INTERNAL SOURCES OF FUNDS

INTERNAL SOURCES OF FUNDS
If a firm wants to expand operations or needs additional working capital, it can look to outside sources or to sources within the firm. In the case of the MNE, the complexity of internal sources is magnified because of the number of related affiliates and the diversity of environments in which they operate. "Funds" can have many different definitions, and the term usually means cash. However, the term funds is used in a much broader sense in business and generally refers to working capital, that is, the difference between current assets and current liabilities.
Figure 20.1 illustrates a situation involving a parent firm with two foreign subsidiaries. The parent, as well as the two subsidiaries, may be increasing funds through normal operations. These funds must be used on a firmwide basis. One possible way is through loans: The parent can loan funds directly to the French subsidiary or guarantee an outside loan to the Brazilian subsidiary.
Additional equity capital from the parent is another source of funds for the subsidiary. Funds also can go from subsidiary to parent. The subsidiary could declare a dividend to the parent as a return on capital or could directly loan cash to the parent. If the subsidiary declares a dividend to the parent, the parent could lend the funds back to the subsidiary. That allows the parent to recapitalize its foreign investment in order to shift income from the subsidiary to the parent. The interest payment to the parent would be additional

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