Well, it is time to talk about multinationals again. I am somewhat over my head here, as this is a developing area, and I am not current in the literature. That said, here goes.
The classic analysis of the “extra” profitability of multinationals looks to market barriers. If there weren't barriers to forming a multinational, there would be new ones created seeking that extra profit. As more multinationals are formed, the extra profit goes away. After all, it must be costly to set up a business that can function legally and practically as one enterprise in many countries, or everybody would do it. Back when there were few multinationals, the market barrier analysis seemed to tell the whole story. Today?
The most common analysis of the “extra” profitability in multinationals looks to the intangible value, particularly non-asset intangible value, in multinational enterprise. This approach can include the market barrier analysis. After all, there is no international law blocking the formation and operation of multinational businesses. Thus, the market barrier must be the cost of learning and understanding multinational law and business and of developing multinational relationships. This cost can be viewed as an investment in an intangible.
Other kinds of intangibles can give a multinational extra oof. Coca Cola is the classic example. Its profitability is attributable in considerable measure to a name and a formula. Consider the tax issue: Where does Coca Cola earn money? (Note the analogy to my Sue example.) The formula sticks world-wide. Advertising, promotion, and marketing in one country can help sales in another. There is no arm's-length price for the name or the formula to help figure out what Coca Cola US earns.
But, it appears that there is something in multinationals in addition to expertise, know-how, goodwill, going concern value, trademarks, service marks, and so on. It seems that multinationals have “extra extra” value. Multinationals can access world capital markets in ways that single-country corporations cannot. Because of thinness in the worldwide derivatives markets, a multinational can diversify risks in ways not otherwise available. Worldwide development and marketing coordination is easier in a multinational. And so on.
With a little shoving, one can push the extra extra value analysis into the other approaches. The sheer size required to be a multinational can be viewed as a barrier to entry. Knowing how to play, and playing, the world can be viewed as an intangible. But, to me, it seems helpful to analyze extra extra value separately from extra value, so long as the developing empirical research bears out that there really is extra value in multinationals that is not attributable to assets or traditional non-asset value like goodwill, know how, and going concern value.
If there really is extra extra value in a multinational, the question arises as to where that profit is situated so that countries can tax it. In fact, it is nowhere and everywhere.
Tomorrow: Taxing nowhere and everywhere…….