A DECISION MODEL FOR THE ALLOCATION OF FOREIGN FUNDS TO DIVIDEND REMITTANCES AND FOREIGN INVESTMENT IN A MULTINATIONAL CORPORATE SYSTEM WITH WHOLLY‐OWNED FOREIGN MANUFACTURING SUBSIDIARIES

Abstract

THE MAJOR OBJECTIVE of this study was an effort to develop a foreign dividend decision model that could supplant arbitrary and rule of thumb foreign dividend decision rules with a rational decision model that applies the theory of financial management to the financial decision problems of the multinational corporate system. To accomplish this purpose, a linear resource allocation model was developed. The model is demonstrated in two steps: (1) the uni-subsidiary case and (2) the multisubsidiary case. The uni-subsidiary case describes a corporate system that consists of only one foreign subsidiary and one domestic parent corporation and sets the stage for the subsequent broadening of the model to the more realistic multi-subsidiary and multi-national case. The decision models seek to determine the key decision variables that affect the efficiency of the allocation of foreign generated funds among the alternative uses: foreign dividend remittances to the domestic parent company and foreign investment of these funds in the host country environment. Specifically, the models seek to measure the comparative returns on the available decision alternatives, given a number of internal (corporate policy determined) and external (environmentally determined) constraints. The decision problem thus involves the adjusting of normal returns that may be expected from available decision alternatives for the impact of such factors as foreign and United States taxation of foreign earnings and dividends, and the risks and uncertainties that prevail in the foreign environment. The key foreign host country uncertainties which have been dealt with explicitly in the models are inflation, host currency devaluation, and political risks to which the foreign properties of a multinational corporate system may be exposed. By giving explicit recognition not only to the key decision variables of foreign funds allocation decisions, but also to changes in these variables over time, the models may serve a useful purpose in providing a framework for the actual process of corporate financial decision making under conditions of uncertainty and rapidly changing foreign and domestic environments. One of the uses of the models-possibly in a computerized form-may be the ex post analysis of foreign dividend and foreign funds allocation decisions in order to compare and evaluate actual decisions with those that may have been indicated by the use of the optimizing procedures implicit in the models. Repeated application of the decision models to ex post and ex ante decision situations, as well as the ability of managers to test various decision alternatives by varying input assumptions and parameter estimates in a systematic way, may lead to the development of a decision tool for managers that can simulate financial resource allocation decisions of the type demonstrated in this paper, before the actual decisions must be made. The value of the model lies in its explicit identification of some of the more important foreign dividend variables; in the attempt to measure and adjust investment