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Internal equity financing and the performance of multinational subsidiaries in emerging economies

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Abstract

We examine the internal equity financing of the multinational subsidiary which retains and reinvests its own earnings. Internal equity financing is a type of firm-specific advantage (FSA) along with other traditional FSAs in innovation, research and development, brands and management skills. It also reflects subsidiary-level financial management decision-making. Here we test the contributions of internal equity financing and subsidiary-level financial management decision-making to subsidiary performance, using original survey data from British multinational subsidiaries in six emerging countries in the South East Asia region. Our first finding is that internal equity financing acts as an FSA to improve subsidiary performance. Our second finding is that over 90% of financing sources (including capital investment by the parent firms) in the British subsidiaries come from internal funding. Our third finding is that subsidiary-level financial management decision-making has a statistically significant positive impact on subsidiary performance. Our findings advance the theoretical, empirical and managerial analysis of subsidiary performance in emerging economies.

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Notes

  1. Penrose effect: Penrose (1959) theoretically develops the research proposition that the finite capacities of the firm’s internally experienced managers limit the rate at which the firm can grow in a given period of time.

  2. The case of Starbucks Coffee UK Ltd, which is a foreign subsidiary of the Starbucks Corporation in the United States, is an example to illustrate how parent firm uses intra-firm loans as a mechanism to manipulate profits in its foreign subsidiary. One of the key expenses contributing to Starbucks Coffee Company UK Ltd’s lack of profits is the high level of interest payment it incurs. Starbucks Coffee Company UK Ltd is funded by debt, provided by the Starbucks Corporation in the United States. The interest rate is Libor plus 4% points. Starbucks Corporation bonds carry a coupon of Libor plus 1.3% in October 2012. The parent firm is charging the UK subsidiary significantly more than their own borrowing costs (Bergin, 2012). This leads to serious concerns from the UK tax authorities.

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Acknowledgements

The first author would like to express her deepest gratitude to the late Professor Alan M Rugman for his kindness, valuable advice, guidance and endless help, support, and encouragement through the years. He was her PhD supervisor at the University of Reading. He worked with her on the third revision of the article when he passed away suddenly on 8 July 2014. The first author alone is fully and solely responsible for any remaining errors and views expressed in this fourth and final revision of the article. We would like to thank the Area Editor, Professor Ram Mudambi, and three anonymous reviewers for their time, helpful comments and insights which have sharpened our contributions. We thank Professor Mark Casson at the University of Reading for his advice on the statistical literature dealing with endogeneity. We also thank Daniel O’Connell and Elsen Ho for their comments.

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  1. Henley Business School, University of Reading, Reading, Berkshire, UK

    Quyen T K Nguyen & Alan M Rugman

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  1. Quyen T K Nguyen
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Correspondence to Quyen T K Nguyen.

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Accepted by Ram Mudambi, Area Editor, 6 October 2014. This article has been with the authors for four revisions.

†Deceased.

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Nguyen, Q., Rugman, A. Internal equity financing and the performance of multinational subsidiaries in emerging economies. J Int Bus Stud 46, 468–490 (2015). https://doi.org/10.1057/jibs.2014.64

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