Title: The Multinational Advantage
Authors: Drew D. Creal (University of Chicago), Leslie A. Robinson (Dartmouth College), Jonathan L. Rogers (University of Chicago), and Sarah L.C. Zechman (University of Chicago)
Publisher: University of Chicago Booth School of Business Working Paper No. 11-37
Date Published: September 2011
Using a broad data set and an innovative method of estimating the worth of international firms, this paper finds new evidence that multinational operations increase the value of U.S. companies. Despite the added risks of expanding into foreign markets, the authors argue, multinationals have an advantage over domestic rivals because they can diversify operations and exploit differences in tax codes and production costs.
Surprisingly, the value of going abroad is still not a settled matter — previous studies have been unable to confirm the advantage it brings, and some have even found that expansion costs drag down value.
However, these earlier studies compared the foreign segments of U.S. multinationals with their U.S.-based rivals in the same industry. As the authors of this paper point out, that approach assumes that the risks and growth potential of foreign operations are the same as those of operations in the U.S., which, of course, is not the case.
Accordingly, these researchers measured U.S. multinationals against their foreign rivals — firms based in, and primarily operating in, the same industry and country as the U.S. firm’s foreign unit. This allowed the researchers to vary the costs of capital and expected growth rates across both industries and countries, while treating foreign-based units as if they were autonomous.
For their data set, the authors combined information from Compustat with records from the U.S. Bureau of Economic Analysis. Together, these sources enabled the researchers to track total sales, industry affiliation, and location for each entity of a multinational corporation, defined as a U.S. parent company with at least one foreign affiliate.
The authors performed a regression analysis on the value of 1,166 multinationals that had annual sales exceeding US$20 million, using the years 1998 through 2008. They controlled for several factors, including sales made by the firm outside its primary industry, firm size, and the ratio of earnings to total sales before interest and taxes.
The paper concludes that for every 20 percent increase in a multinational’s foreign sales, the value of the firm as a whole rose by 3.1 percent. The reason? Lower effective tax rates and increased operating efficiencies, the authors write, combined to produce “excess value relative to a series of local firms covering the same geographic and industrial footprint.”
Bottom Line: The true value of operating abroad emerges when a multinational’s foreign business is compared with its local competition. Because the multinationals can exploit differences in tax codes and production costs, they create value abroad that adds to the parent’s overall value.