International Capital Market Segmentation in the Face of Joint Operating and Capital Budgeting Decisions of Multinational Firms

A recent (in 1976) development of international financial theory is the application of mathematical programming models to the capital budgeting decisions of the multinational firm. This application is an extension of the capital budgeting theory developed by Weingartner for the uninational firm. The investment and financing decision models for the multinational firm developed so far treat, however, the on-going operations (production, intersubsidiary trade, and sales to customers) as given. This simplification ignores the fact that the on-going operations are interrelated with the capital budgeting decisions of the multinational firm. Suboptimal decisions may thus be indicated. This paper presents a deterministic linear programming model for the simultaneous investment, operating, and financial decisions in the multinational firm, explicitly taking the interactions between the decisions into account. The model is then applied to hypothetical examples in order to explore whether barriers to capital flows could effectually separate the international capital market into distinct national segments for the multinational firms as they evidently do for the uninational firms. The results support the view that effective segmentation does not result. This is because the multinational firm can bypass the restrictions by utilizing intersubsidiary trade. Partial segmentation occurs, however, when imperfections exist as barriers to capital transfers between the subsidiaries in different countries. This is reflected in the model as a decrease in the value of the multinational firm's objective function as compared to the case with no restrictions on the intersubsidiary capital transfers.