity. These homes are now being separated and
reallocated advantageously and the home for managerial talent can itself be
served by many locations.
As one example of how firms today are unbundling these headquarters func-
tions, consider the brief history of Genpact. In the early 2000s, Genpact (then
known as GECAS) was the wholly-owned, outsourcing operation of General
Electric and was the largest outsourcing operation in India. GE decided to par-
tially divest this subsidiary to a number of private equity players in 2005. By
2007, the firm was named Genpact and was preparing to go public. In the pro-
cess, its legal home was changed, first to Luxembourg and then to Bermuda.
Today, Genpact’s stock trades only in New York while its managerial talent
sits primarily, but not exclusively, in India. With its origins as a subsidiary of
GE and its NYSE listing is Genpact a US multinational? Or, does its mainly
Indian managerial talent and its extensive operations in India make it an Indian
multinational? Or, is Genpact a Bermudian multinational because it is incorp-
orated in Bermuda? With its unbundled headquarters functions, Genpact’s
national identity is hardly clear-cut. Genpact represents how national identities
are mutating and how it is becoming difficult to ascribe firms to particular
nation states.
What is driving firms such as Genpact to undertake such changes? Are these
moves merely fads? These developments appear to be responses to deeper, sec-
ular changes. First, the revolution in asynchronous communication now allows
decision-makers to exchange ideas remotely and it is less necessary for mana-
gers to have physical proximity to each other. Firms today, therefore, have
more scope to locate key managers in the most advantageous locations. Second,
managerial talent is both increasingly mobile and powerful. The mobility of tal-
ent facilitates these changes and the power of talent often forces it. A number

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FIGURE 2
Decentering the Global Firm

MNC HQ

Home(s) for
A Financial Home A Legal Home Managerial Talent

of private equity firms have been willing to splinter homes for managerial tal-
ent because of the preferences of highly valued talent who refuse to move.
A third force driving these changes is that countries increasingly compete to
become the legal or financial homes for corporations. Low-tax countries, such
as Bermuda and Ireland, have become compelling legal homes for firms from
many countries. National stock exchanges actively compete for listings of
foreign firms and many firms today are listed on a stock exchange outside their
home country or on more than one stock exchange. Also, various countries,
such as Dubai and Singapore, compete actively to be regional or global homes
for managerial talent. Each of these developments is likely to continue and
these are the very forces that have facilitated the unbundling of headquarters
activities that traditionally had been co-located. Finally, and perhaps most
importantly, the emergence of global shareholder and lender bases reinforces
these trends. These investors often facilitate and demand these kinds of changes
as they seek to champion value creation in new ways.
If firms can choose the most appropriate homes for their managerial talent,
the most beneficial financial home, and the best legal home, what determines
the best home for each of these functions?

a. Home(s) for Managerial Talent

The most traditional, and obvious, function of headquarters is that of a home
for managerial talent and key decision-makers. A global firm, though, can have
different homes for different functions in order to draw on different local talent
pools or opportunities. For each critical headquarters function (the relevant
ones will depend on the firm), managers must consider the location of relevant
labour markets, local regulations that might deter or invite certain functions,
and proximity to customers and suppliers. Chief marketing officers and their
marketing departments might usefully reside close to major customer concen-
trations. Chief financial officers and their finance and accounting teams can

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reside in countries with limited regulatory barriers and access to deep and
broad financial markets, such as the United Kingdom, Belgium or the United
States. Chief information officers can reside close to large pools of highly-
skilled labour in countries with flexible immigration policies, such as Singapore
or India. Heads of design might usefully locate near creative hubs in expensive
metropolises, such as New York or Milan, and chief operating officers might
locate in low-cost countries where production is concentrated, such as China,
or in convenient hubs near their supply chains, such as Dubai or Singapore.
The choice of home or homes for a firm’s managerial talent will have a sig-
nificant impact on a company’s culture, and changing this home can change
the company’s culture. For example, when private equity players took control
of Celanese, its German-based managers were replaced with American-based
managers. The sponsors of the transaction felt that American managers were
both more familiar with private equity and more sympathetic with the objec-
tives of the firm’s new owners, including significant restructuring of the com-
pany. Lend Lease, a leading Australian property developer, provides another
instructive example of the consequences of splintering the home for managerial
talent. Lend Lease divided its most senior talent between Sydney and London
for several years in the early 2000s with the CEO moving to London away
from his managerial team. The move was inspired by, and apparently fulfilled,
the desire to expose the organisation to global deal flow in a way that could
not be facilitated otherwise.
The reallocation of a firm’s managerial talent to a new home, or to different
homes, is neither costless nor easy. In particular, internal communication net-
works and interpersonal relationships become more important. Senior manage-
ment teams that are not well-integrated will not be able to handle such
reallocations as trust, and pre-existing relationships will be particularly critical
in these settings. Growing a culture is also much more challenging in such a
decentered set-up and such reallocations are best suited for more mature com-
panies. These costs, while readily identifiable and daunting, must be compared
with the potentially large benefits created by managerial specialisation and the
ability to access differentiated resources easily.

