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Complexities And Issues In Financial Decision Making Of MNEs For International Financial Management Mcom Sem 4 Delhi University Notes

Complexities And Issues In Financial Decision Making Of MNEs For International Financial Management Mcom Sem 4 Delhi University Notes

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Complexities And Issues In Financial Decision Making Of MNEs For International Financial Management Mcom Sem 4 Delhi University Notes

Complexities And Issues In Financial Decision Making Of MNEs For International Financial Management MCOM Sem 4 Delhi University : Where does the decision making power in Multinational Enterprises (MNEs) rests? Is the decision power vested with the parent’s headquarters or with the subsidiary? Decisions made at the foreign-subsidiary level may be considered decentralized, while those made above the foreign-subsidiary level, that is the parent level, are considered centralized. The location of decision making power may vary within the same company over time as well as by product, function, and country. In addition, actual decision making is seldom as one-sided as it may appear. A manager who has decision-making authority may consult other managers before exercising that authority.

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Centralized decision making is a global strategy while decentralized decision making is a multi-domestic strategy. A combination of the two is called a transnational strategy. The reason for choosing one over the other is partly a function of companies’ attitudes. For example, an ethnocentric attitude would influence a company to develop competencies, such as knowledge and technology, in its home country and control how they are transferred aboard. A polycentric attitude would cause the company to delegate decisions to foreign subsidiaries because headquarters personnel believe only people on the spot know best what to do. Multi-domestic attitude encourages this. A region-centric attitude would permit more openness to capabilities either at home or abroad and be conducive to a transnational strategy. A geocentric attitude would be conducive to a global strategy where core decisions lie with the headquarters.

Pressure for global integration leads to centralized decision structure and pressure for responsiveness to local conditions leads to decentralized decision making. The factors that influence are: Resource transference, Standardization, Systematic dealings with stakeholders, Transnational strategy and Ad-hoc strategy. These are dealt now.

1. Resource Transference

Resource transference decisions are centralized. A company may want to move its resources-capital, personnel, or technology-from its facilities in one country to its facilities in another where the projected return is higher and consequently improving the MNE’s global or overall performance. This saves cost, biases and time in decision making. A centralized info-pool with the parent saves cost. Decision away from the subsidiaries avoids biases. Timely decisions are possible as vested interests aren’t buying time to push through their hidden agenda. Royal Dutch/Shell centralized financial control of U.S. operations that were once handled autonomously by its subsidiary, Shell Oil, in the United States for the reason of biases by the subsidiary to retain the control with itself. If a subsidiary is not part of a company’s integrated operation, because it operates in a highly protected market, there is little need for centralized control. Another centralized decision in resource transference may concern jurisdiction over exports. If a company has manufacturing facilities in the United States and Germany, which facility will export to South America? A centralized decision avoids costly price competition between the subsidiaries and considers other vital factors like production costs, transportation costs, tax rates, foreign-exchange controls, production capacity and so on.

2. Standardization

Variety costs high for mundane activities, while uniformity reduces cost. Worldwide uniformity of an MNE’s products, purchases, methods, and policies reduces its global costs substantially. If an MNE standardizes machinery in its production process, cost saving arises from quantity discounts on purchases, consolidation of mechanics training, maintenance of manuals, and carrying of spare parts inventories. Product uniformity gives a company greater R&D thrust, flexibility in filling orders when supply problems arise, advertising and so on. But there are situations where standardization is not needed like GE’s jet engines require no local adaptation. There are situations where adaptation is needed like food products of Nestle or McDonalds. Problems arise only when wanted adaptation/ standardization could not be provided or when unwanted adaptation/standardization is thrust upon.

3. Systematic Dealings with Stakeholders

Stakeholders abound these days for businesses. Companies deal with government officials, employees, suppliers, consumers, environmentalists, consumer activists and the general public. Favoring one group is disliked by others if the same or similar favor is not extended to them also. Similarly companies may face a dilemma if they can’t afford concessions in one country offered offering the same in other country. Thanks to increased mobility of people. A good or bad experience with a product in one country may eventually affect sales elsewhere. Even pricing and product decisions in one country can affect demand in other countries. If prices differ substantially among countries, consumers may even find that they can import more cheaply than they can buy locally. Centralized decision making is necessary to ensure that operations in different countries operate toward achieving global objectives. Global competition also leads to centralized decision. A user MNE recommends its subsidiaries to place orders with particular supplier with whom deals are superior. Thus centralized decision making happens. However, in some cases the subsidiary may be the best place to make decisions about the customer or competitor. When IBM’s top management feared that its eroding Japanese market share would spill into other markets because Japanese competitors would have resources and confidence to fight IBM elsewhere, it gave its Japanese subsidiary decision-making power. The subsidiary increased its manufacturing capacity substantially, and it developed new products specific to the Japanese market.

