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Real Options Conference 2023

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The Use of Tax Havens As A Real Option

This paper develops a real options model which shows the theoretical effect of business uncertainty and of having (or not having) a tax haven (TH) affiliate on the timing of foreign direct investment (FDI). It assumes that a multinational firm has a monopoly over the FDI decision, which is seen as a real option and, if it is optimally exercised, leads to an enhancement of the firm’s pre-tax profits. In line with the real options literature, we conclude that business uncertainty delays the FDI decision irrespective of whether the multinational firm has a TH affiliate or not, but multinational firms with a TH affiliate invest earlier. This runs counter to the existing literature which indicates that the use of tax havens deters investment. We test this theoretical finding using a firm-level dataset that covers the time period 2009 to 2017 and includes information on 22,703 multinational firms. Using a range of empirical models, we find robust evidence to corroborate our theoretical predictions.

Alcino Azevedo
Aston Business School
United Kingdom

Nigel Driffield
Warwick Business School
United Kingdom

Chris Jones
Aston Business School
United Kingdom

Izidin El Kalak
Cardiff Business School
United Kingdom


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