Question

Is the Weighted Average Cost of Capital for MNEs Really Higher than for Their Domestic Counterparts? What do theory and empirical evidence say about capital structure and the cost of capital for MNEs versus their domestic counterparts? Explain.

Answer 1

The weighted average cost of capital is always higher for MNE than domestic counterparts theoretically as the costs of taxation and compliance is higher, manpower and establishments costs are higher, the time to breakeven is more as markets dont respond generously in initial periods.

This has been historically and empirically proven in India where domestic companies like Reliance, Airtel , Tata and Idea saw huge cost savings in Telecommunications industry However when Vodafone entered in India it was slapped with Retrospective taxes and variety of compliance notices which led to sluggish growth and profit minimization.