Carlin, W; Charlton, A; Mayer, C; (2007) Multinational ownership and subsidiary investment. (Discussion Papers in Economics 06-03 ). Department of Economics, University College London, UCL (University College London), Department of Economics, University College: London, UK.

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Abstract

This paper examines how foreign ownership affects the investment decisions of subsidiary firms.In particular, our data allow us to analyse how the investment decisions of multinationalsubsidiaries respond to the financial circumstances of their parent firms. We find thatimprovements in the investment opportunities of parent firms have a negative effect on theinvestment of their subsidiaries, after controlling for the investment opportunities of thesubsidiary. This provides evidence of internal capital markets in multinationals that reallocatefunds towards units with better investment opportunities. We further explore how financialrelationships within multinational firms are affected by the proximity of the parent and subsidiaryand by the level of financial development in the subsidiary?s host country. We find that thenegative effect of the parent?s investment opportunities on subsidiary investment is greatestwhere parents have modest ownership stakes and are distant from their subsidiaries and whensubsidiaries operate in well developed financial markets. This paper examines how foreign ownership affects the investment decisions of subsidiary firms.In particular, our data allow us to analyse how the investment decisions of multinationalsubsidiaries respond to the financial circumstances of their parent firms. We find thatimprovements in the investment opportunities of parent firms have a negative effect on theinvestment of their subsidiaries, after controlling for the investment opportunities of thesubsidiary. This provides evidence of internal capital markets in multinationals that reallocatefunds towards units with better investment opportunities. We further explore how financialrelationships within multinational firms are affected by the proximity of the parent and subsidiaryand by the level of financial development in the subsidiary?s host country. We find that thenegative effect of the parent?s investment opportunities on subsidiary investment is greatestwhere parents have modest ownership stakes and are distant from their subsidiaries and whensubsidiaries operate in well developed financial markets.

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