Multinational firms, internal borrowing, and domestic bank loans (Kujtim Avdiu, Jochen Güntner, Karin Mayr-Dorn, Esther Segalla)

We describe a novel mechanism via which multinational enterprises (MNEs) can serve to propagate productivity and credit supply shocks across borders. We augment the costly-state-verification model of Bernanke et al. [1999] with the internal capital market constraint of an MNE to analyze the external and internal financing and investment decisions of MNE parents and affiliates. We validate our theoretical predictions empirically using mandatory-reporting data on all Austrian MNEs and their FDI relationships with German affiliates for 2007–2022. Importantly, we 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. In turn, more productive German affiliates reduce their share of internal liabilities with Austrian parents and increase their external leverage instead.