multinational organizations management control systems chapter 15 september 2014iwan pudjanegara...
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Iwan Pudjanegara SE., MM. 1
Multinational Organizations
Management Control Systems
Chapter 15
September 2014
Iwan Pudjanegara SE., MM. 2
Cultural Differences
4 Dimensions of Cultural Differences1) Power Distance : the extent to which
power is unequally distributed and centralized.• High power distance cultures: Philippines,
Venezuela, and Mexico.• Low power distance cultures: Israel,
Denmark, and Austria
September 2014
Iwan Pudjanegara SE., MM. 3
Cultural Differences
2) Individualism/Collectivism : the extent to which people define themselves as individuals or as part of a larger group.• Highly individualistic cultures: USA,
Australia, and Great Britain.• Highly collectivistic cultures: Saudi Arabia,
Venezuela, and Peru.
September 2014
Iwan Pudjanegara SE., MM. 4
Cultural Differences
3) Uncertainty Avoidance : the extent to which people feel threatened by ambiguous situations. (ambiguous=dua arti)
• Highest uncertainty avoidance cultures: Japan, Portugal, and Greece.• Lowest uncertainty avoidance cultures:
Singapore, Hongkong, and Denmark.
September 2014
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Cultural Differences
4) Masculinity/Feminity : the extent to which dominant values emphasize assertiveness (=ketegasan) and materialism (“masculine”) vs concern for people and quality of life (“feminine”).• Highly “masculine” cultures: Austria,
Switzerland, and Italy.• Highly “feminine” cultures: Sweden, Norway,
Netherlands, and Denmark.September 2014
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Transfer Pricing
TaxationGovernment RegulationsTariffsForeign Exchange ControlsFunds AccumulationJoint Ventures
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Pricing Methods
1. Comparable Uncontrolled Price Method
2. Resale Price Method
3. Cost-plus Method
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Pricing Methods
Comparable Uncontrolled Price Method
Transfer Price = Price paid in comparable uncontrolled sales +/- Adjustments
September 2014
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Pricing Methods
Resale Price MethodTransfer Price = Applicable Resale Price – Appropriate Markup +/- AdjustmentsAppropriate markup = Applicable resale price x
Appropriate markup percentageAppropriate markup percentage = Percent of Gross
Profit earned by the buyer/reseller or by another party in an uncontrolled purchase and resale similar to controlled resale
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Pricing Methods
Cost-plus Method
Transfer Price = Costs + Appropriate markup +/- AdjustmentsAppropriate markup = Costs x Appropriate
Gross Profit PercentAppropriate Gross Profit Percent = gross profit
percent earned by seller or another party on uncontrolled sales similar to controlled sale
September 2014
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Exchange Rates*
An Exchange Rate : the price of one currency in terms of another currency.
An exchange rate can be expressed as : • the number of units of the home currency that
are needed to buy one unit of foreign currency : Direct Quote*. • The number of units of the foreign currency
that are needed to buy one unit of the home currency : Indirect Quote*.
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Exchange Rates
Exchange rates that usually quoted : Nominal Exchange Rates.
The nominal exchange rate that prevails on a given day : Spot exchange rate.
The spot exchange rate after adjusting for inflation differentials between two countries: Real exchange rate.
The exchange rate known today at which transaction can be entered into for completion at some future time: Forward exchange rate.
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Exchange Rate Exposure
Translation exposure: the Income Statement and Balance Sheet on MNEs to changes in nominal exchange rates.
Transaction exposure: the exchange rate exposure that the firm has in its cross-border transactions when such transactions are entered into today but payment to settle the transaction are made at some future time.
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Exchange Rate Exposure
Economic exposure: the exchange rate exposure of the firm’s cash flows to real exchange rate changes.Economic exposure is also referred to
as operating exposure or competitive exposure to exchange rates.
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Management Considerations
In designing performance evaluation systems of MNE subsidiaries, companies could use the following guidelines :• Subsidiary managers should not be held
responsible for translation effects.Compare budgets and actual results using
the same metric and isolate inflation-related effects through variance analysis.
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Management Considerations
• Transaction effects are best handled through centralized coordination of the MNE’s overall hedging needs.Cheaper and simplerPrevents the subsidiary manager from
becoming a foreign exchange rate forecaster and speculator.
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Management Considerations
• The subsidiary manager should be held responsible for the dependence effects of exchange rates resulting from economic exposure.
• Evaluation of the subsidiary as a basis for a decision to locate operations in a country or to relocate operations from a country should reflect the consequences of translaltion, transaction, and economic exposure.
September 2014