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Financing Multinationals

Jingting Fan¹; Wenlan Luo²

¹ Cheung Kong Graduate School of Business [email protected] · ² Tsinghua University [email protected]

We develop, validate, and quantify a tractable model of multinational firms that connects multinational production (MP) with foreign direct investment (FDI). Firms choose where to produce and how to finance the production. They can access external finance, but capital market imperfections prevent them from relying exclusively on it for affiliate production, giving rise to FDI. The model rationalizes the three-way relationship between MP, FDI, and financial market conditions that we document and leads to novel welfare implications. Quantification of the model highlights the relevance of these welfare implications and the importance of financial factors in shaping the activities of multinationals.

DOI

10.1162/rest.a.1701

Pages

1-45

Language

en

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