Outline of the Research proposal in partial fulfillment of Ph.

D
under faculty of Management, University of Pune.

COMPARATIVE ANALYSIS OF CAPITAL STRUCTURE OF

SELECTED INDIAN MULTINATIONAL COMPANIES AND
FOREIGN MULTINATIONAL COMPANIES.

Submitted By
Mr.N.H. Ghadage.

1) Introduction and conceptual framework

Definition of MNC: Multinational Corporation is one that has operating subsidiaries, branches
or offices or affiliates located in foreign countries. They are engaged in various activities like
exporting, importing, manufacturing in different countries. Multinational organization is an
organization doing business in more than one country.
Financial management of MNC includes how MNC s makes capital expenditure in productive
capacity in foreign land, than first producing domestically and how they explore the market. It
also covers the point that how firm can raise the capital from international market and what
should be the cost of capital and is it favorable or not. The most important point in case
multinational firms is how they adjust with International Tax Environment
MNC considers the opportunities throughout the globe though they do business in few
countries. MNC takes managerial decisions based on global perspective .They are managed by
global perspective rather than from a local perspective of single country, the basic principle of
financial management for domestic firm and multinational firms are same but multinational firms
should consider the financial factors that have a bearing on firms performance. The factors like
foreign exchange rates, variation in interest, different tax policies,different accounting methods,
political interference.
The determinants of capital structure have captured academic thought for many decades,
particularly since Modigliani and Miller (1958). If optimal capital structures do exist and that
these structures maximize firm value, obtaining an understanding of the determinants of capital
structure is important in obtaining an understanding of the way firms maximize value.
Multinational corporations control considerable assets and some multinationals control more
assets than that which is controlled by some countries. Decisions about capital structure may
have important implications in regards to shareholder wealth. Therefore, obtaining an
understanding of the determinants of capital structure and the differences between domestic and
multinational capital structure is of interest to academics, politicians, shareholders and financiers
it show that the level of leverage does not differ significantly between multinational and
domestic corporations. If the substantial variation in capital structure determinants between
multinational and domestic corporations. For both types of organizations growth, profitability
and size are significant determinants of leverage.
For domestic corporations collateral value of assets is also a significant determinant of
Leverage. For multinationals, bankruptcy costs and the number of overseas subsidiaries is a
significant determinant of leverage. Bankruptcy costs are not significant for domestic
corporations. In relation to interaction effects, bankruptcy costs and profitability are significant
in explaining multinational leverage relative to domestic leverage.
Meaning of Capital Structure: It is a part of financial structure, which represents long term
sources..The term capital structure includes only long term debt and total shareholders
investment in business. A mix of long term sources of funds such as equity shares, reserves and
surplus, debentures, long term debt from outside sources and preference capital.

Definition of Capital Structure: Capital structure make up of firms capitalization ie it

represents the mix of different sources of the long term funds in total capitalization of the
company-C.W. Gerstenberg.
Capital Structure = long term debt + preferred capital + Net worth
Capital Structure = Total Assets- Current liabilities.
Optimum Capital Structure: Optimum Capital is that Capital Structure at that level of Debt
and equity proportion where the market value per share is maximum, and cost of capital is
minimum. The study of Capital Structure involves a discussion of nature of industry and specific
circumstances of the business. It is difficult define ideal capital structure. A Capital Structure is a
function of the nature of its business and how risky is the particular business is?
Pattren of Capital Structure: Capital can be raised by following alternatives
1)
2)
3)
4)

Capital Structure through complete equity shares.

Capital Structure through equity shares and preference shares.
Capital Structure through complete equity shares and debentures
Capital Structure through complete equity shares, preference shares and debentures

Determinants of Capital structure: Capital structure decides by following factors

1) Industry leverage ratio
2) Control of management
3) Flexibility of funds
4) Seasonal variations
5) Degree of competition
6) Industry life cycle
7) Agency cost
8) Time of public issue
9) Requirements of investors
10) Period of finance
11) Legal requirements

2) Importance of Optimal Capital Structure:

Appropriate capital should have following importance.
1) Profitability: The optimal capital structure which is most advantageous, with the
constraints of maximum use of leverages at minimum cost .It should generate
maximum returns to the owner without additional cost.
2) Solvency: Use of excessive debt threatens the solvency of the firm, Debt should be
used till the point where debt does not add significant risk, otherwise use of such debt
should avoided.
3) Flexibility: Flexible capital structure means it should allow the existing capital
structure to change according to the changing conditions without increasing cost. It
should also possible for the firm to provide the funds whenever needed to finance its
possible activities, firm should also repay the funds if they are not required.
4) Conservation: Capital structure should be conservative, in the sense that the debt
capacity of firm should not exceeded. Debt capacity of firm depends upon its ability
to generate future cash inflows. It should be have enough to pay its fixed charges and
principle sum.
5) Control: Use of more equity may be lead to a loss of control of the company. Hence
construction of capital structure should not involve the risk of loss of control on the
firm.
Approaches to determine optimal capital structure:
1) EBIT-EPS Approach: It shows sensitivity of EPS to the changes in EBIT under
different financial plans. It is useful to analyze the impact of debt on earning per
share.
2) Valuation Approach: It determines the impact of use of debt on the shareholders
value.
3) Cash flow approach: It analyses firms debt service capacity.

