Multinational Organizations Management Control Systems Chapter 15 September 2014Iwan Pudjanegara SE., MM.1

Cultural Differences 4 Dimensions of Cultural Differences 1)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 2014Iwan Pudjanegara SE., MM.2

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 2014Iwan Pudjanegara SE., MM.3

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 2014Iwan Pudjanegara SE., MM.4

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 2014Iwan Pudjanegara SE., MM.5

Transfer Pricing  Taxation  Government Regulations  Tariffs  Foreign Exchange Controls  Funds Accumulation  Joint Ventures September 2014Iwan Pudjanegara SE., MM.6

Pricing Methods 1.Comparable Uncontrolled Price Method 2.Resale Price Method 3.Cost-plus Method September 2014Iwan Pudjanegara SE., MM.7

Pricing Methods Comparable Uncontrolled Price Method Transfer Price = Price paid in comparable uncontrolled sales +/- Adjustments September 2014Iwan Pudjanegara SE., MM.8

Pricing Methods Resale Price Method Transfer Price = Applicable Resale Price – Appropriate Markup +/- Adjustments Appropriate markup = Applicable resale price x Appropriate markup percentage Appropriate 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 September 2014Iwan Pudjanegara SE., MM.9

Pricing Methods Cost-plus Method Transfer Price = Costs + Appropriate markup +/- Adjustments Appropriate markup = Costs x Appropriate Gross Profit Percent Appropriate Gross Profit Percent = gross profit percent earned by seller or another party on uncontrolled sales similar to controlled sale September 2014Iwan Pudjanegara SE., MM.10

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*. September 2014Iwan Pudjanegara SE., MM.11

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. September 2014Iwan Pudjanegara SE., MM.12

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. September 2014Iwan Pudjanegara SE., MM.13

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. September 2014Iwan Pudjanegara SE., MM.14

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. September 2014Iwan Pudjanegara SE., MM.15

Management Considerations Transaction effects are best handled through centralized coordination of the MNE’s overall hedging needs. Cheaper and simpler Prevents the subsidiary manager from becoming a foreign exchange rate forecaster and speculator. September 2014Iwan Pudjanegara SE., MM.16

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 2014Iwan Pudjanegara SE., MM.17