One of the key factors that constitute the capital structure of a multi-national corporation is determining the ratio of debt of the parent company to the equity of the subsidiary. In other words, the capital structure of an MNC is based on a balancing compromise between debt and equity. The definition of this compromise depends on two types of factors: internal factors of the company, and the factors depending on the country in which an MNC is operating.
One of the corporate factors influencing capital structure decisions is the MNCs’ cash flow, as stable cash flow facilitates a bigger capability of debt management. Also, the lower the MNC’s credit risk, the more access to credit it has. Another factor is access to retained earnings – the high profitability of an MNC and its subsequent retained earnings allow it to finance subsidiaries (Erel, et al., 2019). The other corporate factors are the debt guarantee of the parent company to the subsidiary, and the easiness or potential difficulties in subsidiary monitoring.
MNCs can either win a significant advantage, or lose in revenue through the differences in the exchange rates, interest, and tax rates. This factor can substantially raise their chances to minimize the cost of debt and capital, as the firm’s cost of debt can be reduced through the risk-free interest rate of the foreign currency borrowed by the firm (Erel, et al., 2019). The interest rate is influenced by tax laws, monetary policy, economic situation, and other factors within the foreign country.
Evolution of Accounting Systems in Different Countries
There is no unified accounting system that would be recognized and accepted internationally, rather there is a compilation of a plethora of different accounting systems inherent to different countries. These differences are conditioned upon the country’s legal, economic, political, and financial institutions intrinsic to each country, as they developed differently from country to country.
Erel, I., Jang, Y., & Weisbach, M. (2019). The corporate finance of multinational firms. The Brookings Papers on Economic Activity, 10(1), 1–48.