4. Transnational Strategy

The pharmaceutical companies have a strong need for integration- that is centralization, because they depend on the sale of undifferentiated products for which scale of production is important to cover the high cost of product development. This is their geo-centric form. But, nevertheless, companies need high local responsiveness due to different purchase and distribution regulatory scenario in different countries. Companies have established various practices to improve the flow of information. ABB has a sophisticated information retrieval system that disseminates information about 1,300 entities in its federation of companies to each of these entities. At 3M’s European operations the company has given incentives for country subsidiaries to work together on key accounts. Ford is linking its design groups in North America and Europe through videoconferencing and computer networks in the development of new automobile designs. These are centralized decisions with regional flavor.

5. Ad Hoc Strategy

Companies that gain little from global integration, and also have little need to adapt to local conditions may either centralize or decentralize, depending on such factors as the experience and competency of the personnel at headquarters compared to subsidiaries.

Complexities And Issues In Financial Decision Making Of MNEs For International Financial Management Mcom Sem 4 Delhi University Notes

Complexities And Issues In Financial Decision Making Of MNEs For International Financial Management MCOM Sem 4 Delhi University :  Read this Complexities And Issues In Financial Decision Making Of MNEs For International Financial Management essay to learn about Multinational Enterprises (MNEs). After reading this essay you will learn about: 1. Meaning of Multinational Enterprises 2. Concept of a Multinational Enterprise 3. Types 4. Impact 5. Negative Effects 6. Criteria for Measuring 7. Emerging MNEs.

Contents:

  1. Essay on the Meaning of Multinational Enterprises
  2. Essay on the Concept of a Multinational Enterprise
  3. Essay on the Types of Multinationals
  4. Essay on the Impact of MNEs on Host Economies
  5. Essay on the Negative Effects of MNEs on Host Economic
  6. Essay on the Criteria for Measuring the Extent of MNE’s Internationalization
  7. Essay on the Emerging MNEs from Rapidly Developing Economies

Complexities And Issues In Financial Decision Making Of MNEs For International Financial Management MCOM Sem 4 Delhi University : 

Essay # 1. Meaning of Multinational Enterprises:

Complexities And Issues In Financial Decision Making Of MNEs For International Financial Management MCOM Sem 4 Delhi University : Multinational enterprises (MNEs) are considered powerful drivers of globalization. It is estimated that MNEs account for two-thirds of world trade, and about one-third of the total world trade is intra-firm trade. The universe of MNEs is considered to be large, diverse, and expanding.

The role of multinationals in the world economy has continued to grow as reflected by the expansion of foreign direct investment (FDI) stocks and operations of foreign affiliates. This makes the study of multinationals imperative for business students.

Certain aspects of modem multinationals have a long history and date back to the period of ancient human civilization. Around 2500 BC, Sumerian merchants found that they needed men stationed abroad to receive, store, and sell goods for their foreign commerce. Thirteenth century Italian bankers have been considered among the first multinationals by some authors.

The East India Company of England and the Dutch East India Company of the seventeenth century are widely believed to qualify as multinationals since they had large corporations that spread across national borders (Exhibit 13.1) with sizeable international business.

Complexities And Issues In Financial Decision Making Of MNEs For International Financial Management MCOM Sem 4 Delhi University : 

Essay # 2. Concept of a Multinational Enterprise:

Complexities And Issues In Financial Decision Making Of MNEs For International Financial Management MCOM Sem 4 Delhi University : In simple terms, a multinational enterprise means a firm that operates in more than one country, i.e., in multiple countries. International business literature mentions various definitions of multinational firms. Readers often come across terms like international, multinational, transnational, and global, occurring before the words, corporation and enterprise.

Although conceptual distinctions may be made among these terms, in practice, these are often used interchangeably. In order to understand what precisely constitutes a multinational firm, one must know what constitutes a non-multinational firm.

The key attributes of a non-multinational firm are:

i. It produces and markets goods and services in one country

ii. It is headquartered in one country

iii. It faces low international risk exposure

Complexities And Issues In Financial Decision Making Of MNEs For International Financial Management MCOM Sem 4 Delhi University : 

Essay # 3. Types of Multinationals:

Complexities And Issues In Financial Decision Making Of MNEs For International Financial Management MCOM Sem 4 Delhi University :  Multinationals can be classified under various heads depending upon criteria used, such as investment, operations, management orientation, etc.

