Answer to Question 1
a. Through trade credit, a subsidiary can defer payment for goods and services received from the parent company. Credit terms tend to be longer in foreign markets (90 days) compared to the United States (30 days).
b. Dividend remittances are a common method for transferring funds from foreign subsidiaries to the parent, but vary for each subsidiary depending on factors such as tax levels and currency risks. For instance, some host governments levy high taxes on dividend payments and limit how much MNEs can remit.
c. Transfer pricing refers to prices that subsidiaries and affiliates charge one another as they transfer goods and services within the same MNE. Firms can use transfer pricing to shift profits out of high-tax countries into low-tax countries; minimize foreign exchange risks, and optimize the management of internal cash flows.
d. Royalty payments are remuneration paid to the owners of intellectual property. Assuming the subsidiary has licensed technology, trademarks, or other assets from the parent or other subsidiaries, royalties can be an efficient way to transfer funds. Also, because they may be viewed as an expense, royalties are tax-deductible in many countries. The parent MNE can collect royalties from its own subsidiaries as a way of generating funds.
e. A fronting loan is a loan between the parent and its subsidiary, channeled through a large bank or other financial intermediary. Fronting allows the parent to circumvent restrictions that foreign governments impose on direct intracorporate loans. While some countries restrict international funds transfers in order to keep money within their borders, such restrictions usually do not apply to the repayment of bank loans.
f. Multilateral netting is another method for funds transfer within the MNE. It amounts to strategic reduction of cash transfers within the MNE family through the elimination of offsetting cash flows.
Answer to Question 2
Companies obtain capital in two basic ways: by borrowing it or by selling shares of ownership in the firm. In equity financing, the firm obtains capital by selling stock, which gives shareholders a percentage of ownership in the firm and, often, a stream of dividend payments. The firm can also retain earningsthat is, reinvest profit rather than paying it out as dividends to investors. The main advantage of equity financing is the firm obtains capital without debt. Internationally, many firms obtain equity financing in the global equity market stock exchanges worldwide where investors and firms meet to buy and sell shares of stock.
Debt financing comes from either of two sources: loans from banks and other financial intermediaries or the sale of corporate bonds to individuals or institutions. Using debt financing can add value to the firm because some governments allow firms to deduct interest payments from their taxes.
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