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ACCA Strategic Professional · Advanced Financial Management · Strategic business and financial planning for multinational organisations

A multinational's board is deciding where to locate a new plant. One country offers low labour costs but has high political risk, including possible expropriation and restrictions on profit remittance. Which strategy most directly reduces the exposure to blocked remittances?

Financing the subsidiary with local debt and extracting value through royalties, management fees and transfer prices, within legal limits, most directly reduces exposure to blocked remittances. It lowers parent funds at risk and avoids reliance on dividends, which are the channel most likely to be restricted.

  1. AFinance the subsidiary with local debt and use royalties, management fees and transfer prices to extract valueCorrect
  2. BFinance the subsidiary entirely with parent equity
  3. CHold all surplus cash locally in idle bank deposits
  4. DRaise the dividend payout ratio of the subsidiary only when restrictions appear

Explanation

Local borrowing and alternative remittance channels (royalties, management fees, intra-group pricing, within legal limits) reduce dependence on dividends, which are most likely to be blocked. All-equity parent funding increases the amount at risk. Leaving cash locally keeps value exposed. Raising dividends after restrictions begin is too late.

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