(i) On the Basis of Investment:

Direct investment enterprise comprises those entities that are:

Associates:

An enterprise in which a non-resident investor owns between 10 and 50 per cent

Subsidiaries:

An enterprise in which a non-resident investor owns more than 50 per cent

Branches:

Unincorporated enterprises wholly or jointly owned by a non-resident investor.

To illustrate this classification, ownership and control of a hypothetical MNE operating in countries X, Y, and Z is depicted in Fig. 13.3.

(ii) On the Basis of Operations:

i. Horizontally integrated multinationals have manufacturing operations located in different countries to produce same or similar products. They have multi-plant firms replicating roughly the same activities in many locations.

ii. Vertically integrated multinationals have manufacturing operations in certain country/countries to manufacture products that serve as inputs to their production establishments in other country/countries. Such firms fragment production geographically into stages in multiple countries on the basis of factor intensities.

iii. Diversified multinationals have manufacturing operations located in different countries that are either horizontally or vertically integrated.

(iii) On the Basis of Management Orientation:

Multinational enterprises may be grouped on the basis of the mind-set of the top management to internationalization under the following heads (Table 13.2).

Ethnocentric firms:

In ethnocentric firms, the headquarters of the parent company, located in the home country, dominate the strategic decisions and exert high level of control over the subsidiaries through centralized decision making. Such firms have a complex organizational structure in the home country but the structure is simple in the subsidiaries. Further, home country expatriates dominate senior management.

Polycentric firms:

Such firms have high level of market orientation wherein subsidiaries have autonomy in decision making. Foreign affiliates of polycentric firms are highly adapted to the market requirements and cultures of countries of their operations. Although decision-making is decentralized to a large extent, core decision-making may be centrally integrated.

Regiocentric firms:

In regiocentric firms, foreign affiliates consolidate their decision-making and organization on regional basis. Regional offices have considerable autonomies with accountability to the parent firm. The level of integration is high within the regions but not across the regions. This offers operational advantage to an MNE in consolidating its international expansion.

Geocentric firms:

Organization of geocentric firms is relatively more complex and inter-dependent than that of the other types. The firm follows a collaborative approach to decision-making between headquarters and subsidiaries. Such firms use universal standards for evaluation and control.

The best workforce is employed for key positions from across the world. Most geocentric firms develop global products while taking into account sensitivities of local and regional cultures and their peculiar market needs.

Complexities And Issues In Financial Decision Making Of MNEs For International Financial Management MCOM Sem 4 Delhi University : 

Essay # 4. Impact of MNEs on Host Economies:

Views on the impact of MNEs on host economies are polarized. Multinational corporations are considered to spread wealth, transfer technologies, and improve skill base, promote research and development, and benefit customers by raising their standard of living.

On the other hand, MNEs are often blamed for influencing the host country’s politicians and institutions to further their own interests, as also for transfer of inappropriate technology, dumping of obsolete technology, cultural imperialism, ruthless exploitation of resources, and promoting hostile mergers and acquisitions and unhealthy market competition.

Positive Effects of MNEs:

Some positive effects of MNEs are discussed in this section.

(i) Bring in FDI:

Multinational enterprises bring in foreign direct investment (FDI) to the host countries, leading to their industrial and economic development.

(ii) Transfer of technology:

Multinationals serve as agents for transfer of technical know- how, managerial skills, and marketing strategies to the host countries. This has a favourable impact on overall industrial growth.

(iii) Promote competition:

The operations of MNEs increase competitive intensities in the host countries which compel domestic firms to improve their efficiency in terms of costs, product attributes, and marketing. Post-liberalization, the opening up of the Indian market to foreign MNEs has increased the level of competition in the Indian market, leading to improvements in overall product quality and marketing efficiency.

(iv) Promote research and development:

Multinationals have a positive impact in promoting research and development in host countries, as depicted in Fig. 13.4.

Potential benefits from internationalization of research and development by MNEs include:

i. Improved structure and performance of national innovative systems (NIS)

ii. Contribution to human resource development, such as R&D, employment, training, support to higher education, reverses brain drain effect

iii. Knowledge spill-overs

iv. Contribution to industrial upgrading

However, such internationalization efforts by MNEs may result in the downsizing of existing local R&D or loss of technology, unfair compensation for locally developed intellectual property, technology leakage, and race to the bottom and unethical behaviour in the host countries.

(v) Benefit customers:

Prior to liberalization, India was a sellers’ market with few choices available to its customers. It was not uncommon for customers in India to wait for years to get the delivery of several household goods and services, such as a telephone connection, liquefied petroleum gas (LPG), a car or a scooter.

The arrival of MNEs in India not only improved the product quality but also brought in the concept of ‘efficient services to the customers’ and made products available without any waiting period.

