Transcript
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Multinational BudgetingMultinational Budgeting
andand
Control SystemsControl Systems
Fall, 2006Fall, 2006
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Multinational Budgeting andMultinational Budgeting and
Control SystemsControl Systems
Planning and control are not new...Planning and control are not new...
domestic corporations have beendomestic corporations have been
doing them for years.doing them for years.
However, the development ofHowever, the development of
comprehensive MNC internationalcomprehensive MNC international
planning and control systems withplanning and control systems with
long-range strategic focus is new.long-range strategic focus is new.
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Examples of Variables Calling forExamples of Variables Calling for
Specialized KnowledgeSpecialized Knowledge
Foreign currency exchange risks,Foreign currency exchange risks, Restrictions on fund remittancesRestrictions on fund remittances
across national borders,across national borders,
Diverse national tax laws,Diverse national tax laws,
Interest rate differentials betweenInterest rate differentials between
various national financial markets,various national financial markets,
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The global shortage of money capital,The global shortage of money capital,
The effects of worldwide inflation on enterpriseThe effects of worldwide inflation on enterprise
assets, earnings, and capital costsassets, earnings, and capital costs
A direct response to such environmentalA direct response to such environmentalcomplexities is the emergence of thecomplexities is the emergence of the
international financial management function.international financial management function.
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Managerial AccountingManagerial Accounting
Managerial accounting issues may beManagerial accounting issues may bedivided into two broad areas:divided into two broad areas:
(1) financial planning and(1) financial planning and
(2) financial control(2) financial control
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These may be broken into specific subtopics,These may be broken into specific subtopics,
includingincluding strategic planningstrategic planning
foreign investment analysis (capital budgeting)foreign investment analysis (capital budgeting)
foreign exchange risk managementforeign exchange risk management
management information systems and controlmanagement information systems and control
profitability analysisprofitability analysis
performance evaluation of foreign operationsperformance evaluation of foreign operations
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Strategic PlanningStrategic Planning
As a process, strategic planning involvesAs a process, strategic planning involves
four critical dimensions:four critical dimensions:
1) Identifying key factors relevant to the1) Identifying key factors relevant to the
future progress of the companyfuture progress of the company
2) Formulating appropriate techniques to2) Formulating appropriate techniques toforecast future development states andforecast future development states and
assessing the company's ability toassessing the company's ability to
adapt to or exploit such futureadapt to or exploit such future
developmentsdevelopments
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3) Developing data sources to support3) Developing data sources to support
strategic choices, andstrategic choices, and
4) Translating selected options into4) Translating selected options into
specific courses of action.specific courses of action.
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Complexities in DevelopingComplexities in Developing
Global Business StrategiesGlobal Business Strategies
Planning in the international arena can bePlanning in the international arena can be
more complex than in the domesticmore complex than in the domestic
arena.arena.
The international environment may beThe international environment may bemore susceptible to change than themore susceptible to change than the
domestic environment, and this coulddomestic environment, and this could
severely complicate business planning,severely complicate business planning,
particularly long-range planning.particularly long-range planning. This makes planning even more critical inThis makes planning even more critical in
the international environment.the international environment.
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Variables Important in GlobalVariables Important in Global
PlanningPlanning
Economic and legal environments differEconomic and legal environments differ
from country to country.from country to country. Each country has its own businessEach country has its own business
regulatory framework, tax system, financialregulatory framework, tax system, financial
reporting requirements, inflation rates, andreporting requirements, inflation rates, and
currency with fluctuation exchange rates.currency with fluctuation exchange rates.
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Political environments are differentPolitical environments are differentworldwide.worldwide. Often the political system has aOften the political system has a directdirect
impact on the business operations.impact on the business operations. Lack of political stability increases theLack of political stability increases the
political risk for foreign-based enterprises,political risk for foreign-based enterprises,as does the abrupt change inas does the abrupt change in
governmental policies in countries that dogovernmental policies in countries that donot have a long-standing tradition of freenot have a long-standing tradition of freemarket economy.market economy.
