Growth, Capital Market Development and Competition for Resources within MNCs

We study the resource allocation decisions of U.S. multinational corporations (MNCs). We examine how established MNCs grow across countries and how firm-specific resources and host-country capital market development influence MNC growth. We find no evidence of resource constraints in MNCs with greater knowledge and access to capital. However, when these resources are in scarce supply, our evidence suggests MNC growth involves tradeoffs between divisions. These tradeoffs to growth vary with host-country capital market development and restrictions on foreign direct investment (FDI). In countries with restrictions on FDI and less developed capital markets, we find significant within-MNC resource constraints. Dynamically, in countries with low initial capital market development but high growth in capital markets, we find that affiliates grow with no apparent resource constraints and their growth becomes more closely related to own efficiency and demand growth. This result is stronger after countries undergo financial market liberalizations. Comments Welcome NBER Working Paper #9252 Current draft: August 2, 2004 ∗R.H. Smith School of Business, University of Maryland. Feinberg can be contacted at (301) 405-2251, email [email protected]. Phillips can be contacted at (301) 405-0347, email [email protected]. We wish to thank Mihir Desai, Wayne Ferson, Robert McDonald, Vojislav Maksimovic, Raymond Mataloni, John Popham, Lemma Senbet, Scott Shane, Peter Wysocki, Bernie Yeung, William Zeile, and seminar participants at Boston College, Case Western, Columbia, the Center for Economic Studies, Department of Commerce, Duke University, University of Illinois, MIT finance and organizations seminars, Minnesota, Tulane and the South Carolina and the 2003 Western Finance Association meeetings for helpful comments. The views expressed are those of the authors and do not necessarily reflect those of the Department of Commerce. Growth, Capital Market Development and Competition for Resources within MNCs