Authors: David S. Laster and Robert N. McCauley

The scant profit of foreign firms operating in the United States has prompted many observers to suggest that these firms understate their income to reduce their U.S. tax liability. This article offers an alternative explanation: a surge in foreign acquisitions of U.S. firms in the 1980s drove down the average profitability of foreign-owned firms in this country. The authors also find that high leverage and transfer pricing have contributed tributed to the low U.S. profits of foreign firms.