Corporate Financial Structure - Essay Example

Capitalizing on an MNC and managing its financial structure is often faced with various complications and risks because it operates in different countries which have different rules and regulations, economic conditions, and political leadership. The operating environment in one country may differ significantly from that of another country and therefore may not favor the operations of an MNC in that particular country. This indicates that the financing options available in one country may not be available in another due to the prevailing conditions which may affect the MNC in a negative manner (Horcher, 2013). It is therefore important to evaluate some of the risks and complications that arise as a result of operating in several countries when making capital financing decisions.
Foreign Exchange Risks
Foreign exchange rates as a result of operations spanning several countries are a major risk for MNCs even when they are considering their capital structure and financing issues. A country with exchange rate controls means that the MNC will have difficulties with international capital low and the solution can only be the use of debt. The use of equity financing in such a country will affect the company’s ability to invest in other countries since there are limitations to the flow of capital from one country to another (Horcher, 2013).
Political/Government Risks
One of the major complications of financing MNCs related to the government or political environment is the taxation policies of the foreign country. Taxation has been viewed by various researchers as one of the major factors that influence the capital structure of an MNC. The debt to asset ratio of an MNC is positively related to the tax rate applicable in the host country and negatively related to that of the home country. This means that in case the corporate tax rate in a foreign country is high, a company will prefer to use debt financing in place of equity financing as a source of capital as it will reduce its tax liability and thus increase earnings (Huizinga, Laeven & Nicodame 2008).
Legal Issues
Legal issues may also bring about complications for MNCs such as the issue of repatriation of profits. If a country finances its operations using equity financing and the legal requirements in a country are that there are limitations to the repatriation of profits, this may affect the ability of the company to pay dividends to shareholders outside the country. Another issue is that using equity financing in a country that regulates operations in terms of employment of local people means that the MNC might incur higher human resource costs than necessary and thus affect its ability to make profits (Dayananda, 2002). Read More