Financial transfers in the MNE: the Latin American case

Abstract

This paper examines a variety of types of intra-company, international transfers of funds. Its goal is to analyze key characteristics especially the costs of the moneymoving vehicles that are available to firms with affiliates in more than one country, i.e., multinational enterprises (MNEs). The entire analysis focuses on the fundstransfer process; it is assumed that the firm already has decided on the optimal allocation of funds for each affiliate during the relevant time period. Also, the empirical evidence comes from firms with affiliates in Latin America, a group of countries plagued with foreign debt problems and characterized by tight restrictions on funds transfers by multinational firms. Two of the key dimensions that distinguish international from domestic finance are the needs to deal with more than one national legal environment and to operate in more than one currency. In this broader context, the issue of intra-company funds transfer takes on added importance, because the transfers can be used to reduce currency risk and to arbitrage national legal (i.e., tax) conditions. In Latin America, firms are severely restricted as to cross-border transfers of funds, so the issue plays a large role in corporate finance for MNEs operating in countries of that region. While exchange risk management must play an important part in company decisions as to when to move funds between countries, it does not necessarily affect the choice of transfer method and exchange risk is not treated in any detail in the paper. The potential methods for moving funds internationally among affiliates of the MNE are infinite, dependent only on the creativeness of the contracts or other arrangements utilized. In reality, of course, legal constraints limit many of the potential transfers, but still leave the door open to others. In the Latin American region, the problem may best be viewed as a choice among methods of moving VALUE, rather than just funds, from affiliates to the parent corporation. That is, since foreign exchange such as dollars is very scarce in most countries of the region, the multinational firm may want to consider transfers of products and services as well as money. If the value can be transferred from one country to another in the form of products, and then converted into currency, the same result is achieved albeit in a more protracted and difficult manner. Due to the continuing crisis of external debt in the region during the 1980s, this emphasis on value rather than simply funds is an important shift of focus.