(vi) Promote exports in the host economies:

Manufacturing operations of MNEs reduce the need for imports, resulting in import substitution in host economies. Also, their operations add capacities to promote exports. Multinational enterprises in low- cost developing countries strategically use these countries as their bases to manufacture and export to high-cost developed country markets.

Complexities And Issues In Financial Decision Making Of MNEs For International Financial Management MCOM Sem 4 Delhi University : 

Essay # 5. Negative Effects of MNEs on Host Economic:

(i) Influencing host-country government decisions:

MNEs are often mammoth corporations. The total turnover of a number of MNEs, such as Wal-Mart, British Petroleum, Exxon Mobil, Royal Dutch, etc., is much higher than the total GDP of a number of small countries. Thus, MNEs do possess massive financial strength besides state-of-art technology, extensive networking, and large workforce.

Due to enormous financial and networking strengths, MNEs exert their influence and power on the political decision-making in the host economies. Low-income countries especially get influenced by conditions imposed by MNEs for foreign direct investment. Further, the goals and objectives of MNEs principally cater to the interests of the firm rather than to the host country’s aspirations and development goals.

(ii) Transfer of inappropriate technology:

In order to maintain a technological edge in production processes, MNEs do transfer capital-intensive technology to host countries. In countries with lower levels of development, due to the lack of skilled manpower and supporting industries, such technology becomes unsuitable.

The sophisticated technology brought in by MNEs has also been criticized because of its adverse impact on job creation, contrary to the objectives of the host country. MNE operations also increase the host country’s technology-dependence on the MNE and lead to a decline in indigenous R&D.

The superior technology not only provides a competitive edge to an MNE over existing industries but also acts as an effective entry barrier to indigenous firms.

(iii) Dumping of obsolete technology:

MNEs are often alleged to dump obsolete technologies in low-income countries. This phenomenon is more common when technology transfer takes place to host country-based indigenous firms rather than to the MNE’s own subsidiaries.

(iv) Cultural imperialism:

In order to retain its global identity, MNEs often adopt their global business strategies across subsidiaries in host countries across the world. Marketing systems, work culture, and management philosophies are perceived as cultural invasion in many host countries.

Popularly known as its ‘cultural chemobyl’, Walt Disney’s failure in its French theme park Euro Disney is a classic case of French resistance to ‘American cultural imperialism’.

McDonald’s international expansion has had a significant effect over eating habits in many countries. McDonald’s meticulous supply chain management and use of franchising as a business model has also influenced the service industry in several countries. The influence has been so significant that MNEs are often seen to wield the effect of ‘McDonaldization’, a symbol of American cultural imperialism.

(v) Exploitation of host country resources:

MNEs are often accused of indiscriminate exploitation of natural resources, such as mineral wealth, forests, water, land, and manpower of host countries with the sole objective of meeting their global economic targets. The high returns earned are also denied to the host economies as these are expatriated to the MNEs’ home countries.

(vi) Perceived as agents of neo-colonialism:

It is a well-known fact that several East India Companies from Europe came to India in late seventeenth century mainly for trade and subsequently became instrumental in the colonial rule that lasted for more than two centuries. In India, and many other erstwhile colonial countries, multinationals are often perceived as a threat to the country’s sovereignty, perpetrating a new form of colonialism.

(vii) Promotes unhealthy market competition:

The tendency of MNE affiliates to opt for non-price models of rivalry has important implications for market structure and competition in the host developing countries. MNE affiliates’ preference to operate at a larger scale, depend more heavily on marketing and advertising, and invest in R&D activities so as to differentiate their products and raise barriers to entry of new firms.

These ‘contrived barriers’ to entry explain the continued domination by MNE affiliates of several brand-sensitive consumer goods industries despite the host country’s government policies seeking to curb monopolies.

Additionally, MNEs discourage competition among their subsidiaries as a part of their global integration strategy through globally integrated financial policies, transfer pricing, etc. This adversely affects the local industry.

(viii) Promotes hostile mergers and acquisitions:

As a part of business entry strategy, MNEs often engage in hostile mergers and acquisitions (M&As), resulting in stifling of domestic enterprises. Coke’s ugly takeover of Parle is one such classic example in India’s business history. Coke’s takeover led to the virtual annihilation of Indian soft-drink firms from the market, leading to market duopoly in the soft-drink industry.

(ix) Crowding out domestic entrepreneurship:

The financial muscle, extensive networking, superior technology, and skills base of MNEs make it difficult for domestic firms to withstand competition. It leads to crowding out of domestic firms and indigenous entrepreneurship.