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Variables Important in GlobalVariables Important in Global
PlanningPlanning
Labor considerations are different forLabor considerations are different for
each country.each country. Labor laws may have an impact on theLabor laws may have an impact on the
ability of a multinational company to hireability of a multinational company to hireand terminate workers.and terminate workers.
Labor productivity and the availability ofLabor productivity and the availability of
skilled workforce vary in different parts ofskilled workforce vary in different parts of
the world.the world.
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Language and cultural differences mayLanguage and cultural differences may
create problems in communicationcreate problems in communication
strategies and plans.strategies and plans.
Some cultures make the acceptance ofSome cultures make the acceptance ofplanning difficult because of a cultural senseplanning difficult because of a cultural sense
of fatalism regarding the future.of fatalism regarding the future.
The degree of reliance on trust and on long-The degree of reliance on trust and on long-
standing traditions also varies amongstanding traditions also varies amongcultures.cultures.
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Formulating InternationalFormulating International
Business StrategiesBusiness Strategies
MNCs must answer questions such as:MNCs must answer questions such as: In which countries should the companyIn which countries should the company
expand or curtail its operations?expand or curtail its operations?
What should be the scope of operationsWhat should be the scope of operationsin a new country?in a new country? Should it be a sales operation?Should it be a sales operation? A manufacturing operation? Or both?A manufacturing operation? Or both?
Should the entry in a new country be inShould the entry in a new country be inthe form of a joint venture or should itthe form of a joint venture or should itbe as a wholly-owned subsidiary?be as a wholly-owned subsidiary?
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Added RiskAdded Risk
The strategic planning process of aThe strategic planning process of a
multinational corporation takes intomultinational corporation takes into
account the external as well as theaccount the external as well as the
internal environmental factors of ainternal environmental factors of acompany.company.
Prediction of external environmentalPrediction of external environmental
factors is difficult even within thefactors is difficult even within the
boundaries of one nation.boundaries of one nation. The task is inherently more complexThe task is inherently more complex
when many countries are involved.when many countries are involved.
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Geographical Distance andGeographical Distance and
Planning HorizonPlanning Horizon
Most foreign affiliates of MNCs areMost foreign affiliates of MNCs are
farther removed geographically fromfarther removed geographically from
central headquarters than the domesticcentral headquarters than the domesticcompanies and affiliates are;companies and affiliates are;
This can also present problems for theThis can also present problems for the
budgeting process.budgeting process.
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The time required for approval of theThe time required for approval of thebudget may need to be lengthened, andbudget may need to be lengthened, and
great uncertainty or instability in somegreat uncertainty or instability in somenations may necessitate that a highnations may necessitate that a highpriority be given to reducing the timepriority be given to reducing the timehorizon for planning.horizon for planning.
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A great distance between the operating units ofA great distance between the operating units of
a MNC may lead to severe problems anda MNC may lead to severe problems and
complication in communication and logistics, ascomplication in communication and logistics, as
there may be increased transportation costs,there may be increased transportation costs,
longer delivery times, and a greater frequencylonger delivery times, and a greater frequency
of delays in the intracompany movement ofof delays in the intracompany movement of
materials and other goods.materials and other goods.
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Frequency of RevisionFrequency of Revision
Uncertainty in the international environmentUncertainty in the international environmentusually means that the budgets of foreignusually means that the budgets of foreigndivisions need to be evaluated and reviseddivisions need to be evaluated and revisedmore frequentlymore frequentlythan do those of domesticthan do those of domesticdivision.division.
Planning requires, traditionally, a stablePlanning requires, traditionally, a stablebasis on which to build assumptions andbasis on which to build assumptions andforecasts.forecasts.
Where such a stable basis does not exist,Where such a stable basis does not exist,
the planner must look for other means ofthe planner must look for other means oflocating the company's position and oflocating the company's position and ofsetting the course for the future.setting the course for the future.
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Management Quality andManagement Quality and
Subsidiary SophisticationSubsidiary Sophistication
A potential problem facing the multinationalA potential problem facing the multinational
corporation is the quality of management atcorporation is the quality of management at
the foreign affiliate.the foreign affiliate.
Some companies use foreign nationals to staffSome companies use foreign nationals to staffthe top management positions in foreignthe top management positions in foreign
subsidiaries.subsidiaries.
