Internal capital networks as a source of MNC competitive advantage: Evidence from foreign subsidiary capital structure decisions

This paper documents multinational company (MNC) strategic advantages arising from its internal financial network. Using data from US multinational company affiliates in 62 countries, we show that MNC affiliates in countries with low credit availability, poor creditor protections, high political risks, and high inflation are found to bear high interest costs and multinational affiliate debt ratios are high in high tax countries. In addition, affiliates in countries with high (low) credit availability, a high (low) corruption index, low (high) political risks and high (low) currency depreciation are found to carry high external (parent) debt ratios. We also find that currency depreciation, credit availability, and location in common law countries are negatively associated with the use of parent (relative to external) debt. Thus, our findings suggest that affiliates substitute external debt with parent debt using internal capital markets to overcome weak external financial markets and institutional environments. This is important evidence of the strategic competitive advantage based on financial networks enjoyed by MNCs.