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Multinational Affiliates and Local Financial Markets

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Author Info

  • Selin Sayek
  • Alexander Lehmann
  • Hyoung Goo Kang

Abstract

We use data on the sources of debt finance of U.S. majority-owned foreign affiliates in 53 countries over the period 1983 to 2001 to examine the role of financial market development, and exposure to host country-specific risk on the financing choices of these affiliates. We find that total balance sheets are about four times as large as the cross-border component of foreign direct investment (FDI). The extent of financial leverage through local debt is positively related to host-country corporate tax rates, exchange rate variability, local currency-denominated sales, and financial development. Factors that further the role of local debt reduce that of parent company debt, and through this substitution overall leverage increases.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/107.

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Length: 26
Date of creation: 01 Jun 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/107

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Keywords: Foreign investment; Debt refinancing; Domestic debt; Data analysis; Tax rates; Exchange rate variability; host country; fdi; foreign affiliates; direct investment; host-country; foreign direct investment; parent company; investors; corporate tax; foreign currency; corporate tax rate; tax rate; host countries; external financing; multinational companies; industrial countries; foreign affiliate; retained earnings; credit markets; creditor protection; cost of capital; host economy; investment policies; credit constraints; corporate tax rates; foreign direct investors; international finance; international investment; foreign investor; international trade; foreign investors; multinational firms; interest costs; tax policy; domestic saving; multinational enterprises; foreign exchange; dividend policy; ownership structure; expropriation; interest payments; foreign asset; direct foreign investment;

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References

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  1. Martin Feldstein, 1994. "Tax Policy and International Capital Flows," NBER Working Papers 4851, National Bureau of Economic Research, Inc.
  2. Campa, Joe Manuel, 1993. "Entry by Foreign Firms in the United States under Exchange Rate Uncertainty," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 614-22, November.
  3. Alexander Lehmann & Ashoka Mody, 2004. "International Dividend Repatriations," IMF Working Papers 04/5, International Monetary Fund.
  4. Laurence Booth, 2001. "Capital Structures in Developing Countries," Journal of Finance, American Finance Association, vol. 56(1), pages 87-130, 02.
  5. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
  6. Albuquerque, Rui & Loayza, Norman & Serven, Luis, 2003. "World market integration through the lens of foreign direct investors," Policy Research Working Paper Series 3060, The World Bank.
  7. Harrison, Ann E. & McMillan, Margaret S., 2003. "Does direct foreign investment affect domestic credit constraints?," Journal of International Economics, Elsevier, vol. 61(1), pages 73-100, October.
  8. Du, Julan, 2003. "Why do multinational enterprises borrow from local banks?," Economics Letters, Elsevier, vol. 78(2), pages 287-291, February.
  9. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
  10. Mihir A. Desai & C. Fritz Foley & James R. Hines Jr., 2002. "Dividend Policy inside the Firm," NBER Working Papers 8698, National Bureau of Economic Research, Inc.
  11. Linda S. Goldberg & Charles D. Kolstad, 1994. "Foreign Direct Investment, Exchange Rate Variability and Demand Uncertainty," NBER Working Papers 4815, National Bureau of Economic Research, Inc.
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Cited by:
  1. Akbel, Basak & Schnitzer, Monika, 2009. "Creditor Rights and Debt Allocation within Multinationals," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 304, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  2. Spaseska Kitanovic, Violeta & Kozuharov, Saso, 2012. "The International Monetary Fond As A Creator Of The Global Financial System," UTMS Journal of Economics, University of Tourism and Management, Skopje, Macedonia, vol. 3(1), pages 83-90.
  3. Sjoerd Beugelsdijk & Jean-Fran´┐Żois Hennart & Arjen Slangen & Roger Smeets, 2010. "Why and how FDI stocks are a biased measure of MNE affiliate activity," Journal of International Business Studies, Palgrave Macmillan, vol. 41(9), pages 1444-1459, December.
  4. Shafik Hebous & Alfons Weichenrieder, 2009. "Debt Financing and Sharp Currency Depreciations: Wholly vs. Partially Owned Multinational Affiliates," CESifo Working Paper Series 2892, CESifo Group Munich.

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