b. A Financial Home
A firm also has to have a financial home, a place where its shares are listed
and traded and its finance function is located. This financial home can now be
distinct from the original birthplace of a firm, from where most of its managers
are located and from its legal home. Genpact decided to list in New York
where it is neither legally domiciled nor are there significant managers. A
firm’s financial home is the aspect of headquarters that has been most
neglected. What happens in a financial home and why is it so important?

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First, a firm’s financial home determines what legal rules govern its relation-
ship with its investors, and this relationship, in turn, impacts a firm’s financing
costs. The rights of investors and creditors vary significantly across countries.
Firms whose legal home is situated in a country with weak investor protection
have been shown to have higher financing costs because investors consider
such firms riskier. Today, a firm can effectively recontract around poor rules
that govern its relationship with investors by establishing its financial home in
another location. Firms can accomplish this by cross-listing their shares on a
stock exchange in a country with strong investor protection. Cross-border list-
ings are now common, with many firms using depositary receipts to list their
shares on one or more foreign stock exchanges (see Appendix C for more
detailed information on cross-border listings). Cross-border listings effectively
allow firms to bond themselves to stronger disclosure rules and investor rights
than provided for in their local markets There is considerable empirical evi-
dence that firms from weakly regulated markets that cross-list their shares in
well-regulated markets have a cheaper cost of financing because investors
consider such firms less risky. In other words, a firm can lower its financing
costs by choosing the right financial home without changing its legal home.
These motivations underlie many cross-border listings and the efforts of some
corporations to list primarily in the United States which has strong investor
protection.
Second, a financial home will dictate the incentive compensation arrange-
ments used to reward talent. While managerial talent can be located opportunis-
tically around the world, hiring for some functions (and certainly for CEOs) is
happening in global labour markets. Attracting and retaining talent today typic-
ally requires high-powered contracts that will not be fully valued if the under-
lying securities are in financial markets that are underdeveloped or narrow.
Nestlé ran into this problem when it was the sole owner of the US-based oph-
thalmology company, Alcon. Alcon had to compete with US firms for mana-
gerial talent but stock options in Alcon’s Swiss parent were not highly valued
by Alcon’s American managers. Alcon therefore based its incentive compen-
sation on a phantom stock programme. Managers, however, frequently ques-
tioned the pricing of Alcon’s phantom stock, an issue that was only resolved
when Nestlé sold part of Alcon and the company was listed on the New York
Stock Exchange. Global firms have to choose a financial home that facilitates
their ability to compete for managerial talent.
Third, firms require a financial home for capital raising and capital alloca-
tion. Typically, countries where, for regulatory reasons or tax reasons, costs of
funding are lower and capital can be reallocated around a firm most easily are
desirable. The James Hardie decision to change its financial home to the
Netherlands was dictated by the financing options available there and the News
Corporation move to the United States was similarly motivated.

