What are blocked funds? List and explain two of the three methods the authors list in this chapter for dealing with blocked funds.
When a government runs short of foreign exchange and cannot obtain additional funds through borrowing or attracting new foreign investment, it usually limits transfers of foreign exchange out of the country, a restriction known as blocked funds. In theory this does not discriminate against foreign-owned firms because it applies to everyone; in practice foreign firms have more at stake because of their foreign ownership. Depending on the size of a foreign exchange shortage, the host government might simply require approval of all transfers of funds abroad, thus reserving the right to set a priority on the use of scarce foreign exchange in favor of necessities rather than luxuries. In very severe cases the government might make its currency nonconvertible into other currencies, thereby fully blocking transfers of funds abroad. In between these positions are policies that restrict the size and timing of dividends, debt amortization, royalties, and service fees.
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