Most international cash management functions use central depositories as tools in their procedures. Having a central depository has certain advantages to MNEs. This paper looks at central depositories, their advantages to MNEs and free trades zones.
A central depository refers to a computerized database with information that relates to registered brokers. Central depositories contain employment history, licensing information, exam and test scores and disciplinary actions.
Central depositories have certain advantages to MNEs. First, a central depository provides a ready and cheap access to information because it is located in a world money center. It can reduce the size of total precautionary funds for an MNE. For example, where an imperfectly correlated need for precautionary fund exists, the central pool of funds tends to minimize. Secondly, central depository allows firms to manage funds that maximize the benefit for the firm rather than affiliates. Typically, a firm will require affiliates to maintain cash balances necessary for transactions and forward the rest of money to a centralized location. Thirdly, central depositories provide a location for funds that provide significance for cost purposes, for instance, low taxes, access to information or physical, central presence.
Free-trade zones refer to locations within countries that allow foreign companies to assemble, store or manufacture products without paying duty until after the distribution of products. For example, Nigeria Oil Company can transport oil to the United States of America and store it at a facility in New York. This allows the company to collect an inventory of oil in the states and meet customer needs, but they do not pay any import duty unless the oil gets out of a free-trade zone (Limited, 2003).
Second, Mercedes motors can assemble their motors in Alaska without paying import duty. The duty assessment becomes low because it coves individual parts, as opposed to a finished product. Thirdly, several manufacturing companies can set up their shops in an area meant for foreign manufacture. The manufactured goods get to other countries without paying any duty.
Therefore, countries can benefit from free-trade zones by exempting cost from import duty. This helps countries and firms engage in international trade without difficulty.
Cash depository and free trade zones make international businesses and manufacturing become cheap. Foreign firms, which use cash depository and free trade zones benefit significantly, in terms of cost cuts.