TY - JOUR
T1 - Capital Structure of Foreign Direct Investments
T2 - A Transaction Cost Analysis
AU - Rygh, Asmund
AU - Benito, Gabriel R. G.
N1 - Publisher Copyright:
© 2017, Springer-Verlag GmbH Germany.
PY - 2018/6/1
Y1 - 2018/6/1
N2 - Transaction cost theory (TCT) plays a major role in theorizing about the boundaries of the multinational enterprise (MNE), and is increasingly being applied to intra-MNE governance. We apply TCT to capital structure decisions for MNE subsidiaries. According to TCT, equity and debt are not just financial instruments, but alternative governance structures. Equity is useful for projects involving specific assets that do not serve well as collateral, and for knowledge intensive activities where information asymmetry and public good issues make external financing more costly. We study under what conditions MNE headquarters may wish to partially re-introduce market mechanisms inside the MNE through the use of external or internal debt to finance subsidiaries. This can allow economizing on governance costs and strengthen subsidiary manager incentives, but may be inappropriate if subsidiary assets are MNE-specific or subsidiary-specific. Empirically testable propositions are developed.
AB - Transaction cost theory (TCT) plays a major role in theorizing about the boundaries of the multinational enterprise (MNE), and is increasingly being applied to intra-MNE governance. We apply TCT to capital structure decisions for MNE subsidiaries. According to TCT, equity and debt are not just financial instruments, but alternative governance structures. Equity is useful for projects involving specific assets that do not serve well as collateral, and for knowledge intensive activities where information asymmetry and public good issues make external financing more costly. We study under what conditions MNE headquarters may wish to partially re-introduce market mechanisms inside the MNE through the use of external or internal debt to finance subsidiaries. This can allow economizing on governance costs and strengthen subsidiary manager incentives, but may be inappropriate if subsidiary assets are MNE-specific or subsidiary-specific. Empirically testable propositions are developed.
KW - Capital structure
KW - Foreign direct investment
KW - Foreign susidiaries
KW - Transaction cost theory
UR - http://www.scopus.com/inward/record.url?scp=85032821374&partnerID=8YFLogxK
UR - http://www.mendeley.com/research/capital-structure-foreign-direct-investments-transaction-cost-analysis
U2 - 10.1007/s11575-017-0335-x
DO - 10.1007/s11575-017-0335-x
M3 - Article
SN - 0938-8249
VL - 58
SP - 389
EP - 411
JO - Management International Review
JF - Management International Review
IS - 3
ER -