In this paper, we discuss the problems involved with the internal capital market of Japanese multinational manufacturer, especially the financing roles of the finance subsidiaries. By pooling cash flows from other subsidiaries, finance subsidiaries might relax financing constraints of the group. And since the transactions payments among subsidiaries are centralized by the finance subsidiaries, the finance subsidiaries are able to catch all of the transactions information of the group. This could prevent the managers of subsidiaries from overestimating the profitability of their own projects, make it possible for headquarters to choose the higher quality projects from many subsidiaries by taking risk and profitability into account, and closely monitor the project to make sure whether it is properly conducted. However, if funds of the group fall short, the finance subsidiaries have to raise funds from external capital market for all of the subsidiaries. For outside investors, it is hard to know where the money has gone and how the investment decisions have been made as well as the prospects of the subsidiaries' profitability. That is to say, if headquarters does not function well as a financial intermediary to ensure transparent and safe operation of the business, then the outside investors will reluctantly supply the capital to their enterprise, hence tightening the financing constraints.
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