In this paper, the question if Multinational Enterprises (MNEs) are able to accomplish a more favorable financing situation compared to their domestic counterparts will be examined. In order to prepare a sound discussion, there will be at first an overview of international financing possibilities for MNEs. After that, the different types of cost of capital and the relating consequences for the company’s capital structure in an international surrounding are connected to discuss the relevant views in the financial literature.
Table of Contents
1 Introduction
2 Fundamentals of International Financing for Corporations
3 The Cost of capital and the optimal financing mix for MNEs
4 Conclusion
5 References
Objectives and Topics
This paper examines whether Multinational Enterprises (MNEs) can achieve more favorable financing conditions compared to their domestic counterparts. It explores various international financing vehicles, evaluates the impact of cost of capital, and analyzes how factors like market liquidity, agency costs, and international diversification shape the optimal capital structure for global corporations.
- Overview of international financing possibilities for MNEs
- Mechanisms of cost of capital and their impact on capital structure
- Analysis of market liquidity and international diversification effects
- Evaluation of agency costs and their influence on leverage
- Application of the pecking order theory in multinational contexts
Excerpt from the Book
Fundamentals of International Financing for Corporations
Before handling the cost and availability of capital in the international financing decision more deeply, MNEs are defined and their ways to achieve finance is presented. A MNEs is operating globally and 20% of its sales has to be from each of three different continents (ft.com 2017). Furthermore, there exist the reliance on foreign tax rates as well as foreign assets, what is complementary useful because sales could be generated by a foreign subsidiary or just by selling abroad (Rasaei/Nguyen 2011). To obtain finance there are more and complex possibilities for a global corporation as (shown in figure 1) compared to a local operating enterprise. Intercompany financing relates to a reliance on ‘family’ funds, i.e. receiving finance from the parent company or from sister subsidiaries, both in the form of loans, trade credit, guarantees or equity. There is also the way of keeping higher levels of retained earnings. Both ways reduce the dependence on capital markets and are usually preferred if available (Shenkar/Lou/Chi 2015).
Beyond that, we have classic equity financing which occurs normally through two ways: There is the possibility to ‘cross-list’ shares on foreign stock exchanges - usually via depositary receipts - which improves liquidity and increases the firm’s visibility in the local market. Alternatively, firms can issue stocks via subsidiaries, which can be useful to broaden ownership and to give local administrations the opportunity to invest as required in some states (Ibid.).
On the debt side, there are often used international bank loans called ‘Eurocredits’, which are mostly syndicated between banks to share risks. For short- and medium-term debt capital needs the ‘Euronote market’ ensures relatively cheap financing for MNEs, because these instruments are publicly traded. An example are ‘Euro-Medium-Term-Notes’. The third usual debt vehicle are bonds, dividing into ‘Eurobonds’ and ‘foreign bonds’.
Summary of Chapters
1 Introduction: This chapter outlines the paper's research question, focusing on whether multinational enterprises achieve better financing conditions than domestic firms through an analysis of capital structures and international literature.
2 Fundamentals of International Financing for Corporations: This section defines MNEs and details various financing mechanisms, including intercompany funding, equity issuance, Eurocredits, and local currency instruments.
3 The Cost of capital and the optimal financing mix for MNEs: This chapter investigates the drivers of capital costs, specifically analyzing the roles of market liquidity, international diversification, agency costs, and the pecking order theory in determining optimal leverage.
4 Conclusion: The concluding chapter synthesizes the findings, highlighting that while diversification and scale offer advantages, individual firm circumstances remain critical in determining the most effective funding structure.
5 References: This section lists the academic sources and empirical studies cited throughout the paper.
Keywords
Multinational Enterprises, MNE, Cost of Capital, International Financing, Capital Structure, Agency Costs, Market Liquidity, Diversification, Eurocredits, Pecking Order Theory, Leverage, Financial Management, Global Markets, Debt Financing, Equity Financing
Frequently Asked Questions
What is the primary focus of this research paper?
The paper examines whether Multinational Enterprises (MNEs) possess a financing advantage over domestic companies and how they optimize their capital structures within an international context.
Which specific themes are addressed regarding corporate finance?
Key themes include the methods of international financing, the impact of market liquidity, international diversification benefits, the role of agency costs, and theories of capital structure.
What is the central research question?
The core objective is to determine if MNEs are able to accomplish a more favorable financing situation compared to their domestic counterparts.
What scientific methodology is utilized in this paper?
The paper follows a descriptive and analytical approach, synthesizing existing financial literature, empirical studies, and established corporate finance theories to evaluate MNE financing strategies.
What topics are covered in the main body?
The main body covers the definition of MNEs, diverse international funding vehicles (equity and debt), and the complex interplay of risk, cost of capital, and agency issues.
How would you describe the key terminology of this work?
The work is characterized by terms related to international corporate strategy, such as capital structure, agency theory, market segmentation, and international diversification.
How do agency costs influence the leverage of an MNE?
The paper explains that agency costs, which arise from information asymmetry and monitoring efforts, often have a negative correlation with leverage, potentially leading to higher capital costs for multinational firms.
What role does the 'pecking order theory' play in this discussion?
The theory is used to explain why MNEs might favor internally generated funds over external debt and equity, allowing them to bypass market imperfections and manage information asymmetries.
How does international diversification affect the risk-return profile?
Diversification allows MNEs to reduce unsystematic risk by operating across different regions and markets, which can theoretically lead to lower required returns on equity and better access to funding.
- Quote paper
- Arno Hetzel (Author), 2017, The cost of capital and the optimal financing mix for multinational enterprises, Munich, GRIN Verlag, https://www.grin.com/document/379754
