Multinational firms, internal borrowing, and domestic bank loans

Summary

Multinational companies transfer financial funds within the group and borrow from banks. More productive subsidiaries invest more and borrow more externally, while their parent companies invest less and lend less internally, as financial conditions spill across borders. Data for Austrian parents with German subsidiaries confirm these patterns and highlight the role of internal capital markets for financial stability.

Highlights

Internal Capital Markets as Transmission 
Channel Internal capital markets allow multinationals to flexibly shift funds between locations. More productive subsidiaries borrow more externally, which improves the entire group’s funding. An internal capital constraint links the companies’ units and transmits changes in financial conditions in one location across borders. 

Results for Austrian-German Multinationals 
Data on Austrian MNEs with German subsidiaries show that more productive subsidiaries borrow more externally and less internally relative to their total assets. Vice versa, parents invest less and lend fewer (net) internal funds to productive subsidiaries. These patterns hold even within the same multinational, illustrating how firm productivity affects a group’s financing decisions. 

Importance for Credit Markets 
Multinationals operate in different local credit markets. If productive foreign subsidiaries have easier access to bank loans, their parents cut back on (net) internal lending and borrow less from domestic banks relative to subsidiary total assets. As a result, economic and financial shocks as well as policy changes spill across borders, highlighting the importance of corporate structures for monetary policy analysis.