International Trade, Multinational Activity, and Corporate Finance

by C. Fritz Foley & Kalina Manova
 
 

Overview — This article surveys research at the intersection of international economics and corporate finance. Recent research illustrates how international trade and multinational activity are affected by the credit constraints firms face and by firms' ability to make use of internal capital markets. Differences in access to financial capital explain variation in trade participation at the country, industry, and firm level. Firms need to fund fixed and variable costs of cross-border transactions, and these transactions often tie up capital for longer periods of time than domestic transactions and involve distinct risks. Credit constraints also play a role in determining which firms choose to conduct operations in multiple countries and what kinds of activities they perform in different jurisdictions. Through their internal capital markets, multinational firms can raise funding in one location and deploy it elsewhere. Internally available financial capital gives multinationals an advantage over purely domestic firms in some circumstances. Financial considerations often shape the extent to which multinationals generate spillovers for local firms. Key concepts include:

  • The ability to access financial capital to pay fixed and variable costs affects choices firms make regarding export entry and operations, and, as a consequence, influence aggregate trade patterns.
  • Multinationals may use internal capital markets to pay for fixed costs, address managerial moral hazard, and exploit differences in access to capital across countries. As a result, financial frictions shape multinational decisions regarding production location, integration, and corporate governance.

Author Abstract

An emerging new literature brings unique ideas from corporate finance to the study of international trade and investment. Insights about differences in the development of financial institutions across countries, the role of financial constraints, and the use of internal capital markets are proving central in understanding international economics. The ability to access financial capital to pay fixed and variable costs affects choices firms make regarding export entry and operations, and, as a consequence, influence aggregate trade patterns. Financial frictions and the use of internal capital markets shape decisions that multinationals make regarding production locations, integration, and corporate governance. This article surveys this recent research with the goal of highlighting the main themes it explores, the key results it establishes, and the leading open questions it raises.

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