Tuesday, 25 September 2012

Why does Apple have so much cash offshore?

And Google and GE and etc etc?  Contrary to popular sentiment, it is not that pesky uncompetitive U.S. tax regime, with its punitive rules that would impose corporate taxes on repatriated cash.  At least, there is not enough empirical evidence to pin solely on this well-worn scapegoat.  Instead, three economists examined the evidence of the growing MNC overseas cash stash and conclude that rather than regulation or governance, a company's spending on research and development intensity explains its cash overseas.  

The paper is called Multinationals and the High Cash Holding Puzzle.  Here is the abstract:
Defining as normal cash holdings the holdings a firm with the same characteristics would have had in the late 1990s, we find that the abnormal cash holdings of U.S. firms after the crisis represent on average 1.86% of assets. While U.S. firms held less cash than comparable foreign firms in the late 1990s, by 2010 they hold more. However, only U.S. multinational firms experience an increase in abnormal cash holdings during the 2000s. U.S. multinational firms had cash holdings similar to those of purely domestic firms in the late 1990s, but they hold over 3% more assets in cash than comparable purely domestic firms after the crisis. Further, U.S. multinationals increased their cash holdings since the late 1990s relative to foreign multinationals by roughly the same percentage as they increased their cash holdings relative to U.S. domestic firms. A detailed analysis shows that the increase in cash holdings of multinational firms cannot be explained by the tax treatment of profit repatriations, that it is intrinsically linked to their R&D intensity, and that firms that become multinational do not increase their abnormal cash holdings after they become multinational. There is no evidence that poor investment opportunities, regulation, or poor governance can explain the abnormal cash holdings of U.S. firms after the crisis. 
The authors discuss the paper here, including these interesting facts:
U.S. firms hold more cash than comparable firms whether these firms are in developed countries or not, in common law countries or not, in countries that tax income worldwide or not, and in Eurozone countries or not. 
...We find that U.S. multinationals held comparable amounts of cash than purely domestic firms in the late 1990s, but now hold significantly more cash than similar purely domestic firms. 
...Foley, Hartzell, Titman, and Twite (2007) show that the tax treatment of remittances makes it advantageous for multinationals to keep their earnings abroad and they find that firms for which repatriation is more costly hold more cash. Our findings suggest that the tax costs of repatriation are not the whole story for the increase in cash holdings of U.S. multinationals in the 2000s. ...[T]he Homeland Investment Act of 2004 ... failed to reduce the cash holdings of multinational firms. ...[I]t could be that the incentives of the Act were insufficient to affect firms’ cash holdings. ...[T]he repatriation tax costs could affect more where firms locate their cash rather than how much cash they hold. We expect that the tax cost of repatriation would be more important for high cash flow multinationals, but empirically these multinationals do not hold more cash than low cash flow multinationals. The increase in cash holdings of multinationals is strongly related to their R&D intensity, so that multinationals with no R&D expenditures do not have an increase in abnormal cash holdings compared to domestic firms with no R&D expenditures. Further, a striking result is that, among high R&D spending firms, firms that were already multinationals before 1998 do not hold more cash now than firms that were purely domestic firms before 1998. Among these firms, cash holdings increase sharply for multinationals relative to purely domestic firms, but that is because the cash holdings of multinationals are becoming more comparable to the cash holdings of purely domestic firms. Finally, and perhaps most importantly, we find no evidence that firms that become multinationals start holding more cash after they become multinationals. It appears that firms that become multinationals are firms with attributes that lead them to hold large amounts of abnormal cash even before they become multinationals. 
 Emphases mine.   

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