3) Review of Literature:
Different research literatures has been written on the same topic such as
1) International differences in capital structure norms: An empirical study of large European
companies by R. Aggarwal in Management International Review, Sept, 1994.The main purpose
of this paper is to assess the validity of some of the possible determinants of capital structure
among large European industrials. A secondary purpose is to test the hypothesis that there exist
international differences in capital structure norms among the large companies in various
European countries. This literature is useful to set the objective ie. Evaluation of capital structure
theory, When firm establish its plant in other country.
2) Capital Flows, Taxation, and Institutional Variation published by Mihir A. Desai.In
this paper he wrote on Tariff reductions, falling transport costs, and reduced barriers to
international capital flows have created extensive opportunities for multinational firms and
investors in increasingly integrated global markets. In the midest of this rapid integration,
investors and firms still face tax systems and investor protections that differ across countries,
and these differences have the potential to affect major investment and financing decisions.
This literature is useful to set the Hypothesis that is, MNCs should try to reduce the cost of
capital by getting capital at less interest rates than the interest rate of developed countries.
3)Capital Structure and Cost-of-Capital for the Multinational Firm published by Marjori
Thines. Stanley in Journal of International Business Studies, 1981This paper reviews recent
developments in models dealing with capital structure and cost of capital for the multinational
firm. A number of issues which bear upon the financing decisions of the multinational
corporation are addressed, and related to underlying theoretical and empirical questions with
regard to the degree of segmentation or integration of international money and capital markets
and the efficiency of the foreign exchange market.. This literature is useful to set the
Hypothesis that is, MNCs should try to reduce the cost of capital by getting capital at less
interest rates than the interest rate of developed countries.
4) A Multinational Perspective on Capital Structure Choice and Internal Capital Markets
published by Mihir A. Desai, C. Fritz Foley, James R. Hines, Jr.NBER Working Paper No. 9715
Issued in May 2003.This paper examines the impact of local tax rates and capital market
conditions on the level and composition of borrowing by foreign affiliates of American
multinational corporations. These patterns suggest that multinational firms are able to structure
their finances in response to tax and capital market conditions, thereby creating opportunities
not available to many of their local competitors. This literature is useful to set the hypothesis ,ie.
MNCs cost of capital is generally lower than that of domestic firms

5)Capital Structure with Risky Foreign Investment:

Mihir A. DesaiC. Fritz FoleyJames R. Hines Jr states that American multinational firms respond

to politically risky environments by adjusting their capital structures abroad and at home.
Foreign subsidiaries located in politically risky countries have significantly more debt than
do other foreign affiliates of the same parent companies. American firms further limit their
equity exposures in politically risky countries by sharing ownership with local partners and
by serving foreign markets with exports rather than local production. This literature is useful
to set the Hypothesis that is, MNCs should have to lower debt ratios than Domestic
Corporations.

Articles /Journals:
1. Investment opportunities and Multinationality: Evidence from capital structure changes.
(Multinational corporations and domestic corporations)
Written by Rahman, Manzur in September 22, 1997 in Journal of Financial Research
This study provide evidence that multinational corporations have valuation effects that differ
from domestic corporations For a multinational corporation (MNC) to succeed in a foreign
environment, it must possess assets that provide firm-specific or monopolistic advantages
sufficient to compensate for the costs of setting up foreign operations and competing against
potential indigenous producers..
2. Towards a Capital Structure Theory for the Multinational Company. Published by

Eckert, Stefan; Engelhard, Johann in July 15, 1999 in Management International Review
The multinational company (MNC) as a highly internationalized organization dominates most
industries in the developed economies of our world. Business sciences have responded to this
challenge. Empirical and theoretical insights concerning the internationalization of firms and the
MNC have in spite of the relatively short time,
3.The Capital Structure of Multinational Companies under Tax Competition: Published by
Paolo M. Panteghini. he declared that Equity holders of the higher-valued, leveraged firm would
want to sell their shares; then, using the proceeds plus homemade leverage equivalent to the debt
mix of the leveraged firm, they could buy shares of the lower-valued, all-equity firm. Investors
would continue in a similar fashion until the companies had exactly the same market value
4.Capital structure decisions: what have we learned?Written by Gley t. Ryen,Geraldo.M,
Richard.J in Oct 1997 in this book he emphasized The determination of an optimal capital
structure has been one of the most contentious topics in the finance literature he stated that, in
equilibrium and given perfect capital markets without taxes, the value of a firm was independent
of its choice of capital structure.

