Upgrade to remove ads
Only $35.99/year

Ch 7 Review MGMT 4315

Terms in this set (35)

Budgeting and performance evaluation are critically linked
budget sets the performance criteria on which the operating units within the company will be evaluated at the end of the budget period
If budget is to motivate the employees and to help create goal congruence between the employees and the organization, then it must
set appropriate criteria and provide reasonable targets for the employees to attain
budgeting and performance evaluation issue specific to companies engaged in global business relates to
choice of appropriate currency for measuring the performance of foreign subsidiaries
choice of appropriate currency
results could be very different under the two currencies
If the subsidiary's current role is to contribute to the overall profits of the MNC, then it is appropriate to use the
the parent's currency to measure performance
if the subsidiary's current role is something different (i.e., research and development), then it might be appropriate to use
the local currency
need to link responsibility and authority is also relevant in
the arena of transfer pricing policies used within an organization for its intrafirm activity
transfer price
is the price at which goods or services are transferred between affiliated entities within an organization
Transfer prices can be
market based (i.e., arm's length), cost based, or negotiated
The type of transfer pricing policies within an organization impacts
the revenues (of selling divisions) and costs (of buying divisions) and, therefore, can have a nontrivial effect on the profitability of each subsidiary engaged in intrafirm trade
Research findings indicate
1) the average length of time spent in preparing budgets was greater in the United States than in Japan, 2) U.S. firms tended to focus on profitability measures of performance in their budgets (such as return on investment), while Japanese firms tended to focus on sales volume and market share 3) U.S. firms used budget variances primarily to evaluate division managers' forecasting ability and management ability, while Japanese firms used budget variances primarily for the timely recognition of problems and to improve the next period's budget, and 4) the compensation and promotion of American managers was more likely to be impacted by their budget performance than was those of Japanese managers. It was remarkable to see how differently U.S. and Japanese firms rated return on investment (ROI) as a performance evaluation measure in both these studies (68 percent for U.S. firms versus 3 percent for Japanese firms in the Bailes and Assada study; 75 percent for U.S. firms versus 7 percent for Japanese firms in the Shields et al. study).
Shareholder wealth is created when
the MNC makes an investment that will return more (in present value terms) than what it costs
capital projects globally
These investments will determine the firm's competitive position in the marketplace, its overall profitability, and, ultimately, its long-run survival
Capital budgeting for a foreign project uses the same
net present value (NPV) discounted cash flow model used in domestic capital budgeting
multinational capital budgeting is considerably more complex due to the consideration of a number of additional factors
Parent versus,Project Cash Flows, Financing versus operating cash flows, Foreign currency fluctuations, Long-term inflation rates, Subsidized financing,Political risk, Terminal values
Financial risk management is concerned with
minimizing the company's exposure to changes in currency exchange rates, interest rates, and credit risks related to customer receivables; placement of liquid funds; and trading in derivative instruments
Managers who refrain from active management of foreign exchange risk may do so for a variety of reasons
they might consider the use of risk management instruments such as forward contracts, options, and futures as speculative and rationally argue that these activities lie outside the company's realm of expertise
three main types of foreign exchange exposures
1) translation exposure (alternatively referred to as accounting exposure), 2) transaction exposure, and 3) economic exposure (also known as operating exposure).
The growth in the global flow of goods and services and the increase in cross-border mergers and acquisitions have
dramatically increased the volume of intrafirm trade (i.e., transactions between related firms in one or more countries).
Transfer pricing
relates to the pricing of goods and services that change hands between entities engaged in intrafirm trade.
numerous objectives of transfer pricing
avoiding foreign currency restrictions and quotas, minimizing taxes and tariffs, minimizing exchange risks, increasing share of profits from joint ventures, bypassing profit repatriation restrictions, and optimizing managerial performance evaluation and reward systems
Assuming that the employees are evaluated based on the profitability of their division, employees of the buying division would prefer
lower intrafirm transfer price while employees of a selling division would prefer a higher intrafirm transfer price
corporate tax compliance division would prefer
a transfer price that is a reasonable reflection of an arm's-length transaction in the event that the firm is audited by the tax authorities
Domestic government bodies include
the national and local tax collecting agencies, the customs agency, the legislative body, and other regulatory and enforcement agencies
domestic tax collecting agencies are interested in collecting their "fair share" of taxes
to ascertain that the firm is not using transfer pricing as an income-shifting mechanism to inappropriately reduce its domestic tax liability
transfer pricing methods can be split into three categories
1) market-based methods, 2) cost-based methods, and 3) negotiated transfer prices
Market-based transfer pricing methods require the existence of comparable products on the market
Since this approach is most reflective of arm's-length pricing, it presents fewer challenges in administering since it is easy to defend to various constituents
The main transfer pricing methods for sales and transfer of tangible items include
The Comparable Uncontrolled Price Method (CUP), The Resale Price Method (RPM) , The Cost-Plus Method (CPLM) ,The Comparable Profits Method (CPM), The Profit-Split Method (PSM).
advance pricing agreement (APA)
is a mechanism used to settle, and even preempt, a transfer pricing dispute with a tax authority
APA is a
binding agreement between a company and a tax authority under which the tax authority will accept an agreed transfer pricing method used by a company for a fixed term
transfer pricing is one of the ethical dilemmas confronting MNEs
notably when local practices accept ethically questionable behavior such as "abusive" transfer pricing that is not based on arms-length pricing
Companies are mostly restricted to the degree that they can vary the transfer price
Where national regulations require an arm's length standard, a company has to follow that standard in setting its transfer price
Managers in MNCs must deal with more diverse information than those in single-country firms because
information from foreign affiliates and from the parent must be combined (e.g., preparing consolidated financial statements)
main areas of differences between MNCs and domestic firms in IT are
1) factors affecting system design, 2) factors affecting system operation, and 3) factors affecting regulation.
Foreign Corrupt Practices Act (FCPA)
includes two distinct provisions, the first prohibiting bribery of foreign government officials and the second requiring adequate internal control over books and records
Other sets by this creator