Multinational firms, internal borrowing, and domestic bank loans

This paper studies the external and internal financing decisions of multinational enter prises (MNEs) and their role in the transmission of shocks across borders. We augment the costly-state-verification model of Bernanke et al. [1999] with the internal capital market constraint of an MNE and derive predictions for the optimal response of external and internal borrowing, both at home and abroad, to a change in the return on capital of a foreign affiliate. Using mandatory-reporting data on all Austrian MNEs and their FDI relationships with German affiliates for 2007–2022, we validate our theoretical pre dictions empirically and find that Austrian parent firms extend less internal credit to more productive German affiliates and reduce their own stock of external liabilities with domestic banks relative to the affiliate’s total assets, whereas more productive German affiliates reduce their share of internal liabilities with Austrian parents and increase their external leverage instead.