Arbitrage spaces in the offshore world: Layering, ‘fuses’ and partitioning of the legal structure of modern firms

Abstract

In this article, we discuss the way offshore financial centres are used by the multi-subsidiary, multi-jurisdictional group structure known as the ‘multinational enterprise’ to arbitrage between social geographies of political jurisdictions. We define arbitrage as the use of corporate legal entities located in diverse jurisdictions to arbitrate a third country's rules and regulations. Using a new method to categorize firm-level data from Van Dijk’s Orbis, we operationalize the notion of arbitrage to systematically detail and compare the structural sequencing choices firms are making, likely in part for reasons of arbitrage. We base our techniques on legal theory of the firm, acknowledging the underpinning of social technologies of law and accounting by which business enterprises are constructed and maintained. We conclude that two specific types of entities, ‘standalones’ versus ‘in-betweeners’, are qualitatively different from others in the activities they perform. We also highlight the existence of liability structures, or ‘fuses’, which typically take the form of a split ownership arrangement. Ultimately, we demonstrate that the position of a firm’s subsidiary within the overall network ecology of that firm is as important as its jurisdictional registration location.

The changing spatial arrangements of global finance: Financial, social and legal infrastructures

“…Financial arbitrage based on legal provisioning is a crucial element in the article from Palan, Petersen and Phillips (2021). Drawing inspiration from Jean-Philippe Robé's work (2011, 2020), Palan and co-authors explore how firms, abetted by networks of accounting and law experts, have re-engineered their corporate structures to create ‘opportunity spaces’ in accommodative offshore sites, in which they realize and control a significant proportion of group profits.…”

“…Social networks stabilize how actors in the market read one another, as well as create enduring relations and power asymmetries which shape markets. International legal structures provide avenues for arbitrage, ambiguity and absences (Grasten et al 2021), as well as the design of corporate structures to protect the interests – not of stakeholders – but the social unit of the firm (Robé 2020; Palan et al 2021). Below we extend this discussion of financial institutions, social networks and legal management as infrastructures that help us to understand the changes and continuities in the spatial organization of finance.…”

Arbitrage power and the disappearing financialized firm

“…The second and related puzzle is that instead of concentrating exclusively on their supposedly core task of coordinating factors of production or developing mean, lean, efficient organizational structures, modern multinationals are creating ever-more complex networks of subsidiaries and affiliates held together by layers of holding entities (Palan et al, 2021; Phillips et al, 2021. A New York Federal Reserve Bank study found the number of subsidiaries and affiliates owned by some of the largest US banking holding companies rose to an average of 3,400 in 2012, up from about 1,000 in 1990 (Avraham, Selvaggi and Vickery, 2012).…”