Multinational Financial System

The Multinational Companies are the companies established with a view to produce and sell goods and services in more than one country. Mainly the parent company or the company registered initially will be situated in the home country where it was registered and they may have their branches in the other countries and thereby they function or otherwise, the parent company will purchase the majority of the shares of the other company or companies situated in other countries and convert them as its subsidiary company or companies and through them the parent company will sell their products of goods and services. The Multi National Companies (MNCs) are entirely different from the Domestic Companies. They have vast financial resources, enlarged scope of their operations, ability to mobile their funds, sophisticated departments, strong managerial backup, internal financial transfer mechanisms etc. Generally, the domestic companies cannot compete the MNCs in any way. These special characteristics collectively are called as the multinational financial system. According to Prof Alan C Shapiro, the ability to transfer funds and to reallocate profits internally presents multinationals with three different types of arbitrage opportunities.

• Tax arbitrage: MNCs can reduce their tax burden by shifting profits from units located in high-tax nations to those in lower-tax nations. Or they may shifts profits from units in a taxpaying position to those with tax losses.
• Financial market arbitrage: By transferring funds among units, MNCs may be able to circumvent exchange controls, earn higher risk-adjusted yields on excess funds, reduce their risk adjusted cost of borrowed funds, and tap previously unavailable capital sources.
• Regulatory system arbitrage: when subsidiary profits are a function of government regulations.

The MNCs can be visualized as unbundling the total flow of funds between each pair of affiliates into separate components that are associated with resources transferred in the form of products, capital services and technology. The different channels available to the multinational enterprise for moving money and profits internationally include transfer pricing, fee and royalty adjustments, leading and lagging, inter-company loans,, dividend adjustment, and investing in the form of debt versus equity.