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Using a large panel data set for European firms, this paper provides evidence that operations at multinational headquarters are significantly more profitable than operations at their foreign subsidiaries. The effect turns out to be robust and quantitatively large. The authors' findings suggest that the profitability gap is partly driven by agency costs which arise if value-driving functions are managed by a subsidiary that is geographically separated from the headquarters management. In line with falling communication and travel costs over the last decade, the profitability gap is shown to decline over time.
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