Can British Multinational Enterprises Finance Economic Development in South East Asia?

By Nguyen, Quyen T. K. | Multinational Business Review, July 1, 2013 | Go to article overview

Can British Multinational Enterprises Finance Economic Development in South East Asia?


Nguyen, Quyen T. K., Multinational Business Review


Introduction

According to [103] Rugman and Doh (2008), the impact of multinational enterprises (MNEs) on host-country development is an important but controversial topic. The subject has long generated disagreements among researchers and practitioners from international development policy, finance and multinational management strategy. One side of the debate has hailed the foreign direct investment (FDI) undertaken by MNEs for inducing economic growth by capital inflows, spillovers, transferring technology and management skills, and increasing competition. The other side has argued that MNEs crowd out local firms, use technology which is inappropriate for local circumstances, actively constrain potential technology spillovers, and reduce (rather than complement) the domestic capital stock and tax base through transfer price manipulation and excessive profit repatriation.

The motivation of this paper is to add empirical content to the debate about the role of FDI in fostering the economic development in emerging economies in the ASEAN region. Specifically, there has been debate on the capital inflows by MNEs which could be reduced by raising funds locally ([59] Hood and Young, 1976). By examining the capital structure and financing sources of MNE subsidiaries, this study provides important public policy implications regarding two issues:

Whether MNEs bring in invested capital which host countries are looking for (i.e. MNEs use their internal funds to finance FDI projects) or whether MNEs rely heavily on host countries' creditor funds to finance their subsidiaries' operations (i.e. MNEs use external funds through debt financing raised in the host countries).

Whether foreign subsidiaries reinvest a part of their profits to expand and grow their subsidiaries' business through retained earnings or whether they repatriate excessive profits to their parent firms through dividend payment and other mechanisms.

In order to achieve these research objectives, this study integrates capital structure and financing theories in the finance literature with internalization theory in the international business literature.

The three most important decisions in international financial management of the MNEs and their subsidiaries concern investment, financing and dividends. Investment decisions include new investment projects, such as major FDI, takeovers, mergers and acquisitions, sell-offs and divestments, and selection of new markets and products. Financing decisions include financing and sources of capital, long-term capital structure, availability, costs and risks of long-term capital as well as short-term working capital management. Dividend decisions include dividend policy as dividend payment limits the amount of retained earnings available for reinvestment. Dividends may affect external views of the firm's long-term prospects, and thus the shares' market values.

Unfortunately, the international business literature has focused mainly on investment decisions by parent MNEs, namely FDI decisions with entry mode choice, such as wholly owned foreign subsidiaries (WOFSs) or joint ventures (JVs), greenfields or acquisitions ([27] Brouthers and Hennart, 2007). The financing and dividend decisions of the MNE have been largely neglected. How will MNEs finance initial FDI projects, subsequent expansion and growth of foreign subsidiaries? What is the level of retained earnings for subsidiaries and the dividend payment from subsidiaries to parent MNEs? What are the uses of financial resources by foreign subsidiaries? These questions need empirical investigation.

From an international business perspective, MNEs have large capital resources and international access to debt and equity capital ([123] Verbeke, 2009), which are considered important firm-specific advantages (FSAs) in internalization theory ([28] Buckley and Casson, 1976; [100] Rugman, 1981; [56] Hennart, 1982). The FSAs in the form of capital, technology and managerial skills are internalized by MNEs and represent resources, core competences and capabilities of MNEs used in both home and host countries. …

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