In recent years, several U.S. firms have penetrated Mexico’s market. One of the biggest challenges is the cost of capital to finance businesses in Mexico. Mexican interest rates tend to be much higher than U.S. interest rates. In some periods, the Mexican government does not attempt to lower the interest rates because higher rates may attract foreign investment in Mexican securities.
a. How might U.S.-based MNCs expand in Mexico without incurring the high Mexican interest expenses when financing the expansion? Are any disadvantages associated with this strategy?
b. Are there any additional alternatives for the Mexican subsidiary to finance its business itself after it has been well established? How might this strategy affect the subsidiary’s capital structure?