4) Research Methodology
Research: Scientific and Systematic search for the pertinent information on specific topic. In
fact, Research is an Scientific investigation.
A) Objectives Of Research:
1. To understand the importance of direct investment specially when a firm sets its plant in
another country.
2. To evaluate the capital structure norms, adopted by Multinational organization.
3. To understand foreign exchange risk, if company has listed in international capital
market.
4. To understand the Scope of International Business Activities.
B) Hypothesis
Keeping the objectives of the Research Study in mind, the following hypotheses are formulated:
(1) MNCs should have to lower debt ratios than Domestic Corporations.
2) While doing the international business, organizations suffers from political risks, country
risks, foreign exchange risks. All MNCs can look towards maintenance of Business risk.
3) MNCs often possesses monopolistic advantage that enables them to outperform local
companies in host countries.
4) Foreign direct investment, it gives the facilities to produce and market the product in
foreign country.
5) MNCs should try to reduce the cost of capital by getting capital at less interest rates than
the interest rate of developed countries.
6) MNCs cost of capital is generally lower than that of domestic firms.
7) When the MNCs parent proposes an investment in a foreign project that has the same
risk as the MNC itself, it can use its weighted average cost of capital as the required rate
of return for the project

C) Sampling Design
I. Sampling Procedure
Out of two broadly classified sampling techniques namely Probability Sampling and NonProbability Sampling, Non-Probability Sampling techniques had been chosen. Again out of four
non-probability sampling techniques namely Purposive or judgmental sampling, Convenience or

Accidental sampling, Quota sampling and Snow balling sampling techniques, Purposive or
judgmental sampling technique will be adapted by researchers for selecting the sample units.
The Purposive or Judgmental sampling as the name suggests, the sample elements will be
selected deliberately, based on certain predetermined criteria or judgment of the researcher. The
underlying principle being that those typical cases which will supposed to be appropriate for the
study should be selected as a part of the sample.
II. Sample Size
Out of Total Industries in Automobile sector in Pune. Researcher will take selected companies
and can study balance sheet, profit and loss account and multinational policies of every company
C) Methodology
I)
Design
The research design used for the study is Case study method. In this case in depth analysis of a
small number of units can take analysis of an economic and business situation over a period of
time to analyse the changes and consequent adjustments in multinational organization. An
attempt could made to capture as many variables as possible in a complex set of circumstances to
produce a particular manifestation. It is a highly versatile research method and employs any and
all methods of data collection from testing to interviewing.
II)
Sources and methods of Data Collection
Secondary data will be collected from different sources to accomplish the various objectives of
the study.
Here researcher only use. Secondary data which can be collected from
a) Published and Unpublished materials in the form of books, reports, journals and periodicals,
dictionaries & encyclopedias policy documents, mission statements.
b) Electronic sources, such as internet, e-mail, browsers of websites and online databases related
to the research topic.
I) Observation Method
The observation method employed as supplementary technique to generate more thoughtful
information about the research problem.
Processing Of Data
In the current research work, data relating to research topic will feed to to the MS-Excel, then
various operations were performed to process the enormous data to draw findings and
conclusions.
Analysis of data in the research project involves summarizing the mass of data collected and
presenting the results in a way that communicates the most important features.
The basic process followed is as given below:

First by coding every item of information so as to recognize differences and similarities between
all different items. Hence a method of identifying and labeling (coding) items of data which
appear in the text of a transcript so that all items of data in one interview can be compared with
the data collected from other interviewees. The process called content analysis should be
adopted.
D) Data Analysis and Interpretation
Various statistical tools like correlation, regression, Chi-square test, Z-test will be used to
analyze the collected data and arrive at scientific conclusions.

5)Scope of study:
This study should be helpful to domestic organizations who want to become multinational
organization. After studying all above factor we can come to know why so many foreign
companies are willing to invest in IndiaThis study is helpful to Indian MNCs to know the
business environment of particular country in which organization wants to establish its
subsidiary.

1. This study is helpful to MNCs to know the regulatory and ethical constraints of business
of particular country
2. This study is helpful to MNCs to how to maintain international capital structure and
international capital budgeting.
3. This study is helpful to that particular countrys Government for preparing Tax and
regulatory policies.
4. This study is helpful to MNCs to form different international agreements with foreign
country and its firms.
5. This study is helpful to MNCs Management for controlling foreign exchange exposure.
6.Bibliography

Sinha Pradip.Kumar., International Business Management-A Global Perspectve

(2008)
Apte A.G., International Financial Management
Rao. P.Subba. International Business Text and practices,.(2008)
Prof.Badi N.V. International Business 2nd Edition(2007)
Sinha Pradip.Kumar., Financial Management Tools and Techniques, Excel Books
(2009), pp.300-302.
Reddy G. Sudarsana, Financial Management Principles and Practices
Kothari C.R. Research Methodology-Methods and Techniques (2009)

Chapterization Scheme
1) Introduction
2) Importance of the Study
2) Review of Literature
4) Research Methodology
A) Objectives of the Study

B) Hypothesis
C) Research Methodology
D) Scope and limitations of the Study
5 ) Scope of study:
6) Bibliography