Capital Structure

The aim of this report is to analyses the capital structures of foreign affiliates and internal capital markets of multinational corporations based on three main determinants, which are taxes and capital structure, institutions, markets and external borrowing conditions, and internal capital markets. As for the purpose of this report, the capital structure of Dell Computer Corporation will be analysed. "Multinational affiliates are financed with less external debt in countries with underdeveloped capital markets or weak creditors' rights, reflecting significantly higher local borrowing costs" (Yonezawa, Y. , Yamaguchi, H., Yamamoto, T. , Nambu, T. , 2006).

"Instrumental variable analysis indicates that greater borrowing from parent companies substitutes for three-quarters of reduced external borrowing induced by capital market conditions" (Desai, M. A. , Foley, C. F. , Hines Jr. J. R. , 2003). Multinational firms appear to employ internal capital markets opportunistically to overcome imperfections in external capital markets. The findings shows that higher tax rates increase the use of debt from all sources, with borrowing from parent firms exhibiting greater responsiveness to tax rate differences than borrowing from external sources.

Multinational companies take advantage of higher tax rates in host countries by holding high debt in their affiliates. This tax effect is most significantly reflected in the determinants of the total debt ratio of foreign affiliates. Capital structure choice of foreign affiliates is particularly important for multinationals because the capital markets differ among countries with respect to the degree of development" Desai, Foley and Hines (2003). A multinational firm should maximize its consolidated firm value under such difference.

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"In particular, it should raise necessary capital in a country where capital cost is low, and optimally allocate the fund to the firms that provide it with the highest value" (Harris, M. , Artur, R. , 1991). To do so, the multinational should centralise their financing decisions, with creating and maintaining well-functioning capital markets. Desai (2000) examines the effect of tax structure difference and legal regimes on the capital structure choice and interest costs of the affiliates of U.S. multinationals.

As an extension of Desai (2000), Desai, Foley and Hines (2003) further analyse the determinants of capital structures for foreign affiliates of U. S. multinationals using affiliate-level data. Dell Inc. manufactures sells and services personal computers. The company markets its computers directly to its customers and builds computers after receiving a customer order. This build-to-order model enables Dell to have much smaller investment in working capital than its competitors.

It also enables Dell to more fully enjoy the benefits of reduction in component prices and to introduce new products more quickly. Dell has grown quickly and has been able to finance that growth internally by its efficient use of working capital and its profitability. Dell Inc. and its subsidiaries engage in the design, development, manufacture, marketing, sale and support of various computer systems and services to customers worldwide. The company sells its product directly to large corporate, government, healthcare, and education accounts as well as small-to-medium businesses and individual customers.

Dell operates principally in United States, Europe, Middle East and Africa, and Asia Pacific-Japan. The company was founded in 1984 and is headquartered in Round Rock, Texas. The aim of the report is to analyse the determinants of foreign affiliates of United States multinational firms, thereby obtaining evidence of the workings of their internal capital markets. The purpose of the report is to offer evidence of the tax and capital market determinants of capital structure and also to illustrate factors influencing the choice between external and internal finance.

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