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We present a model that explains how repatriation restrictions can increase or decrease a multinational's capital investment in and technology transfer to its subsidiary. Past remittance restrictions influence the multinational's expectation of current and future repatriation policies which affect its operations. We show that the model can capture the flows of United States multinational's capital and technology in response to various forms of Brazilian repatriation restrictions seen in the eighties. By comparing steady state level effects of the restrictions, we show countries should expect an inflow of foreign direct investment with the abolishment of restrictions, not an outflow as some countries fear.

For the past decade more than 50% of the members of the International Monetary Fund have imposed restrictions suspending remittances by Multinational Enterprises (MNEs). These restrictions take the form of blocking subsidiaries’ remittance of capital, dividends, royalties and fees and/or profit back to their headquarters for days, months or years. Surveys and empirical data suggest that these restrictions affect MNE's operations. Wallace (1990), in a survey of 300 MNEs, finds repatriation restrictions to be one of the top three factors affecting direct investment decisions. Hines (1997) finds these restrictions have an econometrically significant impact on the actions of MNEs. This paper provides a theoretical and quantitative look at how repatriation restrictions can increase or decrease an MNE's capital investment in and technology transfer to its subsidiary. Understanding the link between capital flows and repatriation policies is important since countries who impose restrictions are often concerned about maintaining a minimum level of foreign exchange reserves and their current stock of foreign direct investment. Since technology transferred by MNEs is diffused into the local economy (see Teece, 1976), it is of interest to know how repatriation policies influence the stock of technology available to domestic firms. Past research in this area has focused on capital account liberalizations’ effect on capital flows.1 This paper differs from their analysis in three important ways. First, this research focuses on the actions of the MNE as restrictions vary through time. Although other work has explained why a country generally experiences a capital inflow as restrictions are lifted, we focus on explaining how capital investment may increase or decrease in the country when restrictions are enforced. Second, this work not only considers the effect remittance policies have on capital flows but, we analyze the effect it has on technology transfers. Third, besides providing the theoretical underpinnings of the analysis, we quantify the effect repatriation policies have on capital and technology flows. The theoretical analysis provides intuition for how movements in repatriation restrictions affect the MNE's activities. We show that changes in government restrictions, which alter the MNE's belief about the expected present discounted value of their remittance, can cause the MNE to reinvest in the subsidiary and wait out the restriction or, cause the MNE to get funds out of the subsidiary immediately. Technology transfer to the subsidiary may increase or decrease as government restrictions affect the MNE's valuation of the marginal benefit of an additional unit of technology used in the subsidiary. It is the MNE's belief about the enforcement of current and future restrictions that increase or decrease technology and capital flows. We quantify the effect of repatriation policies in three ways. First, through impulse responses, we measure how the imposition of restrictions causes capital investment and technology transfer to deviate from their long run mean values. We illustrate that different forms of restrictions, partial versus full blocking of funds, can cause tremendously different dynamic effects on these flows. Second, focusing on United States (US) MNEs with subsidiaries in Brazil, we simulate the model with actual repatriation restrictions enforced through the eighties. The model can predict the level increases and decreases in foreign direct investment found in Brazil. Last, we compare the effects of various constant repatriation policies on the stock of foreign direct investment in a country. That is, we compare comparative static levels of the subsidiary's capital stock under the assumption that the government blocks a constant percent of remittance. Results suggest government can increase the flow of capital, not have capital flee their country as is sometimes feared, by lifting remittance restrictions. The remainder of the paper is structured as follows. Section 2 reviews repatriation policies of Brazil from the late 1970s through 1990. This highlights and motivates how MNEs’ capital and technology transfer decisions can vary from one episode of repatriation restrictions to another. The model is presented in Section 3. Section 4 provides the theoretical analysis while Section 5 provides quantitative measures of how remittance policies affect the MNE's operations. Concluding remarks are in Section 6.

This paper provides both a theoretical and quantitative look at how repatriation restrictions affect an MNE's operations of capital investment in and technology transfer to its subsidiary. It explains how an MNE's operations can increase during some episodes of repatriation restrictions and decrease during others. The MNE's actions are based on its expectations of current and future repatriation restrictions and exchange rates. A change in the government's repatriation policy alters the MNE's expectations of restrictions and, therefore, their operations. Quantitatively the model captures the effect of repatriation restrictions on capital investment in and technology transfer to the MNE subsidiaries by three means. Through impulse response functions we show how various forms of restrictions produce tremendously different effects on the flows of capital and technology as is evident in the data. Second, by focusing on US MNEs with subsidiaries in Brazil, we show that model simulations can capture foreign direct investment flows as seen in the eighties. Last, an analysis of steady state repatriation restrictions finds that a country who abolishes their repatriation policy will see an inflow, not outflow, of capital investment into their country. This is consistent with many countries who have recently lifted restrictions and the results apply to countries, like South Africa, who still allow the central bank to impose restrictions.