Report

Teaser, summary, work performed and final results

Periodic Reporting for period 2 - CORPLINK (Corporate Arbitrage and CPL Maps: Hidden Structures of Controls in the Global Economy)

Teaser

Multinational firms are among the largest, most powerful global players in the 21st century with a far-reaching influence on policy, society, and the world economy. But as firms grew in size during the 20th century, their legal architecture developed into something very...

Summary

Multinational firms are among the largest, most powerful global players in the 21st century with a far-reaching influence on policy, society, and the world economy. But as firms grew in size during the 20th century, their legal architecture developed into something very different from the prevailing image of a singular, unitary actor that still dominates the neoclassical theory of the firm. Modern firms had evolved complex multi-subsidiary structures, spanning hundreds, and at times, thousands of independent corporate entities linked together by a complex web of ownership arrangements. What drives such great proliferation of corporate entities in a group? Do these developments have overall positive or negative impact on society? should we embrace them or not?

The causes are as diverge as the groups themselves, ranging from genuine operational causes, such as joint ventures, brand development, and expansion into new markets, to risk hedging and tax mitigation. The CORPLINK project core aim was to develop a theory of the evolution of such complex modern firm as evidence of mechanisms and processes of corporate arbitrage power. Strictly, each legal entity in a corporate group is subject to the rules and regulations of its licensing authority. The complicated nature of the modern MNE, the complex and sometimes inconsistent national rules and regulations, combined with historical expansion to new markets, often encourage the development of deep chains of subsidiaries, as well as complicated sharing of ownership claims, that can be used by management to avoid and evade regulations, as well as increase their own power vis-à-vis other stakeholders. This project seeks, therefore, to understand the relationship between the corporate world and the political and legal environment, specifically, how politics and political institutions shape the nature of some of the most important players in the world, the multinational enterprises.

To elucidate the claim, the project sought to develop mapping of the internal architecture of 13 additional corporate ‘maps’ to the eight already available on opnecorporate.com. The larger sample of corporate mapping would be used, then, to identify certain repeated corporate patterns and linkages (CPLs), a term innovated by the project, adopted by certain firms. Working together with legal and accounting experts, the team would them seek to identify the motivation for cell selection (i.e., the purpose of those CPLs). This research would generate qualitatively new knowledge about this facet of power (arbitrage power), about the ways in which power operates in complex financial and corporate networks, and about the influence of these ecologies of corporate organisations on existing social and political structures.

Work performed

Following the opening conference and a series of training workshops with our consultant, Open Oil, we decided to use the Orbis database, available free to City University’s academics, instead of opencorporate.com data. The first year of the project was devoted to improving and fine-tuning our equity mapping technique. We introduced a number of innovations to the technique that were unanticipated in the original application. As a result, we have achieved far greater efficiency in our mapping of corporate equity technique, improved visualisation technique, and greater granularity in the depiction of corporate mapping. This allowed us to produce a far larger sample of equity mappings for our comparison than was planned. As a result, the originally desktop work was completed ahead of schedule. Indeed, instead of 13 mapping, we have produced now equity mapping that cover the top 100 nonfinancial firms in the world in terms of revenues (2016/7). We adopted also a different method of visualisation based on the forced gravity model, which allows us to see corporate patterns and CPLs more clearly. Our innovative approach combines CPL structures with financial data, something that was not anticipated in the original application, thus further fine-tuning our ability to understand the motivation for cell selection. Recently, another breakthrough in our methodology allow us to venture beyond the original plan and begin to map corporate patterns of ownership from below, so to speak, by mapping corporate entities that are not classified as group subsidiaries, but hold stakes in firms in our sample. This new approach allows us to understand the relationship between the firm and its immediate environment. A completely new set of new data became known, further enriching our equity mapping. I believe this new line of research may shed new lights on the famous principal-agent debate, and indeed, on the role of professional services in shaping modern organisation.

The sample of firms revealed important common features in the architecture of firms so that we could reach certain conclusions already. We identified two generic type of OFC-registered corporate holdings (or CPLs), the standalone and ‘in-betweeners’, and in combination with financial we are able to show that ‘in-betweeners’ are the likely structures that used in profit shifting. In addition, a new pattern of ownership have been identified that seems to be largely used by non-EU firms for their EU operations – splitting of ownership of EU based corporate entities along two, three and sometimes four chains. Often one of those chains contain also element of an ‘in-betweener’ CPL structure. This type of ‘super-CPL’ proved important on two counts. We were able to show that the vast majority of US firms adopt simple corporate structures at home, but far more complex structures abroad, a finding that suggests that firms develop ‘bifurcated’ corporate architecture. The bifurcated corporate architecture is the result of geopolitical dimension to corporate organisation that was not known until now in the literature. Many firms pay their taxes at home and hence adopt simple structures, but are allowed to ‘game’ the system abroad and hence reduce their corporate taxation. We discovered, in addition, that super-CPLs are targeting primarily the European markets, raising the prospect that much of corporate gaming internationally is targeting the EU market. We also identified another core CPL pattern so far not acknowledged in the literature, the corporate ‘fuse.’ Corporate fuses consist of typically split ownership patterns of entities downstream, often divided 99% on one chain and only 1% on another. These structures often consist of 5, 6 or more corporate entities in various locations are used by management as protection device in case of growing liabilities in downstream activities.

These findings so far take us a long way to understanding the complexity of the

Final results

The project innovated an entirely new way of mapping corporate architecture. These maps are far more accurate and granular than available so far. The mapping techniques allowed us to view, for the first time, certain important common features among multinational enterprise. We observe a number of important CPLs. We also observe how they adapt, sometimes very quickly and dramatically, to new regulations. We observe the way by which they react to external stimuli, including changes in taxation, regulation, risk and even political mood. Our finding confirm that the modern MNEs are highly \'political\' entities, highly response to the political environment to the extent that their very architecture is designed to respond to external stimuli; their organisation is shaped as much by political and legal environmental consideration, as by competitive market conditions. The modern firm, in fact, are like Buddhist monk that can sing in two voices at the same time: they seek to compete in the delivering of goods and services to markets, but at the same time, evolved into highly tuned political animals that respond to the political environment, taking advantage of loopholes and blind spot in the international regulatory environment in order to maximise post-tax profits. The project also demonstrates that the incredible complexity of the modern firm provides another layer of power in the hand of management vis other stakeholders. The broad findings are important to the academic community and society and large, and will be disseminated through academic papers and the media. Some of the specific findings of these project can empower regulators, some of which are already interested in this project.

Website & more info

More info: https://corp-link.org/.