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Many countries discourage the use ofMany countries discourage the use offoreign expatriates, and some haveforeign expatriates, and some havepassed laws restricting them.passed laws restricting them.
Even if the foreign nationals are fullyEven if the foreign nationals are fullyversed in the customs and language ofversed in the customs and language ofthe local country, there may still bethe local country, there may still beproblems in communication andproblems in communication and
differences in management practices,differences in management practices,and directives may be misunderstood.and directives may be misunderstood.
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Management Quality andManagement Quality and
Subsidiary SophisticationSubsidiary Sophistication
There may be important differencesThere may be important differences
among nationalities in:among nationalities in: the attitudes toward risk;the attitudes toward risk;
relation to government;relation to government;
delegation of authority;delegation of authority;
disclosure of information and ideas;disclosure of information and ideas;
acceptance of criticism and authority;acceptance of criticism and authority;
openness in discussing business problems;openness in discussing business problems; and methods of dealing with lendingand methods of dealing with lending
institutions, suppliers, and various serviceinstitutions, suppliers, and various service
organizations.organizations.
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Management Quality andManagement Quality and
Subsidiary SophisticationSubsidiary Sophistication
These differences must be consideredThese differences must be considered
when developing the managementwhen developing the management
control system.control system.
No control system is going to be of anyNo control system is going to be of anybenefit to a company if it cannot bebenefit to a company if it cannot be
comprehended and accepted by thecomprehended and accepted by the
people to whom the budget pertains.people to whom the budget pertains.
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It is unreasonable to expect that allIt is unreasonable to expect that all
subsidiaries will maintainsubsidiaries will maintain
homogeneous technology andhomogeneous technology and
functional skills, or will operate infunctional skills, or will operate inlocal markets and operatinglocal markets and operating
environments of the same relativeenvironments of the same relative
sophistication.sophistication.
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Other Environmental FactorsOther Environmental Factors
Environmental factors can affect theEnvironmental factors can affect the
MNCs control system.MNCs control system.
Government regulations andGovernment regulations and
restrictions on the movement ofrestrictions on the movement ofgoods and personnel across nationalgoods and personnel across national
boundaries can complicate theboundaries can complicate the
planning and control process.planning and control process.
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Foreign Investment AnalysisForeign Investment Analysis
The decision to invest abroad is a principal meansThe decision to invest abroad is a principal meansof implementing the global strategy of aof implementing the global strategy of a
multinational company.multinational company.
Direct investment beyond national boundaries,Direct investment beyond national boundaries,
however, typically involves an enterprise in ahowever, typically involves an enterprise in a
commitment of enormous sums of capital to ancommitment of enormous sums of capital to an
uncertain future.uncertain future.
Risk is compounded by an unfamiliar internationalRisk is compounded by an unfamiliar international
environment that is distant and complex and in aenvironment that is distant and complex and in a
constant state of change.constant state of change.
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Foreign Investment AnalysisForeign Investment Analysis
The capital budgeting frameworkThe capital budgeting framework
compares the benefits and costs of anycompares the benefits and costs of any
contemplated activity.contemplated activity.
While capital expenditures of sufficientWhile capital expenditures of sufficientsize normally constitute part of a firm'ssize normally constitute part of a firm's
strategic plans, capital budgeting analysisstrategic plans, capital budgeting analysis
helps to ensure that the implementation ofhelps to ensure that the implementation of
strategic plans is financially feasible andstrategic plans is financially feasible and
desirable.desirable.
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Foreign Investment AnalysisForeign Investment AnalysisThe following all introduce aThe following all introduce a
degree of complexity not usuallydegree of complexity not usuallyfound under more homogeneousfound under more homogeneous
and stable domestic conditions.and stable domestic conditions.
Different tax laws and accountingDifferent tax laws and accountingmeasurement rules,measurement rules,
differential rates of inflation,differential rates of inflation,
risks of expropriation ,risks of expropriation , exchange controls,exchange controls,
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fluctuating exchange rates,fluctuating exchange rates,
restrictions on the transferability ofrestrictions on the transferability of
foreign earnings,foreign earnings,
language and intercultural differenceslanguage and intercultural differences Because of these complications,Because of these complications,
modification of traditional investmentmodification of traditional investment
planning models is necessary.planning models is necessary.