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Fourth, a financial home dictates who your owners are. Even though share-
holder bases are becoming increasingly global, where a firm lists its shares does
have a significant impact on who owns its shares. Nestlé’s listing in Switzerland
ensures that it has a Swiss-dominated shareholder base. Nestlé may have reason
to be content with its Swiss ownership. Swiss shareholders seldom challenge
management or question performance, so Nestlé is largely protected from take-
over attempts. When Nestlé sold off part of Alcon, though, it chose to have
mainly American shareholders for Alcon and so listed it in New York. Why? It
was in Nestlé’s interest to get the highest valuation for Alcon so it was willing to
accept the closer scrutiny and higher performance expectations of US sharehold-
ers. Shareholders in different countries may have distinct expectations from man-
agers over possibly varying horizons. When a firm chooses to list in New York, it
will open itself up to the demands and monitoring of US institutional investors.
Similarly, European shareholders may require discussions of corporate social
responsibility that would otherwise not be germane. Financial homes help dictate
a firm’s shareholders and, accordingly, corporate priorities.
Finally, the choice of a financial home will dictate firm value. While it is
tempting to think that no valuation discrepancies can arise between comparable
firms in today’s globally integrated markets, this does not appear to be the
case. Equity research analysts and institutional investors are deeper in some
markets than others and this can vary by industry. The Celanese, Warner-Chil-
cott and News Corporation examples demonstrate that relocating a financial
home can give rise to considerable value creation.
Picking a financial home can be thought of as two distinct decisions. First, a
firm has to decide where to list its shares and have its stock traded. This deci-
sion will have an impact on the firm’s financing costs, its valuation, its owner-
ship, its contractual relationships with its investors and its success in competing
for managerial talent with stock-based incentives. Second, a firm has to decide
where its finance function will be located and which countries offer the firm
the most seamless ability to reallocate funds across the world. This decision
affects the firm’s capital-raising and capital allocation functions. The two deci-
sions on a financial home need not be twinned. For example, it is conceivable
that an NYSE-listed stock will have a CFO administering a finance team in
Singapore. Just as firms may have several homes for their managerial talent,
they may have more than one financial home.

c. A Legal Home
Ultimately, a corporation is a legal person, a citizen of the country where it
is incorporated. A legal home creates obligations and opportunities. First, cor-
porate residency determines the firm’s tax obligations at the corporate and
investor level. There are wide variations in tax rates and in the definition of

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taxable income across countries. For example, a country can choose to tax the
income earned within its borders or the income earned by its citizens regardless
of where it is earned. Similarly, a country can choose varying ways to tax divi-
dend income and can afford relief to dividend taxes depending on an investor’s
residence. Today, firms can choose a legal home that can minimise its tax obli-
gations at the corporate and individual level. Stanley Works, for example, tried
to move to Bermuda in order to circumvent the worldwide corporate tax regime
of the US, and the BHP-Billiton structure was designed in part to preserve indi-
vidual tax benefits for residents of different countries. A firm can change its
legal home through a specially-designed transaction or a merger.2
Legal homes can also determine the rights for a firm’s investors and work-
ers, wherever they are located. Countries vary tremendously in the degree to
which they protect creditors during bankruptcy proceedings. Unsurprisingly,
weaker investor protections have been found to give rise to higher costs of
finance, lower valuations and higher control premia on stocks with voting
rights. By reincorporating opportunistically, managers can choose to go to
locales where investor rights are stronger (and gain valuation benefits) or
weaker (and gain more autonomy). Similarly, worker participation in firm gov-
ernance (as in the German co-determination system) and worker rights can vary
according to a firm’s legal home. These arrangements, in turn, will likely influ-
ence firm value. The ability to change their legal home means that firms are no
longer stuck with the creditor rights or worker rules with which they were
born.
Figure 3 summarises this reconceptualisation of the determinants of how
firms are dividing up traditionally bundled homes. Firm value will be maxi-
mised when each function is located in the most advantageous location.
What types of firms are most likely to maximise firm value through the de-
coupling and optimal location of the traditional headquarters functions? Firms
in global industries – ones with global customer bases and global competitors –
are likely to have the skills and knowledge required to identify the best homes
for each of their headquarters functions. Multinationals with significant intan-
gible assets, such as pharmaceutical and technology firms, have experience in
decentralised processes, and such experience could be applied to the unbundling
of headquarters activities. Mature businesses with strong cultures have the
strong networks required to maintain the ties among differently-located head-
quarters functions. Start-up firms may also be well positioned to locate their
different headquarters functions opportunistically because they are less likely
to be bound to a particular location by their heritage. More generally, the de-
coupling, and optimal allocation, of homes for managerial talent, a legal home
and a financial home requires significant managerial effort and an increased

2
For an explanation of such transactions see Appendix A and Desai and Hines (2002).

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FIGURE 3
Reconceptualising the Corporate Home

MNC HQ

Home(s) for
A Financial Home A Legal Home
Managerial Talent

Incentive compensation Tax obligations Proximity to suppliers,

Analyst coverage Worker rights customers, labour
Price discovery Legal liability pools
Disclosure regulations Corporate law Cultural compatibility
Investor protections Labour pools
Infrastructure/Hubs

Maximising
firm value

emphasis on the development of the internal communication, personnel and cul-

tural networks of firms.

