This paper analyzes the determinants of partial ownership of the foreign affiliates of U.S. multinational firms and, in particular, the marked decline in the use of joint ventures over the last 20 years. The evidence indicates that whole ownership is most common when firms coordinate integrated production activities across different locations, transfer technology, and benefit from worldwide tax planning. Because operations and ownership levels are jointly determined, it is helpful to use the liberalization of ownership restrictions by host countries and the imposition of joint venture tax penalties in the U.S. Tax Reform Act of 1986 as instruments for ownership levels to identify these effects. Firms responded to these regulatory and tax changes by using wholly owned affiliates instead of joint ventures and expanding intrafirm trade and technology transfer. The implied complementarity of whole ownership and intrafirm trade suggests that the reduced costs of engaging in integrated global operations contributed substantially to the sharply declining propensity of American firms to organize their foreign operations as joint ventures over the last two decades. Estimates imply that as much as one-fifth to three-fifths of the decline in the use of joint ventures by multinational firms is attributable to the increased importance of intrafirm transactions. The forces of globalization appear to have diminished, rather than accelerated, the use of shared ownership.

ABSTRACT This paper analyzes the capital structures of foreign affiliates and internal capital markets of multinational corporations. Ten percent higher local tax rates are associated with 2.8% higher debt/asset ratios, with internal borrowing being particularly sensitive to taxes. Multinational affiliates are financed with less external debt in countries with underdeveloped capital markets or weak creditor rights, reflecting significantly higher local borrowing costs. Instrumental variable analysis indicates that greater borrowing from parent companies substitutes for three‐quarters of reduced external borrowing induced by capital market conditions. Multinational firms appear to employ internal capital markets opportunistically to overcome imperfections in external capital markets.