How MNCs will cope with risks in Capital Budgeting Higher targeted return

How mncs will cope with risks in capital budgeting

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How MNCs will cope with risks in Capital Budgeting? § Higher targeted return required. § Decision not invest even though financial analysis shows positive results Economic Risk Likelihood that changes in the host country economy will impact cash flows. Inflation is the most significant of economic risks. Inflation affects the ability of the local population to purchase goods and also impacts the overall cost structure of a business. There are also costs associated with manager time and effort to respond to inflation. How MNCs will cope with economic risk in Capital Budgeting? § Restate the reports for PP GAIN or LOSS - Costs associated with manager time and effort to respond - These costs should be estimated and included investment decision making process Financial Risk This refers to the likelihood that changes in currency values, interest rates, and other financial factors will impact cash flows. Foreign exchange risk is also a component of financial risk. Whether to evaluate the project based on host country or parent country cash flows is affected by foreign exchange risk. How MNCs will cope with financial risk? à Will be discussed in finance part Strategy Implementation – Management Control Aims to evaluate the implementation and effectiveness of strategy. Accounting is involved in management control primarily through its role in operating budgets and performance evaluation. Operating budgets provide a link between strategy and performance. Verspreiden niet toegestaan | Gedownload door Sybe klaas Kappe ([email protected]) lOMoARcPSD|105219
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Factors affecting management control: The organization structure effects strategy implementation. Three types are: 1) Ethnocentric, assumes that the cultural background of the firm is universal 2) Polycentric, assumes that the culture of the host country to be most important 3) Geocentric: consist of units that play very distinct roles (global innovator, integrated player, implementer, and local innovator) Levels of control and delegation (influenced by the organizational structure and the roles of each division in the structure) are factors that influence management control. One major type of management control system is bureaucratic control, which employs a significant amount of structure. The other major type is cultural control, which is more informal and less structured. Performance Evaluation for MNCs Monitoring an organization’s effectiveness No single measure for all subsidiaries – Why? § Classification of the foreign operation as cost, profit or investment center Complex issue for MNCs § Unique issues (exchange rate fluctuations, inflation, transfer pricing, cultural and environmental differences) § Joint or separate evaluation of the foreign operation and the manager of the operation Designing Performance Evaluation Systems Depends on:
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