Abstract
This paper provides empirical evidence on two potential costs of shared ownership of German affiliates abroad. First, in periods of currency crises, wholly-owned affiliates, in contrast to partially-owned affiliates, seem to circumvent financial constraints by accessing capital from their parent companies. In terms of differences in performance regarding sales of both types of firms, wholly-owned affiliates have a significantly better sales performance than partially-owned affiliates in periods of crises. This finding contributes to the evidence that FDI helps in mitigating the negative consequences of sharp currency depreciation, and stresses that this effect works especially through capital inflows to wholly-owned affiliates. Second, the debt financing of partially-owned affiliates is less sensitive to the tax rate suggesting that partially-owned affiliates rely less on international debt shifting than wholly-owned affiliates. This indicates that partially-owned affiliates are less flexible to exploit tax efficient strategies.
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Notes
While the focus in this paper is to compare differences between both types of affiliates, other studies examine the determinants of the ownership decision. For example, Raff et al. (2009) stress the role of firm productivity in the ownership decision and provide evidence from Japanese multinational firms. Kesternich and Schnitzer (2009) find that the ownership share depends negatively on political risks.
See Lipponer (2008) for details on the reporting requirements and the MiDi data set.
The producer price index is not available for five countries. In these cases, we use the consumer price index.
We correct for outliers by excluding affiliates characterised by a total debt ratio above the 98th percentile. These are observations with extreme values of negative equity.
Since the key point to be made is the access of affiliates to loans from their parent companies in Germany, we consider affiliates that are owned by two or more German parents as wholly-owned affiliates.
Forbes (2002) compares the performance of firms in economies that did not experience depreciation episodes with those located in economies that did experience depreciations without distinguishing between multinational and domestic firms. The results suggest that particularly firms with foreign sales exposure outperform those with low foreign sales exposure.
Empirically, Aguiar (2005) finds that firms with heavy exposure to short-run foreign currency debt before the Mexican devaluation of the peso crisis in 1994 experience relatively low levels of post-devaluation investment. Bleakley and Cowan (2008) examine firms in five Latin American countries and find no support that those firms holding more dollar debt invest less than firms indebted in local currency.
Some studies consider the other side of the issue, namely, the effects of FDI on the host market financial development. See for example Harrison and McMillan (2003).
In a related application, Mintz and Weichenrieder (2005, Chap. 5) study the "indirect" determinants of outbound German FDI by splitting the sample into a wholly-owned sample and a partially-owned sample without distinguishing between OECD and emerging markets. We prefer here to include a dummy variable capturing the ownership structure, which enables us to directly compare the behaviour of both types of affiliates.
Lehmann et al. (2004) examine the role of borrowing from the capital market of the host economy.
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Acknowledgments
The authors gratefully acknowledge the hospitality and support of the research centre of Deutsche Bundesbank. The authors would like to also thank Heinz Herrmann, Stefan Klonner, Beatrix Stejskal-Passler, an anonymous referee and the seminar participants at the Goethe University Frankfurt for helpful comments. This paper was written while the second author was visiting the Oxford Centre for Business Taxation. The hospitality of the centre is highly appreciated.
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Hebous, S., Weichenrieder, A.J. Debt financing and sharp currency depreciations: wholly versus partially-owned multinational affiliates. Rev World Econ 146, 281–302 (2010). https://doi.org/10.1007/s10290-010-0055-9
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DOI: https://doi.org/10.1007/s10290-010-0055-9