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A multinational corporation is a term used to refer to a company that operates in two or more nations. This means that they are those firms that do not operate in one country but rather conduct business throughout the globe. These multinationals actually form the largest corporations in the world as compared to the domestic operations. The management teams of multinational firms face a wide scope of challenges that are not faced by companies operating in a single country (Besley & Brigham 2008, p. 191). In this paper we examine the factors influencing the choice of financing for these multinational firms and suggest financing recommendations including their justifications and any assumptions.
The financing sources are very important for the success required by a multinational firm. The multinational corporation has a wider source of finance as compared to the company located in a single country. However, there are factors that influence these several sources of income and should be considered carefully by the management so as to be able to utilize those sources that suit the multinational needs. We shall discuss in details the factors that influence the sources of finances for these multinational firms.
The first factor is the restrictions on capital flows between different nations. There are countries that prohibit the financing of investments in subsidiaries located outside the parent nation (Heller 1980, p. 35). This means that for every financing source, the management must consider whether the legislations of the parent firm country location allow such financings. They should only consider those financing sources if allowed by the respective nations. However, not all countries have these restrictions which means that research should done independently by multinationals.
In addition, other countries may allow financing of subsidiaries in other nations but limits the amount of the financing (Heller 1980, p. 35). This means that if the financing required by the particular subsidiary exceeds the limit levels the finance management should consider alternative sources. The subsidiary can receive the partial financing up to the limit amount and source the rest from other available sources or decide to seek another source totally so as to avoid partial financings.
Moreover, the national economic policies spell out the terms for money exchange as well as the debt issuance in their respective capital markets (Heller 1980, p. 35). This means that the financing source will be influenced by these policies. For those countries which allow cross debt issuance in their respective capital markets means that several sources of financing will be available for firms’ subsidiaries. As for those policies that allow easy currency exchange will facilitate more sources from other countries unlike those with stringent exchange policies. The economic policies are developed differently by countries and as such differ from nation to nation.
The other factor that influences the source of funding is size of the subsidiary which requires financing (Business Organization, p. 192). For a small subsidiary, the medium ability source of financing will be required and as such influencing the choices of funding sources. However, for a bigger subsidiary there is need for a source which has a greater financing muscle to provide the huge financing required. Therefore the size of the multinational firm’s subsidiary influences the sources of financing for the firm.
Moreover, the source of funding is influenced by the security required by the different sources of finance (Latimer & CCH Australia Limited 2008, p. 847 & 848). The security will include assets of the individual subsidiaries of the firm or external guarantees. The multinational firm can aggregate its total assets from individual subsidiaries and acquire a single source of financing. The other option is for each subsidiary to take its own assets as a security to secure individual financing sources. Therefore it shows that the treatment of the assets of the multinational firm as security aggregately or independently will influence the source of financing.
The other influence on the choice of financing source is the exposure and the risk involved in foreign borrowing as compared to the domestic currency borrowing. When the subsidiary receives income in foreign exchange and it faces long exposure in the foreign currency. Thus they have to seek negative premium when borrowing in foreign currency so as to minimize the exposure. To hedge from this risk, the subsidiary would seek to borrow from money markets where the currency risk is minimal. The foreign borrowing risk is magnified increases with long term borrowing which makes it significant for the firm to have sizeable subsidiaries in those countries so as to minimize the risk (Levi 2005, p. 406). Therefore particular subsidiaries will seek to borrow in local currencies of respective locations so as to minimize the exposure to risk and as such influences the choice of the financing source.
Moreover, the costs associated with obtaining financing from a particular source influences the choices made by financial managers of multinational companies. If the multinational is to source finances from shares issues, it must ensure that only the lowest cost countries carry out the issues. This means that the shares should be sold where the price less total issue costs is the highest. Since the issue costs vary from one country to the other, it is important that the firm consider all available options carefully before selecting a particular country of issuance. This explains why most multinational companies have decided to sell their shares on the New York Stock Exchange and NASDAQ as they have low issue costs (Levi 2005, p. 401 & 402). Therefore the costs of obtaining any financing would influence the choice of the appropriate financing source.
Furthermore, the investor protection and disclosure requirements have an influence on the source of financing for multinational companies. The reporting requirements for specific countries like United States conform to the Securities Exchange Act that requires the firms to disclose certain information. With the large pool of investors who value the disclosure of information, it becomes easy for multinationals listed in those country’s stock markets to source their financing (Levi 2005, p. 400). Therefore the investor requirements make the finance managers to select their sources of finances from those countries that comply with disclosure requirements so as to tap from the large pool of investors.
The other important factor that influences the choice of the source of financing is the financial requirements that may require funds from different sources. These financial requirements include long term, medium term and short term financial needs. The firm will select different sources for the different financial requirements. For instance, the short term needs would be financed by local commercial banks whereas long term needs would even be done through equity shares issues (Business Organisation, p. 193). Therefore the financing source decision is definitely influenced by the nature of financial requirements.