We show that internal capital markets of multinationals have large real effects and transmit shocks across countries. Our approach combines detailed micro data on internal capital markets with a quasi-experimental research design. Following an exogenous lending cut by a large German bank in 2008/09, parents of German multinationals became financially constrained. We find that affiliates of affected parents increased net lending to their parent after the lending cut. Affiliates were unable to raise external funding and instead had to reduce real activities to finance internal lending. As a result, affiliate sales fell sharply and took three years to fully recover. Effects were largest for affiliates that lent more to the parent and had weak access to external finance. Though the bank lending cut only directly hit firms located in Germany, the impact in other countries was large, due to transmission through multinationals (over 0.3 percent of aggregate sales in Austria, Czech Republic, and Poland). We argue that internal capital flows can affect the distribution of firm growth in most countries, since internal capital markets are large relative to aggregate capital flows and output.