Protectionism and MNE Investments

• In Event: Tax Policy and MNE Investment

Abstract

We examine the impact of protectionism through tariff increases on the investments of multinational enterprises (MNEs). Tariff increases are currently prominent on politicians’ agendas. However, they are also debated due to their adverse effects on global supply chains. Countries may raise tariffs to bolster domestic industries and attract investments, but global interconnectivity may diminish these effects. Using historical ownership, financial, and trade data, we analyze U.S. tariff increases during the trade war period of 2018-2020 and find a significant decline in MNE investments in countries affected by tariffs. MNEs with higher locational flexibility tend to withdraw more easily from tariff-affected countries. However, we find no evidence that, on average, MNEs affected by the tariff increases bring factories home.

Authors

• Ayse Sule Ozdogan Laurenz, Vienna University of Economics and Business

• Xixi Zhang, IESEG School of Management