Profit Sharing Between Governments and Multinationals in Natural Resource Extraction: Evidence From a Firm-Level Panel

Margaret S. McMillan, Andrew R. Waxman

NBER Working Paper No. 13332
Issued in August 2007
NBER Program(s):International Trade and Investment

The "fairness" of negotiations between countries and resource extracting firms is subject to many accusations and counter-accusations and may be argued, in many instances, to impact the subsequent economic benefit to a host country from extraction. This paper examines the role of host country governance on the share of government take from extraction revenue. We attempt to disentangle a number of competing hypotheses regarding the relationship between governance and government take using panel data for US resource extracting multinational corporations (MNCs) operating abroad from the Bureau of Economic Analysis of the US Department of Commerce over 1982-1999. Using fixed effects regression, we find a statistically significant positive impact of institutional quality on government take. The nature of this relationship -- whether this represents the result of a "corruption premium" paid by US MNCs or the exploitation of poor governance in negotiating government take -- is not completely clear. The evidence presented does, however, indicate that potential forms of bargaining power other than institutional quality (e.g., outside options to the deal) do increase government take, indicating that bargaining power may nonetheless be an important factor.

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Document Object Identifier (DOI): 10.3386/w13332

Published: Brookings Trade Forum Coverage: 1998-2008/2009 Publication of this title ceased in 2009. JSTOR Subjects(s): Business, Economics JSTOR Collection(s): Arts & Sciences VI Collection, Business II Collection, For-Profit Academic Arts & Sciences VI Collection, For-Profit Academic Business II Collection Published by: Brookings Institution Press ISSN: 15205479

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