A Quantitative Assessment of Total Factor Productivity and Tax Haven Use in Digital Firms

Abstract

This doctoral thesis aims to provide a comprehensive exploration of the distinctive characteristics, ownership advantages, productivity dynamics, and tax behaviours of digital firms, addressing key gaps in the existing literature on the digital economy. Aiming to fill a series of gaps in the literature on digital firms, this thesis performs both theoretical and empirical analyses. We define digital firms as those primarily engaged in the production, distribution, or sale of digital objects, tangible and intangible. We push forward the idea of scalability as an advantage of the digital firm, linked to the digital object, and propose malleability as another ownership advantage. Combined, these ownership advantages have had a transformative impact on global competition and resource management. We operationalise the digital object criterion, employing firm-level data from ORBIS by Bureau van Dijk, to provide two additional empirical chapters. Empirical findings reveal substantial variability in productivity across digital and traditional sectors. Digital service firms exhibit the highest total factor productivity, while digital manufacturers face challenges, often underperforming compared to their non-digital counterparts. Urban locations enhance productivity for service firms but provide limited advantages for digital manufacturers, underscoring the need for sector-specific strategies. This research challenges several assumptions about tax avoidance and the capabilities of the digital firm, arguing that digital service firms are indeed more productive as expected, but are not the worst offenders when it comes to tax avoidance practises, contrary to expectations. Increased levels of intangible assets in the hands of digital firms do increase the risk of tax haven use, but manufacturing firms in general pose a higher tax risk. The use of operating revenue turnover, a measure of size proposed for the Digital Service Tax, has been found wanting when assessing tax avoidance risk of digital firms. This thesis has been written in the backdrop of the OECD-sponsored Base Erosion and Profit Shifting (BEPS) initiative, a set of new rules to tackle a series of deficiencies within the international tax system. Divided in fifteen Actions, Action 1, focused on the perils of the digital economy, is still standing. Our findings have wide implications on the BEPS initiative discussion, actionable not just for theory purposes, but also for managerial and policy purposes.