4. HOW SHOULD COUNTRIES RESPOND TO THESE CHANGES?

These developments pose bracing challenges to governments accustomed to

considering corporations as captive citizens. Some governments will be tempted
to bar the doors and censure firms that opportunistically rearrange their
headquarters. Following the uproar over Stanley Works’ proposed move to
Bermuda, for example, the United States enacted legislation that limits the ability
of US firms to change their legal domicile. (See Appendix A.) Such efforts may
work in the short run for very large countries. They will probably fail for smaller
countries that cannot censure companies by withholding government contracts.
And they will surely fail in the longer run as the global market for corporate con-
trol can circumvent local efforts to retain ownership. In other words, saying an
American corporation cannot leave for Bermuda is a recipe for a foreign acquirer
to buy the American firm and achieve the same result in other ways.
A more reasoned response requires countries to dismantle bars to these devel-
opments and to adopt strategies to capitalise on them. Policymakers in every
country have to reconsider rules based on national identities. These rules can
range from prohibitions that restrict ownership of certain industries and compa-
nies to particular nationalities (usually locals), to tax rules that create distinct
obligations based on national identities rather than the location of activities.

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Ownership rules based on national identities inhibit the efficient ownership of

firms and industries. In the United States, the limitations on foreign ownership in
the airline sector provide one such example. Even though British founder
Richard Branson owned less than 25 per cent of the low-cost start-up, Virgin
America, it took the new airline 17 months to gain regulatory approval because
its US competitors charged that the new airline would be unduly influenced by
its British investors. Virgin America had to agree to replace its chief executive,
so as to satisfy tests of nationality, in order to operate in the United States.
Similarly, the attempt to tax the worldwide income of US firms inevitably
runs up against the pressures described in this paper. Other countries have
attempted novel definitions of citizenship for tax purposes, defining corporate
citizens not by the location of incorporation but by tests that measure the loca-
tion of headquarters activities. The logic of the trends discussed in this paper
suggests that countries intent on taxing corporate income may have to remain
content with taxing the income associated with activities occurring within their
borders. Such regimes usually occasion fears that all profits will be stripped
away to lower-tax countries. Countries may need to devote more attention to
enforcing transfer pricing rules that ensure that value-creation activities that
occur within their borders are properly measured and reported rather than trying
to insist on an outmoded notion of what determines a firm’s national identity.3
Finally, countries can attempt to change legal rules associated with investor
rights that deviate considerably from worldwide norms. Historically, countries
with weak investor protections hurt local firms by increasing their cost of capi-
tal. Now, these countries will simply see their firms move their financial homes
or get acquired by firms able to exploit these margins. Countries can prevent
local firms from migrating toward deeper capital markets by improving local
financial conditions and strengthening investor protections.
Ultimately, countries must respond to these developments with efforts
toward increased specialisation and greater investments in human capital. All
of these headquarters functions require highly-skilled workforces so countries
that invest in education and training will be attractive locations for the head-
quarters functions. Countries can also respond to the decentering of global
firms through specialisation. Tax-haven countries are instructive examples of
such specialisation. Low-tax countries in the Caribbean and in Europe have
prospered by specialising in providing legal and financial homes for corpora-
tions. Indeed, Ireland’s remarkable economic trajectory over the last two dec-
ades rests, in part, on its transformation into the premier regional headquarters
for multinational firms. Low tax rates, an accommodating regulatory regime,
proximity to major markets, and strong institutions have combined to make
Ireland an attractive home away from home. While smaller countries can

3
Tax policy in an international setting is discussed in Desai and Hines (2003, 2004).

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1284 MIHIR A. DESAI

specialise in this way, larger countries are more likely to succeed by reducing
the reasons for their native corporations to seek multiple homes.

