What are blocked funds? List and explain two of the three methods the authors list in this chapter for dealing with blocked funds

Question

What will be an ideal response?

Answer 1

Answer: Blocked funds are those that have been restricted from foreign exchange in some fashion by the government of the host country. If this is a potential problems firms take a number of steps to reduce or minimize the impact of such a governmental action. In this chapter the authors identify three techniques for dealing with the problem of blocked funds. First, using fronting loans. Here the firm deposits money into a large financial institution, typically in a neutral third country, and then has the bank loan the same amount to the foreign subsidiary. There are several reasons why governments are more likely to allow repayments of such loans as opposed to repayment to the parent.
Second, the local firm may create new exports thus increasing the flow of currency into the country and achieving the goals of the government. Third, the authors also mention a special dispensation whereby firms in highly desirable and specialized industries such as telecommunications or pharmaceuticals are contractually guaranteed repatriation of funds at a greater rate than normal.