Multinational Ownership and Subsidiary Investment

Abstract

This paper examines how foreign ownership affects the investment decisions of subsidiary firms. We find that improvements in the investment opportunities of parent firms have a negative effect on the investment of their subsidiaries, after controlling for the investment opportunities of the subsidiary. This provides evidence of internal capital markets in multinationals that reallocate funds towards units with better investment opportunities. We find that the negative effect of the parent's investment opportunities on subsidiary investment is greatest where parents have modest ownership stakes and are distant from their subsidiaries and when subsidiaries operate in well developed financial markets.

Keywords: Investment, Internal Capital Markets, Foreign Ownership

JEL Classification: F21, G31