What is the most important purpose for a foreign affiliate to have a well-defined dividend policy?

What will be an ideal response?

Answer: It is often advantageous for a multinational corporation to have an established dividend policy that it can easily defend if government officials of the host country question it to avoid problems repatriating profits from abroad. Without such a policy or a history of dividend payments, an MNC may have difficulty explaining the reason for any given year's dividend payment.

If the host country is having difficulty financing its balance of payments, it may appear to the government that the MNC's dividend payment is actually an attempt by the company to export capital from the country in a time of crisis. Even if a government blocks the dividends and no transfers can be made, many firms find it to their advantage to at least declare a dividend in order to establish its validity in case the government later relaxes its foreign exchange restrictions.

Some corporations also set a "common" dividend repatriation rate for all their foreign affiliates in different countries. This approach establishes that the shareholders of the parent corporation demand a certain share of the earnings of all of the corporation's foreign subsidiaries and are not merely trying to take capital out of one particular country.