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Foreign Investment AnalysisForeign Investment Analysis
Specifically, adaptations haveSpecifically, adaptations have
occurred in 3 major areas:occurred in 3 major areas:
1) determination of the relevant return1) determination of the relevant return
from a multinational investmentfrom a multinational investment2) measurement of expected cash2) measurement of expected cash
flows, andflows, and
3) calculation of the multinational cost3) calculation of the multinational costof capitalof capital
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Relevant ReturnRelevant Return
Should the international financialShould the international financial
manager evaluate expected investmentmanager evaluate expected investment
returns from the perspective of thereturns from the perspective of the
foreign project or that of the parentforeign project or that of the parentcompany?company?
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Returns could differ dramaticallyReturns could differ dramaticallybecause ofbecause of governmental restrictions on repatriation ofgovernmental restrictions on repatriation of
earnings and capitalearnings and capital license fees, royalties, and other paymentslicense fees, royalties, and other payments
that provide income to the parent but arethat provide income to the parent but areexpenses from the project viewpointexpenses from the project viewpoint
differential rates of national inflationdifferential rates of national inflation changing foreign currency valueschanging foreign currency values and differential taxes, to name a few...and differential taxes, to name a few...
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Relevant ReturnRelevant Return
One might argue that, ultimately, return and riskOne might argue that, ultimately, return and riskconsiderations of a foreign investment should be onconsiderations of a foreign investment should be on
behalf of the parent company's stockholders.behalf of the parent company's stockholders.
This is consistent with domestic capital budgetingThis is consistent with domestic capital budgeting
doctrine, as cash flows to the parent ultimatelydoctrine, as cash flows to the parent ultimately
provide the basis for dividend payments and otherprovide the basis for dividend payments and other
uses that support parent company objectives.uses that support parent company objectives.
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Relevant ReturnRelevant Return
On the other hand, arguments can beOn the other hand, arguments can bemade that such an ethnocentric posture ismade that such an ethnocentric posture is
no longer appropriate.no longer appropriate.
Investors in the parent company areInvestors in the parent company are
increasingly drawn from a worldwideincreasingly drawn from a worldwidecommunity, so investment objectivescommunity, so investment objectives
should reflect a more cosmopolitanshould reflect a more cosmopolitan
outlook than before.outlook than before.
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Funds generated abroad tend to beFunds generated abroad tend to be
reinvested there rather than repatriated toreinvested there rather than repatriated to
the parent, so returns from a host countrythe parent, so returns from a host country
perspective may be more appropriate.perspective may be more appropriate. Emphasis on local project returns isEmphasis on local project returns is
consistent with the objective of maximizingconsistent with the objective of maximizing
consolidated earnings of the group.consolidated earnings of the group.
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Relevant ReturnRelevant Return
A dual rate of return calculation wouldA dual rate of return calculation would
provide a basis for evaluating thisprovide a basis for evaluating this
component of the capital budgetingcomponent of the capital budgeting
process.process. However, the numbers cannot be lookedHowever, the numbers cannot be looked
at without considering the environment.at without considering the environment.
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For example:For example: Would the project rate of return calculations reallyWould the project rate of return calculations really
reflect the host country's opportunity costs?reflect the host country's opportunity costs? Are the expected returns limited to projected cashAre the expected returns limited to projected cash
flows or are there additional social externalities to beflows or are there additional social externalities to beconsidered?considered? Can externalities be measured?Can externalities be measured?
Does a foreign investment require any specialDoes a foreign investment require any special
overhead expenditures by the host country?overhead expenditures by the host country?
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Measurement of Cash FlowsMeasurement of Cash Flows
An issue with predicting cash flowsAn issue with predicting cash flowsis the impact of changing pricesis the impact of changing prices
and fluctuating currency values onand fluctuating currency values on
expected foreign currency returns.expected foreign currency returns. A parent company is concernedA parent company is concerned
with the parent-currency utility ofwith the parent-currency utility of
foreign cash flows.foreign cash flows.
