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MNE Capital Structure

Identify an optimal capital structure for a multinational enterprise and determine an effective dividend policy.

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The complexity of capital structure decision for the multinational firm is due to:
- Exchange risks,
- Tax differentials and
- Multiple market environments.

Multinationals have advantages over domestic firms in the form of financial flexibility that allows them to take advantage of tax differentials and costs of external financing between home and host countries so they can minimize their overall tax burden and their overall cost of capital.

Subsidiaries of MNE in high tax rate and low cost of borrowing countries should take advantage of those favorable conditions and borrow more heavily than implied by the parent's or local norms.

However, multinationals may not be able to take full advantage of their financial flexibility when their actions are limited by host country institutions or regulations. Specifically, the protection of investor rights and legal institutions may play important roles in determining the debt structure for foreign affiliates. Not only do these and other institutional factors ...