5. IMPLICATIONS FOR RESEARCHERS

The changing shape of multinationals presents researchers with several chal-

lenges. Empirical work must wrestle with a new set of difficulties. The assump-
tion that a firm’s operations are local has been inaccurate for some time.
Cross-country regressions that analyse ‘local’ firms by attributing their character-
istics to the nations in which they are listed have neglected the important qualifi-
cation that many of their operations are not in those countries. Now, assigning
national identities to firms in large sample studies has become problematic as
well. When firms have different locations for their legal home, their financial
home, and several homes for their managerial talent, which home determines
their national identity? In particular, financial or legal homes are typically
employed to assign firms to countries in such regressions with little attention
paid to the underlying realities for these firms. For example, Genpact would be
characterised as ‘American’ in most cross-country regressions because such
regressions simply use an NYSE listing to define American firms. Such compari-
sons were always crude but the inability to capture the nature of operations and
now their actual identities makes such studies particularly hard to interpret. More
granular, empirical work on the ways firms are unbundling these homes will help
inform new empirical, large-sample methods for capturing these developments.
Theoretical efforts to analyse tax competition or investor protections typically
take firm national identity as a given and then considers responses to home
environments. Future work might more usefully consider how managers choose
distinct homes with different purposes, ranging from valuation consequences to
tax liabilities and self-interest. These choices might be nested usefully within a
more accurate portrait of the market for corporate control, which itself facili-
tates rapid changes of national identity. As with tax avoidance, the factors that
inhibit more aggressive splintering of homes may also be a useful line of
inquiry. What frictions inhibit firms from doing this more aggressively?

6. CONCLUSIONS

The notion of a firm with a unique national identity is quickly fading. A Ber-
muda-incorporated, Paris-headquartered firm, listed on the NYSE with US-style
investor protections and disclosure rules, a chief information officer in Banga-
lore, a chief finance officer in Brussels and a chief operating officer in Beijing
may not sound nearly so fanciful in the near future. The conclusion that ‘the

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 DECENTERING OF THE GLOBAL FIRM 1285

center cannot hold’, however, does not necessarily mean that ‘things fall apart’.
The same forces that have dictated the changing shape of the multinational firm
over the last several decades will propel these changes as well, even if much
hand-wringing is likely to occur. An appropriate response to these develop-
ments should acknowledge the difficulties inherent in policies predicated on
characterising firms as exclusively linked to specific countries.

APPENDIX A

Stanley Works and Corporate Inversions

In February 2002, Stanley Works, a leading US toolmaker headquartered in
New Britain, Connecticut, announced its intention to move its legal domicile to
Bermuda so that the company could lower its worldwide tax rate and become
more globally competitive. Stanley described the move as simply a change in
the company’s legal structure, one that would have no impact on its day-to-day
operations. Stanley was currently a US firm with foreign subsidiaries; the move
to Bermuda meant only that Stanley would become a Bermuda firm with
subsidiaries in the US and in other countries (see Figure A1).
In announcing its decision to invert its corporate structure and become a for-
eign corporation, Stanley was following the example of two of its competitors
(Cooper Industries and Ingersoll Rand), other US firms that had recently moved
abroad, and firms that chose to incorporate new subsidiaries outside the US.
Nonetheless, Stanley’s announcement provoked an outcry against selfish and
unpatriotic US firms moving to tax havens to avoid paying US taxes, and
several Congressmen vowed to deny such firms defence contracts. The close
vote in favour of the move at Stanley’s AGM prompted the Connecticut
Attorney General to launch an investigation into ‘irregularities’ that occurred in
the voting. In the end, Stanley decided not to implement its inversion but its
CEO insisted that there was a compelling need for a change in US tax laws
because they undermined the global competitiveness of American firms.
Most countries around the world tax income that is generated within their
borders. In such territorial tax systems, firms are taxed by their home govern-
ment on their domestic income and pay taxes to foreign governments on their
foreign-source income. The US, in contrast, has a worldwide tax system and
firms must pay US taxes on both their domestic and foreign income. US firms
with foreign operations, of course, must also pay foreign taxes; to avoid double
taxation, the US tax regime allows foreign taxes to be offset against US taxes
but not all firms qualify for such credits. Since foreign source income is liable
to tax when it is repatriated to the US, there is an incentive for US firms to
defer receiving dividends from their foreign affiliates and to search for opportu-

