Financing the internationalisation of Indian MNEs. Issue 3 (2nd July 2016) - Tripathi, Vanita
Abstract: In the wake of increasing outward foreign direct investment (OFDI) from India, their financing in the form of intra-company loans and equity is an interesting area of research. This paper examines the determinants of OFDI financing by Indian parent firm to its affiliates abroad. Using disaggregated analysis of 66 countries where Indian parent firms have invested over the period of March 2009 to March 2014, the paper analyses the impact of economic, political, legal and financial environment including stock market development on the financing decision of Indian parent firms. By applying random effects probit model, we find that the financial and legal environment have a significant bearing on their financing decision. This paper is first of its kind to explore the relatively unexplored link between host country's characteristics on the nature of funds invested by parent firm in its foreign affiliate. By focusing on parent debt, we move into the realm of internal capital market of the parent firm investing abroad. The results indicate that parent debt is provided to foreign affiliates as a measure to contain risks posed by legal environment and political instability in host country. This contributes to the brighter side of internal capital market. Lesser parent debt provided in response to high tax regime and exchange depreciation in the host country highpoints to the dark side of internal capital market. The paper in a way also contributes to the scant literature on supply-side macroeconomic determinants of capital structure in a multinational setting.