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Estimates of future inflation and theEstimates of future inflation and the
relationship between inflation andrelationship between inflation and
exchange rates used to convertexchange rates used to convert
foreign cash flows to parent currencyforeign cash flows to parent currencyare needed.are needed.
Provisions relating to the taxation ofProvisions relating to the taxation of
foreign source income must also beforeign source income must also beconsidered.considered.
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Multinational Cost of CapitalMultinational Cost of Capital
Some factors that can influenceSome factors that can influencethe multinational cost of capitalthe multinational cost of capitalthat need to be considered:that need to be considered:
The availability of capital. TheThe availability of capital. Theavailability of capital is assumed inavailability of capital is assumed insome economies, but it may be ansome economies, but it may be animportant variable in animportant variable in aninternational context.international context.
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Segmented national capital markets. InSegmented national capital markets. Insome markets, required returns ofsome markets, required returns ofsecurities of comparable risk and returnsecurities of comparable risk and returncan differ, which may distort capital costs.can differ, which may distort capital costs.
Investor demands. Some investors mayInvestor demands. Some investors maybe willing to pay a premium for shares ofbe willing to pay a premium for shares ofan MNC because it can satisfy theiran MNC because it can satisfy theirinternational portfolio diversificationinternational portfolio diversificationneeds.needs.
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Multinational Cost of CapitalMultinational Cost of Capital
The cost of capital may beThe cost of capital may beadjusted to reflect foreignadjusted to reflect foreign
exchange and political risksexchange and political risks
International tax considerationsInternational tax considerations
may significantly affect the after-may significantly affect the after-
tax rate of returntax rate of return
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Financial disclosure may affect a company'sFinancial disclosure may affect a company's
access to international capital markets andaccess to international capital markets and
consequently, the cost of capitalconsequently, the cost of capital
Multinational operations may change a firm'sMultinational operations may change a firm's
optimal financial structure. Specifically, theoptimal financial structure. Specifically, the
added international availability of capital andadded international availability of capital and
the ability to diversify cash flows internationallythe ability to diversify cash flows internationally
may affect a firm's optimal debt ratio.may affect a firm's optimal debt ratio.
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Foreign Exchange ManagementForeign Exchange Management
RiskRisk
Foreign exchange risk refers to the riskForeign exchange risk refers to the riskof loss due to changes in theof loss due to changes in the
international exchange value of nationalinternational exchange value of national
currencies.currencies.
Fluctuating exchange rates can affectFluctuating exchange rates can affectthe values of a firm's foreign assets andthe values of a firm's foreign assets and
liabilities, its current profits and futureliabilities, its current profits and future
cash flows.cash flows.
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Now that foreign currencies of mostNow that foreign currencies of most
major industrial nations are relativelymajor industrial nations are relatively
free to find their own value levels infree to find their own value levels in
the international marketplace, thethe international marketplace, thefrequency of exchange rate changesfrequency of exchange rate changes
has almost become a dailyhas almost become a daily
occurrence, and the magnitude ofoccurrence, and the magnitude ofrate changes is significant.rate changes is significant.
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Foreign Exchange ManagementForeign Exchange Management
RiskRisk
In view of currency instability, a major objectiveIn view of currency instability, a major objectiveof financial management is to minimize financialof financial management is to minimize financial
losses.losses.
This requires:This requires:
forecasting exchange rate movementsforecasting exchange rate movements measuring a firm's exposure to the risks of lossmeasuring a firm's exposure to the risks of loss
caused by currency movementscaused by currency movements
designing strategies to hedge exchange risksdesigning strategies to hedge exchange risks
assessing performanceassessing performance
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Foreign Exchange ManagementForeign Exchange Management
RiskRiskThose supporting exchange rate forecasting asThose supporting exchange rate forecasting as
a valid risk management tool operate on thea valid risk management tool operate on the
premise that decisions makers in the firm havepremise that decisions makers in the firm have
the capability of outperforming the market as athe capability of outperforming the market as a
whole when it comes to predicting exchangewhole when it comes to predicting exchangerate behavior.rate behavior.
This is based on the existence of timely andThis is based on the existence of timely and
comprehensive information on which to basecomprehensive information on which to base
such predictions.such predictions.