(x) Limited benefits to host countries:

MNEs seeking markets produce and sell their output in the host economies, but this hardly has any positive impact on the host economies’ balance of payments. Supporting industries and suppliers may not benefit if MNEs have vertical integration and produce most of their requirement themselves.

(xi) Circumventing host countries’ regulatory framework:

MNEs often circumvent rules and regulations of host countries. Global integration among MNE affiliates is used for achieving MNE’s corporate objectives. For instance, transfer pricing is widely used as a tool to abuse the host country regulations by way of exhibiting higher profits in low-tax countries or tax heavens so as to evade host country’s taxes and maximize their own profits.

Complexities And Issues In Financial Decision Making Of MNEs For International Financial Management MCOM Sem 4 Delhi University : 

Essay # 6. Criteria for Measuring the Extent of MNE’s Internationalization are Complexities And Issues In Financial Decision Making Of MNEs

A variety of criteria can be used for assessing how multinational a multinational is.

It may include one or more aspects of the following:

(i) Size:

A multinational is perceived to have a mammoth size. Major criteria used for determining the size of a firm include sales revenue, profits, market value, return of equity, etc. It is generally believed that firm size has a positive influence on its internationalization, though not accepted universally. A number of multilateral organizations do ignore small and medium enterprises while compiling information on MNCs.

(ii) Structure:

Structure implies the number of countries an MNE operates in and the citizenship of its top managers and corporate owners influence the level of internationalization of an MNE.

(iii) Performance:

The extent of commitment of the firm’s resources to foreign operations and the reward from these commitments may be used to determine an MNE’s performance. Various performances based parameters, such as foreign sales, profits, assets, etc., may be used to gauge the extent of a firm’s internationalization.

About 99 per cent sales revenue of Nokia came from foreign sales in 2005 whereas Nokia gets merely 1 per cent sales from its home market.

(iv) Management Orientation:

Attitude and behaviour of top management towards internationalization, though ab­stract, are crucial factors in determining the extent of a firm’s internationalization.

Ethnocentrism:

It is a predisposition where all strategic decisions are guided by the values and interests of the parent firm. Such a firm is predominantly concerned with its viability worldwide and legitimacy only in its home country.

Polycentrism:

It is a predisposition where strategic decisions are tailored to suit the cultures of various countries in which the MNE competes. A polycentric multinational is primarily concerned with legitimacy in every country that it operates in, even if that means some loss of profits.

Regiocentrism:

It is a predisposition that tries to blend the interests of the parent firm with that of the subsidiaries at least on a limited regional basis. A regiocentric multinational tries to balance viability and legitimacy at the regional level.

Geocentrism:

It is a predisposition that seeks to integrate diverse subsidiaries through a global systems approach to decision-making. A geocentric firm tries to balance viability and legitimacy through a global networking of its business. On occasions, these networks may even include the firm’s stakeholders and competitors.

Geocentrism can be further classified as enclave or integrative geocentrism. The former deals with high-priority problems of host countries in a marginal fashion; the later recognizes that the MNE’s key decisions must be separately assessed for their impact on each country.

(v) Indices for Measuring the Extent of MNE’s Internationalization:

In order to measure the level of internationalization of an MNE, indices serve as useful tools. Trans-nationality index (TNI) and Internationalization Index (II) employed by UNCTAD are good indicators to monitor an MNE’s internationalization.

Trans-nationality index:

It is an indicator of the share of a company’s activities taking place in a country other than its own.

It is calculated as the average of the following three ratios:

i. Foreign assets to total assets

ii. Foreign sales to total sales

iii. Foreign employment to total employment

Complexities And Issues In Financial Decision Making Of MNEs For International Financial Management MCOM Sem 4 Delhi University : 

Essay # 7. Emerging MNEs from Rapidly Developing Economies:

Companies from rapidly developing economies (RDEs) are on the fast track to become major twenty-first century multinationals and would play an important role in the radical transformation of industries and market access worldwide.

These firms are fast gaining global market share, making worldwide acquisitions and emerging as important customers, business partners, and competitors for the world’s largest companies.

These emerging multinationals from RDEs with low production costs, leadership, appealing products and services, state-of-art facilities and systems with their overseas expansion are likely to radically transform industries and markets around the world.

These emerging multinationals are likely to offer challenges to the established companies in quest for innovation, in competition for supplies, in search for talents, in worldwide acquisitions, and in capturing markets.

The Boston Consulting Group has identified 100 leading RDE-based companies that already have combined annual revenue of US$715 billion and are growing at an annual average rate of 24 per cent.

Complexities And Issues In Financial Decision Making Of MNEs For International Financial Management Mcom Sem 4 Delhi University Notes

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