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.
Inhaltsverzeichnis (Table of Contents)
- Introduction
- Fundamentals of International Financing for Corporations
- The Cost of capital and the optimal financing mix for MNEs
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This paper examines whether Multinational Enterprises (MNEs) achieve more favorable financing compared to domestic companies. It begins by outlining international financing options for MNEs, then connects different cost of capital types to a company's international capital structure, referencing relevant financial literature.
- International financing options for MNEs
- Cost of capital and its impact on MNE capital structure
- The role of market liquidity in securing financing
- International diversification and its effect on risk and cost of capital
- Agency costs in international financing
Zusammenfassung der Kapitel (Chapter Summaries)
Introduction: This introductory section poses the central question of whether multinational enterprises (MNEs) enjoy a financing advantage over their domestic counterparts. It outlines the paper's structure, promising an overview of international financing options for MNEs followed by an analysis of cost of capital and its implications for capital structure in a global context, drawing on existing financial literature.
Fundamentals of International Financing for Corporations: This chapter defines MNEs, specifying their global operational scope and reliance on foreign tax rates and assets. It details the diverse financing avenues open to MNEs, contrasting them with those available to domestic firms. The chapter explores intercompany financing (relying on parent companies or subsidiaries for loans, trade credit, guarantees, or equity), retained earnings, equity financing (cross-listing shares or issuing stock through subsidiaries), and debt financing (Eurocredits, the Euronote market, and international bonds, including Eurobonds and foreign bonds). Local currency financing options, utilizing local banks and non-bank sources, are also discussed, highlighting the complexities and broader range of choices accessible to MNEs compared to their domestic peers. The chapter visually presents these options in Figure 1, illustrating the multifaceted nature of MNE financing strategies.
The Cost of capital and the optimal financing mix for MNES: This chapter investigates the advantages and disadvantages of international financing to address the main research question. It explores how multinational expansion can lead to cost reductions, particularly in situations where the domestic market is illiquid or segmented, resulting in higher required returns on securities compared to global markets. The importance of market liquidity in enabling efficient capital raising is stressed, contrasting the limitations faced by domestic companies relying heavily on internal funds and commercial banks with the opportunities offered by larger, more liquid international markets. The chapter further examines international diversification's role in reducing investor risk, leading to higher prices and lower issuing costs for MNEs. The calculation of the weighted average cost of capital (WACC), employing the capital asset pricing model (CAPM) to determine the cost of equity, is explained using Figure 2. The impact of company beta (a measure of systematic risk) and the benefits of portfolio diversification are discussed, acknowledging the counterargument that the diversification benefits might be reduced if the market portfolio is itself global, containing mostly MNEs. The chapter concludes by acknowledging that despite the potential benefits, MNEs often face higher capital costs due to increased agency costs stemming from the challenges of monitoring in an international context and information asymmetries.
Schlüsselwörter (Keywords)
Multinational Enterprises (MNEs), international financing, cost of capital, weighted average cost of capital (WACC), capital asset pricing model (CAPM), market liquidity, international diversification, agency costs, risk, equity financing, debt financing.
Frequently Asked Questions: A Comprehensive Language Preview of International Financing for Multinational Enterprises
What is the overall purpose of this paper?
This paper investigates whether multinational enterprises (MNEs) enjoy a financing advantage over domestic companies. It analyzes international financing options available to MNEs and explores the relationship between the cost of capital and a company's international capital structure, referencing relevant financial literature.
What are the key themes explored in this paper?
Key themes include various international financing options for MNEs (including intercompany financing, equity financing, and debt financing), the impact of the cost of capital on MNE capital structure, the role of market liquidity, the effects of international diversification on risk and cost of capital, and agency costs in international financing.
What topics are covered in the introduction?
The introduction poses the central research question regarding financing advantages for MNEs. It outlines the paper's structure, promising an overview of international financing options and an analysis of cost of capital and its implications for capital structure in a global context.
What does the chapter on "Fundamentals of International Financing for Corporations" cover?
This chapter defines MNEs and details the diverse financing avenues available to them, contrasting them with options for domestic firms. It explores intercompany financing, retained earnings, equity financing, and debt financing (including Eurocredits, Euronotes, Eurobonds, and foreign bonds), as well as local currency financing options. The chapter visually presents these options, illustrating the multifaceted nature of MNE financing strategies.
What is discussed in the chapter on "The Cost of capital and the optimal financing mix for MNEs"?
This chapter investigates the advantages and disadvantages of international financing, exploring how multinational expansion can lead to cost reductions due to increased market liquidity. It examines the role of international diversification in reducing investor risk and the calculation of the weighted average cost of capital (WACC) using the capital asset pricing model (CAPM). The chapter also addresses agency costs associated with international financing and information asymmetries.
What are the key words associated with this paper?
Key words include Multinational Enterprises (MNEs), international financing, cost of capital, weighted average cost of capital (WACC), capital asset pricing model (CAPM), market liquidity, international diversification, agency costs, risk, equity financing, and debt financing.
What is the structure of the document preview?
The preview includes a table of contents, a statement of objectives and key themes, chapter summaries, and keywords. It provides a comprehensive overview of the paper's content and methodology.
What specific models or frameworks are used in the analysis?
The paper utilizes the Capital Asset Pricing Model (CAPM) to determine the cost of equity and calculate the Weighted Average Cost of Capital (WACC).
What are the main conclusions hinted at in the preview?
While MNEs may benefit from lower costs due to international diversification and market liquidity, they might also face higher capital costs due to increased agency costs and information asymmetries. The overall financing advantage for MNEs is a central research question that the full paper aims to answer.
- 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
