Long before the globalisation had become a buzz word and an impetus for companies to
invest abroad, enterprises enlarged their “business playing field” into foreign countries
for various reasons, such as to capture a new market, to secure resources, or to take advantage
of local cost levels. Therefore, subsidiaries are heavily involved in the value
creation process for and within multinational corporations (MNCs). However, despite
the fact that the measurement of performance is crucial for globally active companies
not only in steering the value creation for the MNC but also, for example, in fostering
international expansion or guiding resource allocation, MNCs differ significantly in the
extent to which they are aware of the performance of their subsidiaries.
Due to the fact that strategic decisions regarding the global expansion of a MNC require
a wide and clear information basis to be able to assess how successfully a foreign subsidiary
has conducted its business or under what possibly unfavourable environmental
conditions the business results were achieved, multinational enterprises have to implement
a system for evaluating the performance of their foreign subsidiaries and their
management. Therefore, this paper aims to analyse the central aspects to consider in the
evaluation of the performance of foreign subsidiaries.
This paper is divided into five chapters. After a short introduction to the theoretical
background of performance evaluation in chapter 2, the paper continues in chapter 3
with the central issues of an effective performance evaluation system for foreign subsidiaries
with a clear focus on the aspect of separating managerial and subsidiary performance.
Then chapter 4 illustrates the measures used for evaluating foreign subsidiary
performance. Finally, the paper concludes by emphasising that an MNC can properly
evaluate the performance of it foreign subsidiaries only by considering the specific environmental
factors of the foreign country, separating managerial and subsidiary performance,
and supplementing financial with nonfinancial measurements.
[...]
Table of Contents
1 Introduction
2 Theoretical Background of Performance Evaluation
2.1 Theoretical Concepts of Performance Evaluation
2.2 Performance Evaluation in Multinational Corporations
3 Designing an Effective Performance Evaluation System for MNCs
3.1 Treatment of the Foreign Operation
3.2 Separating Managerial and Subsidiary Performance
3.2.1 Noncontrollable Factors in the External Environment
3.2.2 Noncontrollable Factors in the Internal Environment
4 Measures for Performance Evaluation of Foreign Subsidiaries
4.1 Financial Performance Measures
4.2 Nonfinancial Performance Measures
5 Conclusion
Objectives and Core Topics
This seminar paper explores the complex requirements for evaluating the performance of foreign subsidiaries within multinational corporations (MNCs), focusing on how companies can effectively isolate managerial performance from external and internal environmental factors to ensure accurate assessment and strategic alignment.
- The theoretical foundations of performance evaluation in global organizations.
- Challenges in distinguishing between subsidiary and managerial performance.
- The impact of noncontrollable factors such as exchange rates, inflation, and transfer pricing.
- The role and integration of both financial and nonfinancial performance measures.
Excerpt from the Book
3.1 Treatment of the Foreign Operation
The concept of responsibility accounting distinguishes between different spheres of reference to place performance evaluation into a manageable context. The responsibility centres have control over costs and/or revenues and over which inputs (resources) and outputs (products, services, or revenues) can be allocated. According to this concept, an MNC must decide whether a foreign operation will be evaluated as a cost centre, a profit centre, or an investment centre since this decision determines the exact techniques and measures by which the foreign subsidiary has to be assessed. Each of these types of centres is different in terms of complexity of control, structure, and purpose compared to the others (McWatters, Morse, & Zimmerman, 2001).
Cost centres form the basic sphere of the responsibility accounting concept as far as controls and objectives are concerned. Usually they are not permitted to dispose of existing assets or purchase new assets. Cost centres have to reach the goal of maximising outputs, in both quality and quantity, within the constraints specified by time and effort, standard cost, flexible budget, and similar systems, or they must produce a specified amount with predetermined quality at the lowest possible outlay. Thus, responsibility is only assigned for cost control and reduction and not for the creation and enhancement of sales. To accomplish improved control and evaluation in practice, the structure of the cost centre is broken down into its basic elements. Responsibility centres classified as cost centres have the objective of concentrating on costs that are controllable at the levels being addressed. Noncontrollable factors, however, are excluded from consideration.
Summary of Chapters
1 Introduction: Provides an overview of the global business landscape and defines the objective of developing a system to evaluate foreign subsidiary performance accurately.
2 Theoretical Background of Performance Evaluation: Examines general control theories and the specific complexities of applying these within multinational structures.
3 Designing an Effective Performance Evaluation System for MNCs: Investigates the structural classification of subsidiaries and strategies to isolate management performance from uncontrollable environmental and internal factors.
4 Measures for Performance Evaluation of Foreign Subsidiaries: Analyzes the diverse range of financial and nonfinancial metrics used to gauge subsidiary success and mitigate the risks of information overload or short-termism.
5 Conclusion: Summarizes key findings, reiterating that success depends on integrating tailored measurement systems that account for specific environmental variables.
Keywords
Multinational Corporations, Performance Evaluation, Subsidiary Management, Responsibility Accounting, Financial Measures, Nonfinancial Measures, Transfer Pricing, Exchange Rates, ROI, Economic Value Added, Strategic Management, Organizational Control, Global Business, Balanced Scorecard, Inflation.
Frequently Asked Questions
What is the primary focus of this paper?
The paper examines how multinational corporations can develop and implement effective systems to evaluate the performance of their foreign subsidiaries while accounting for the unique challenges of global operations.
What are the central themes discussed in this work?
The key themes include responsibility accounting, the distinction between cost, profit, and investment centers, the impact of uncontrollable environmental variables, and the selection of appropriate performance metrics.
What is the main research objective?
The objective is to analyze the critical aspects that MNCs must consider to properly evaluate foreign subsidiary performance, specifically emphasizing the separation of managerial contribution from overall unit performance.
Which scientific methods are utilized?
The paper employs a review of existing academic literature, analyzing empirical studies and theoretical frameworks regarding international accounting and management control.
What content is covered in the main body?
The main body covers the classification of responsibility centers, the identification of external and internal noncontrollable factors (such as exchange rates and transfer pricing), and a comparative analysis of financial and nonfinancial performance measures.
Which keywords characterize this paper?
Key terms include Multinational Corporations, Performance Evaluation, Responsibility Accounting, Transfer Pricing, and Financial/Nonfinancial Metrics.
Why is separating managerial and subsidiary performance considered difficult?
It is difficult because various uncontrollable factors—such as local inflation, host-country economic policies, and corporate-wide transfer pricing strategies—can significantly distort the financial results that are ostensibly under the manager's control.
How does transfer pricing influence the evaluation process?
Transfer pricing can artificially inflate or deflate profits in different subsidiaries to suit corporate tax or strategic goals, which often conflicts with the concept of responsibility accounting and necessitates adjustments in performance evaluations.
Why are nonfinancial measures recommended alongside financial ones?
Financial measures can encourage short-term decision-making and are often lagged indicators; nonfinancial measures help capture long-term value drivers like product quality and customer satisfaction, providing a more comprehensive view of subsidiary health.
What does the paper conclude about EVA and CFROI?
The paper notes that while these are important modern metrics, empirical studies from the mid-80s to mid-90s suggest they played a secondary role in practice, indicating a gap between financial theory and applied management control.
- Citar trabajo
- Hendrik Vedder (Autor), 2008, Performance Evaluation of Foreign Subsidiaries , Múnich, GRIN Verlag, https://www.grin.com/document/119314
