Capital Structure Choice of the Foreign Affiliates of Japanese Multinational Firms: Characteristics and Problems

Abstract

In this paper, we compare and analyze capital structure strategies of foreign affiliates of Japanese and U.S. multinational firms in terms of efficiency of the internal capital markets. A hypothesis is that foreign affiliates of multinational firms rely more on external borrowing in well-developed capital markets, and on internal borrowing otherwise. Despite the limitation with respect to the data, our research revealed that Japanese multinationals allocate funds efficiently by utilizing internal capital markets to the same extent as U.S. counterparts do. However, they heavily rely on financing from their parent companies and Japanese banks, and diversification of the source of funds seems to be insufficient.