Internalization Theory and Internal Capital Markets of Multinational Enterprises

Abstract

This study brings unique ideas from internalization theory in the international business (IB) literature to the study of internal capital markets, financing, and tax planning strategies of multinational enterprises (MNEs). Insights about the role of MNEs in overcoming external capital market imperfections through the use of internal capital markets are proving instrumental in understanding corporate international finance in MNEs. The ability to access capital in multiple locations to take advantage of differences in cost of financing, and to create a pool of internal financing sources through internal capital markets, which are used to fund international business activities, is an important firm- specific advantage (FSA) of MNEs. However, the use of internal capital markets may raise tax concerns because it gives MNEs opportunities to arbitrage tax differentials across countries to reduce the overall corporate taxes. This article synthesizes, critically analyzes, and assesses these lines of research with the goal of highlighting the main themes it explores, the key results it establishes, and the leading open questions it raises.