F i E h M t
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Foreign Exchange ManagementForeign Exchange Management
RiskRisk This information includesThis information includes changeschanges in thein the
following:following: Inflation differentialsInflation differentials
Monetary policyMonetary policy
Balance of tradeBalance of trade
Balance of paymentsBalance of payments
International monetary reservesInternational monetary reserves
National budgetNational budget
Forward exchange quotationsForward exchange quotations
Unofficial ratesUnofficial rates
Behavior of related currenciesBehavior of related currencies
Interest rate differentials.Interest rate differentials.
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Translation ExposureTranslation Exposure
Translation exposure stems from theTranslation exposure stems from thepreparation of consolidated accounts.preparation of consolidated accounts.
Foreign currency assets and liabilitiesForeign currency assets and liabilities
that are translated at the current ratethat are translated at the current rate
are subject to exchange rate risk.are subject to exchange rate risk. Translation exposure is the differenceTranslation exposure is the difference
between the relevant assets andbetween the relevant assets and
liabilities.liabilities.
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Translation ExposureTranslation Exposure
A net asset position is called a positiveA net asset position is called a positiveexposure.exposure. Devaluation of the foreign currency relativeDevaluation of the foreign currency relative
to the domestic currency produces a loss.to the domestic currency produces a loss. A net liability position is called a negativeA net liability position is called a negative
exposure, and a devaluation of the foreignexposure, and a devaluation of the foreigncurrency relative to the domestic currencycurrency relative to the domestic currencyproduces a gain.produces a gain.
Hedging activities can minimize the risk.Hedging activities can minimize the risk. One possibility is to take steps to come upOne possibility is to take steps to come up
with equal foreign currency assets andwith equal foreign currency assets andliabilities.liabilities.
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Transaction ExposureTransaction Exposure
Transaction exposure refers to exchangeTransaction exposure refers to exchangegains and losses that rise from thegains and losses that rise from thesettlement of transactions denominated insettlement of transactions denominated inforeign currencies.foreign currencies.
Unlike translation gains and losses,Unlike translation gains and losses,transaction gains and losses have a directtransaction gains and losses have a directeffect on cash flows.effect on cash flows.
Again, once the exposure is identified,Again, once the exposure is identified,hedging activities can minimize the risk.hedging activities can minimize the risk.
One possibility is to hedge purchaseOne possibility is to hedge purchasecommitments with forward contracts.commitments with forward contracts.
M t I f ti S tM t I f ti S t
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Management Information SystemsManagement Information Systems
and Controland Control
Once questions of strategy have beenOnce questions of strategy have beendecided, attention generally focuses ondecided, attention generally focuses on
the areas of financial control andthe areas of financial control and
performance evaluation.performance evaluation.
as effectively and efficiently as possible.as effectively and efficiently as possible.
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This enables financial mangers to:This enables financial mangers to: Implement the global financial strategyImplement the global financial strategy
of the multinational enterpriseof the multinational enterprise
Evaluate the degree to which the chosenEvaluate the degree to which the chosenstrategies contribute to the attainmentstrategies contribute to the attainment
of enterprise objectivesof enterprise objectives
Motivate management and employeesMotivate management and employeesto achieve the financial goals of theto achieve the financial goals of the
enterpriseenterprise
Management Information SystemsManagement Information Systems
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Management Information SystemsManagement Information Systems
and Controland Control Goals and objectives often differ amongGoals and objectives often differ among
international subsidiaries and thus uniforminternational subsidiaries and thus uniformperformance criteria for all subsidiariesperformance criteria for all subsidiaries
would not be appropriate.would not be appropriate. A foreign subsidiary may be established toA foreign subsidiary may be established to
manufacture a component for othermanufacture a component for othersubsidiaries.subsidiaries.
Another subsidiary may be formed to takeAnother subsidiary may be formed to take
advantage of certain advanced technology inadvantage of certain advanced technology in
the host country.the host country. Yet a third subsidiary may be established toYet a third subsidiary may be established to
take advantage of tax incentives granted by thetake advantage of tax incentives granted by the
local government.local government.