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1286 MIHIR A. DESAI

FIGURE A1

Pre-inversion Post-inversion

US
Parent Bermuda Co.
Operations

Divi- 1 Owner- Divi- 2 Owner- 2 Divi-

dends ship dends ship dends

Foreign US Foreign
Subsidiary Operations Operations Operations

Transaction Summary
US parent own all worldwide
1
operations

2 Bermuda parent owns US and

foreign operations separately

Subject to full US taxation

Subject to adjusted US taxation

(repatriations, foreign tax credits)

nities to reinvest their foreign-based income abroad. US firms can avoid the
complexities and relative disadvantages of the US worldwide tax system by
restructuring themselves as foreign corporations, and an increasing number of
firms did so during the 1990s.
Congress responded to the cry against firm expatriations and the call for tax
changes with the American Jobs Creation Act of 2004. The Act made it more
difficult for US firms to restructure themselves as foreign firms; expatriate firms
would still be considered US firms for tax purposes if they relocated to a
country where they had no substantial operations and their shareholders
remained essentially the same. The principle of taxing the worldwide income
of US firms remained intact, but the law simplified the system of foreign tax
credits and the rules on allocation of expenses among US and foreign opera-
tions. It also lowered the tax on repatriated foreign earnings to 5.25 per cent

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 DECENTERING OF THE GLOBAL FIRM 1287

for one year. Firms took advantage of this concession by repatriating over
US$300 billion of foreign profits, a six-fold increase over the previous year.

APPENDIX B

The Dual Listed Company Structure4

Just as some individuals have dual citizenship, some firms have two
national homes. A dual listed company (DLC) has two distinct but equal
parents located in different countries. Each parent is a legal resident in its
home country and is listed on its home stock exchange, but the firm otherwise
operates as a single entity. The parent companies hold shares in each other or
have cross-holdings in each other’s subsidiaries and dividends to shareholders
of each of the parents are equalised according to the founding agreement.
This corporate structure dates back to the 1903 merger between Royal Dutch
Petroleum and Shell Transport. The firm merged its operations but retained
separate legal identities and separate stock exchange listings in the Nether-
lands and the UK. In 1930, the combination of Lever Bros. in the UK and
Margarine Unie in the Netherlands created another DLC, Unilever. For many
years, these were the only examples of this unusual company structure. In the
late twentieth century, as cross-border mergers became more common, a
few more firms became DLCs, including the Swiss ⁄ Swedish firm ABB, the
British ⁄ Dutch firm Reed Elsevier, and the Australian ⁄ British firms GKN
Brambles and BHP Billiton.
A DLC structure allows firms in different countries to combine their opera-
tions but still retain their separate national identities and shareholder bases.
This type of merger is sometimes more attractive to shareholders since share-
holders in each country can continue to hold shares in and receive dividends
from a domestic firm; this is often important for institutional shareholders with
restrictions on their foreign holdings. A DLC structure may also facilitate regu-
latory approval for a merger since each parent in a DLC remains a domestic
firm and the merger is usually perceived as a combination of equals. A DLC
structure can provide significant tax advantages, too. In a regular merger, share-
holders of one firm have to sell or exchange their shares and the transaction
may trigger a capital gains liability. In a DLC merger, each group of sharehold-
ers retains shares in one of the parents and there is no capital gains liability for

4
Firms are often described as ‘dual listed’ when their shares are listed on more than one stock
exchange and ‘dual listings’ may refer to firms listed on two exchanges in the same country, or to
firms listed in two different countries. ‘Dual listings’ also sometimes refer to firms that list different
classes of shares. There are numerous firms with multiple (or dual) listings, but only a few firms
have the dual listed company structure described above.

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1288 MIHIR A. DESAI

any shareholder. In a DLC, each parent pays dividends to its own shareholders,
and this may be beneficial when two countries have different tax treatments of
dividend payments.
Firms and tax experts continue to explore the potential of DLC structure but
there is still uncertainty about the regulatory and tax implications for such firms
and there are only a handful of DLCs. Some firms have abandoned the struc-
ture: ABB ceased being a DLC in 1998, and Royal Dutch ⁄ Shell moved to a
unified structure and single stock listing in 2001 following criticisms of its cor-
porate governance. Other firms continue as DLCs but have moved to simplify
an unwieldy structure stemming from having two parents. Unilever now has a
single chief executive for the first time in its history, and Reed Elsevier has
instituted a unitary management structure and identical boards for each of its
parents.

