Firm-Specific Resources, Financial-Market Development and the Growth of U.S. Multinationals

Abstract

We study the resource allocation decisions of U.S. multinational corporations (MNCs). We examine how established MNCs grow across countries over time and how firm-specific resources and host country financial-market development influence MNCs' growth across their networks of affiliates. We find that affiliates of high-R&D MNCs with small affiliate networks face trade-offs to growth within the firm. These trade-offs are particularly important when MNC affiliates have lower combined host-country and parent financing. We also find evidence that country-level contracting effectiveness is associated with increased affiliate growth for MNCs with small affiliate networks in countries with less developed capital markets. MNCs that have large affiliate networks can internalize contracting costs and are less affected by host country institutions. Our findings also show that intra-MNC trade-offs to growth are affected by the development of host-country institutions and financial markets. Overall, our findings are consistent with MNCs possessing organizational and financial capital that is in scarce supply for MNCs with smaller networks of affiliates.