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Different corporate objectives requireDifferent corporate objectives require
different performance evaluationdifferent performance evaluation
criteria.criteria.
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Foreign Corrupt Practices ActForeign Corrupt Practices Act
The FCPA is designed to eliminate 2The FCPA is designed to eliminate 2
problems..problems..
--poor internal controls--poor internal controls
--bribery--bribery
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SEC was astounded at the extent toSEC was astounded at the extent to
which corporate executives andwhich corporate executives and
employeesemployees falsified books andfalsified books and
recordsrecords and circumvented internaland circumvented internalcontrol systems to make foreigncontrol systems to make foreign
bribesbribes
The SEC response was the FCPAThe SEC response was the FCPA
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Problems for MNCsProblems for MNCs
Operate in a variety of countries withOperate in a variety of countries with
different business practices and lawsdifferent business practices and laws
Compete with companies from otherCompete with companies from other
countries that have different sets ofcountries that have different sets oflaws and customslaws and customs
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Bribes may be paid because theBribes may be paid because the
receiver has a strong market positionreceiver has a strong market position
or control over an aspect of theor control over an aspect of the
environment that impacts a firmsenvironment that impacts a firmsoperationsoperations
Sometimes payments are made inSometimes payments are made in
countries where this is an acceptedcountries where this is an acceptedbusiness practice, some in countriesbusiness practice, some in countries
where such payments are illegal.where such payments are illegal.
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Sometimes payments are madeSometimes payments are made
without the knowledge ofwithout the knowledge of
headquarters. If a fee is paid to aheadquarters. If a fee is paid to a
local agent, it may not known howlocal agent, it may not known howthat fee is then used.that fee is then used.
A local subsidiary may choose toA local subsidiary may choose to
play the game.play the game.
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Nature of PaymentsNature of Payments
The FCPA made it illegal to pay or toThe FCPA made it illegal to pay or to
offer to pay money or anything ofoffer to pay money or anything of
value to a foreign government officialvalue to a foreign government official
to get them to abuse their power toto get them to abuse their power tobenefit the firm for businessbenefit the firm for business
purposes.purposes.
The FCPA excluded greaseThe FCPA excluded greasepayments.payments.
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Grease paymentsGrease payments
Payments to foreign officials with littlePayments to foreign officials with little
decision-making authority and if they havedecision-making authority and if they have
little impact on the relations between the USlittle impact on the relations between the US
and the local government, assuming theand the local government, assuming the
payments are made to expedite trade.payments are made to expedite trade.
Parent may be exonerated if a NON-whollyParent may be exonerated if a NON-wholly
owned subsidiary engages in payments aboveowned subsidiary engages in payments above
the protest of the parent corporationthe protest of the parent corporation
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ExtortionExtortion
If a payment is construed asIf a payment is construed as
extortion, approval may be grantedextortion, approval may be granted
by the Justice Department in the USby the Justice Department in the US
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US Corporate ReactionUS Corporate Reaction
78% felt that the FCPA made it78% felt that the FCPA made it
difficult to sell in countries wheredifficult to sell in countries where
bribery is a way of lifebribery is a way of life
55% felt that unless the law was55% felt that unless the law wastough, small payments wouldtough, small payments would
escalate into major paymentsescalate into major payments
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PenaltiesPenalties
Fines of up to $1,000,000 for aFines of up to $1,000,000 for a
companycompany
Fines of up to $10,000 and five yearsFines of up to $10,000 and five years
in prison for an individual.in prison for an individual. Only civil, rather than criminal,Only civil, rather than criminal,
penalties for negligent orpenalties for negligent or
unintentional violators of the law.unintentional violators of the law.
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FCPAFCPA
A good accounting control system isA good accounting control system is
designed to safeguard corporatedesigned to safeguard corporate
assets and to enhance fairassets and to enhance fair
presentation of financial accountingpresentation of financial accountinginformation.information.
Firms were falsifying records toFirms were falsifying records to
disguise improper transactions. Somedisguise improper transactions. Sometransactions were not recorded.transactions were not recorded.
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Two IssuesTwo Issues
Payment of bribesPayment of bribes
Recording payment of bribes.Recording payment of bribes.
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