APPENDIX C

Cross-border Listings
Over 3,200 companies around the world are listed on stock exchanges out-
side their home country. The NYSE lists over 400 foreign companies (from 47
countries) and NASDAQ lists around 350 non-US firms. In Europe, the London
Stock Exchange Main Board lists over 350 non-UK firms and about the same
number of foreign firms are listed on its AIM market for smaller companies.
Some firms list their shares directly on a foreign exchange, meeting the same
regulatory requirements as domestic firms listed on the exchange, but shares in
most cross-listed firms are traded in the form of depositary receipts, or DRs. In
2007, the trading value of DRs on stock exchanges around the world was
US$3.3 trillion, representing a record level of cross-border investing. US stock
exchanges accounted for 88 per cent of the traded value of DRs in 2007 (Bank
of New York Mellon, 2007).
Depositary receipts make it possible for investors to invest in foreign firms in
the same way they invest in domestic firms. Most foreign firms listed in the US
trade in the form of American Depositary Receipts, or ADRs. Shares of the for-
eign firm are held by a depositary bank which issues depositary receipts that are
traded on a US exchange just like domestic stocks. (The underlying mechanics of
an ADR are illustrated in Figure C1.) ADRs are listed on a US exchange, so
American investors do not have to deal with a foreign broker or a stock exchange
which may be unfamiliar to them. ADRs are denominated in US dollars, so inves-
tors do not incur any foreign exchange costs in buying or selling shares or when
they receive dividends. Foreign firms trading through ADRs that are listed on a
US exchange have to meet US accounting and governance standards, so investors

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 DECENTERING OF THE GLOBAL FIRM 1289

FIGURE C1
The Mechanics of an ADR

UNITED STATES OVERSEAS MARKET

US Investor Local Firm

1
NY Broker

NYSE Local
AMEX
DTC NASDAQ Stock
Exchange
OTC

Depositary Bank Custodian Bank

BALANCE SHEET BALANCE SHEET

Assets: 100 Local Shares Assets: 100 Local Shares
Liabilities: 10 ADRs (100 ADSs) Liabilities: 100 Shares Pledged

1 The foreign firm signs an exclusive deposit agreement with the depositary pursuant to which the firm
will provide shares to back the initial ADR issuance and the depositary will maintain the ADR facility.
2 The local firm issues shares directly into the custodian as underlying securities for the ADRs.

do not have to worry about foreign reporting conventions or be uneasy about the
shareholder protections available to them as foreign investors. ADRs thus over-
come many of the barriers to foreign investments and facilitate international
diversification by investors. Other types of depositary receipts meet the needs of
investors around the world. European investors, for example, can use euros to
invest in non-euro area firms through European Depositary Receipts (EDRs).
Cross-listing allows a firm to access more investors and can increase the
liquidity of its shares. A listing on the NYSE or other major exchange makes a
foreign firm more visible to investors and may broaden its shareholder base.
A US listing also provides investors with strong shareholder protections
because US regulatory and disclosure standards are more stringent than in
many other countries, making the shares less risky. Increased liquidity, a larger
shareholder base, and lower risk may increase firm value. Academic studies of
firms that cross-listed in the US suggest that such firms do have higher returns
and lower their cost of capital.

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1290 MIHIR A. DESAI

There are risks to cross-listings, both to firms and to local stock exchanges.
Firms that issue ADRs may not attract sufficient investor interest in the US,
and trading volume may ‘flow back’ to the home market, meaning the firm
gains little from its cross-listing. Cross-listed firms may draw trade away from
local exchanges. This is an issue in emerging economies when trade in cross-
listed domestic firms migrates to larger, more international centers, under-
mining trading volume on the local exchange and making it more difficult to
sustain an active market for local firms.

REFERENCES

Bank of New York Mellon (2007), The Depositary Receipts Market: The Year in Review
(New York: ADRBNYMellon).
Desai, M. A. and J. R. Hines Jr. (2002), ‘Expectations and Expatriations: Tracing the Causes and
Consequences of Corporate Inversions’, National Tax Journal, 55, 3, 409–41.
Desai, M. A. and J. R. Hines Jr. (2003), ‘Evaluating International Tax Reform’, National Tax
Journal, 56, 3, 487–502.
Desai, M. A. and J. R. Hines Jr. (2004), ‘Old Rules and New Realities: Corporate Tax Policy in
a Global Setting’, National Tax Journal, 57, 4, 937–60.
Reich, R. B. (1990), ‘Who is Us?’, Harvard Business Review, January/February, pp. 3–13.
Reich, R. B. (1991), ‘Who is Them?’, Harvard Business Review, March–April, pp. 14–23.
Tyson, L. (1991), ‘They Are Not Us: Why American Ownership Still Matters’, The American
Prospect, 4, 37–49.

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