Question

What additional strategies might a firm employ to send money to another part of the company if the firm is operating in a country that blocks funds? In otherwords, Subsidiary A wants to send money to its parent and Subsidiary A is located in a country that regularly blocks funds? In addition, what techniques might the parent use to send money to the subsidiary if its subsidiary is located in a country that blocks funds?

Please help me answer this international financial management question.

Answer 1

There are various strategies Subsidiary A can use to send money to its parent Company:

1. Transfer Pricing

A contract will be mutually signed between the subsidiary and parent company, where the terms of the contract will be in favour of the parent company. For example, Subsidiary A purchased goods for $100 from the parent company, however the parent company has purchased the same good at $10 and just repackaged the good for Subsidiary A.

2. Lead and Lag

The Subsidiary Company will release the funds quickly to the parent company if they see the value of local currency is depreciating. Hence, Company uses lead and lag strategy for the flow of funds depending on the currency risk.

3. Fronting Loans

The parent company transfer funds to a renowned International bank. This international bank will give loan to Subsidiary A. The country will not block funds to repay loan for the International bank as this will create a negative image.

4. Generation of Exports

The parent company will try to create unnecessary export sales due to the currency risk in the subsidiary company. They will organize expensive events and the payment will be done in local currency.

5. Special Permission

The parent company is involved in a very important industry which leads to the development of country economy. They might obtain funds from the subsidiary company through special permission.

One of the best technique to transfer funds from the parent company to its subsidiary company where they block funds will be channelizing funds from renowned international banks. This kind of funds can be treated as loans.