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Multinational ownership and subsidiary investment

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. Green open access

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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.

Type: Report
Title: Multinational ownership and subsidiary investment
Open access status: An open access version is available from UCL Discovery
Additional information: Imported via OAI, 20:31:45 23rd Feb 2007
UCL classification: UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of SandHS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/2347
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