Risks of Raising Investment Funds from Multinational Resources

All companies face certain risks regardless of they are national or multinational statuses. These common risks are explained in another post. In addition to them followings apply particularly to multinational companies.

Tax Scheme on Host Country: Different tax rules apply on different countries. Having different tax rules in different countries will have companies to recalculate their leverage ratios. Higher taxes means that companies would prefer debt resources than the equities as debt is perceived as tax shield.

Weighted Average Cost of Capital: One other element which is being affected is the cost of capital. The weighted average cost of debt has two components tax and debt ratio (usually an interest rate on the loan company is liable to pay). Having different tax ratios will result in different cost of debt. As the corporate taxes are increased company face less weighted average cost of debt. There are studies which have revealed that multinational companies facing higher cost of capital up to 20% than the domestic ones. See this for more information.

Imputation Scheme: Multinationals also have to think about the imputation scheme of their operating countries.

Most companies using equities to fund their investments have to share some of their profits to their shareholders. The general rule is that companies pay their taxes first and then distribute their profits in the form of dividends to the shareholders. Shareholders then pay tax on the income they receive. Because tax has already been paid on the earnings of the company by the company itself, this is, in effect paying tax twice or double taxing.

The idea of being able to claim imputation on personal income tax is designed to prevent the double taxing of income.

Imputation credits represent the underlying tax paid by a company on the pre-tax profits from which the dividends were paid. Individual shareholders that receive dividends may use the tax paid by the company to eliminate double taxing on the dividends they earn. This means, that when a shareholder received fully franked or partly franked dividends he/she can claim a franking rebate for the tax already paid by the company issuing the dividend.

Imputation scheme differ from country to country, for example US has no imputation scheme at all. Shareholders will have different incentives when they have different imputation schemes. This may also change multinational companies to use different strategies to attract investors with different expectations.

Cost of Transferring Funds: Companies should take into account the cost of transferring funds between parents and their subsidiaries. In some cases parent company may want to pull out of some cash from its business units in another company. In such cases the parent must first determine if the cross-border arbitrage makes financial sense to the organization as a whole. The management team has to consider, for example, whether repatriation taxes* negate the benefit of a cash transfer; if cash transfer is cheaper than borrowing domestically; and what kind of currency risk is involved in the transfer.

Ecological Risks: There are substantive changes companies can make that should help to avoid them from disruption by the ecological risks. A large multinational corporation should weigh the benefits achieved through current economies of scale against the expected value of locating supplies, production, and customers as close together as possible and practical.

The same is true of companies that depend on outsourced production facilities in distant places. While these manufacturing and distribution strategies are currently cheap, this may not prove true as climate change disruptions cause delays, unintended consequences, or inability to complete a contract.

Labouring: Multinationals pay higher wages than host-country companies in both industrialized and developing countries, and when multinationals acquire host country businesses, they institute changes in production methods and human resource management practices that raise productivity sufficiently to support higher wages.

*Repatriation Taxes: taxes paid when remitting cash flows from a foreign affiliate to the parent firm.


  1. Managing Ecological Investment Risk
  2. Multinational Corporations and Labor Conditions. Flanagan, Robert J. Source: Globalization and Labor Conditions, August 2006 , pp. 118-146(29)

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