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SESSION 9
ALIGNING INTERNATIONAL FUNCTIONAL STRATEGIES
TO THE INTERNATIONAL BUSINESS STRATEGY
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MARKETING IN
THE GLOBAL
FIRM
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GLOBAL STRATEGY IN MARKETING
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Global Marketing Strategy: A plan of
action that
guides the firm in:
(1) positioning itself and its offerings,
(2) targeting global market segments, and
(3) devising marketing program elements,
on a global basis.
GLOBAL MARKETING STRATEGY
AND5 POSITIONING
Global market segment: a group of
customers that share common characteristics
across many national markets. Firms target
these buyers with relatively uniform marketing
programs. E.g., the global youth segment who
are customers to MTV, Levi’s. The global
segment of jet-setting business executives.
Global positioning strategy: strategy in
which the firm’s offering is positioned similarly
in the minds of buyers worldwide. E.g.,
Starbucks, Volvo, Sony.
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STANDARDIZATION AND
ADAPTATION
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• Adaptation: company efforts to modify elements of
the international marketing program to accommodate
specific customer requirements in a particular market.
E.g., publishing and software industries.
• Standardization: company efforts to make the
marketing program elements uniform, with a view to
targeting entire regions of countries, or even the global
marketplace, with a similar product or service.
However, “one offering – one world” strategy is not
usually feasible.
• Management tries to strike some ideal balance
between global integration and local responsiveness
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FIRMS PREFER
STANDARDIZATION
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• Adaptation is costly. May require substantial
changes to products, manufacturing
operations, (lower) pricing, distribution, and
marketing communications.
• Costs add up across many national markets.
• Thus, managers usually err on the side of
standardization, adapting marketing
program elements only when necessary.
• Or, firms pursue a regional strategy, where
marketing program elements are formulated
to exploit commonalities across a geographic
region, instead of across the world.
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GM’s Global Brand Hierarchy
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Global
Europe, Middle East, North America,
Regional
International Asia Middle East, Europe North America, Asia
North America North America
Local
United Kingdom Australia Korea
GLOBAL BRANDING
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• Well-known global brands include: Hollywood movies
(e.g., Star Wars), pop stars (Shakira), sports stars (David
Beckham), personal care products (Gillette Sensor), toys
(Barbie), credit cards (Visa), food (Cadbury), beverages
(Heineken), furniture (IKEA), and electronics
(Playstation).
• A strong global brand enhances the efficiency and
effectiveness of marketing programs, facilitates the
ability to charge premium prices, increases the firm’s
leverage with resellers, stimulates brand loyalty, and
inspires trust and confidence in the product.
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DESIGNING GLOBAL PRODUCTS
WITH GLOBAL TEAMS
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• Until 1990s, product development and design was
a sequential process, usually based in a single
country.
• Today, many more firms develop global products
intended for world markets from the outset.
• Product designers work in virtual global teams,
experts drawn from subsidiaries across the globe.
• Leveraging information and communications
technologies to create virtual teams is key.
• For example, Boeing 777 was developed by design
teams from Europe, Japan, and the United States.
FACTORS AFFECTING
INTERNATIONAL PRICING
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• Nature of the product or industry. A specialized or
highly advanced product, or an industry with few
competitors, can facilitate charging a higher price.
• Location of the production facility. Locating
manufacturing near customers or in countries with low-
cost labor facilitates lower prices.
• Type of distribution system. Channels in some
countries are very complex. Some distributors mark up
prices substantially.
• Foreign market considerations. Local purchasing
power and distribution infrastructure are big factors.
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THREE PRICING STRATEGIES
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• Rigid cost-plus pricing. Set a fixed price for all export
markets, by adding a flat percentage to the domestic price
to compensate for the added costs of doing business
abroad.
• Flexible cost-plus pricing. Set price to accommodate
local market and competitive conditions, such as customer
purchasing power, demand, and competitor prices.
• Incremental pricing. Set price to cover only variable
costs, not fixed costs. Firm assumes that fixed costs are
already paid from sales in the firm’s home country, or
other countries.
STRATEGIES TO COMBAT
INTERNATIONAL PRICE ESCALATION
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[Link] the distribution channel. That is, bypass some
intermediaries in the channel.
[Link] product to remove costly features. E.g.,
Whirlpool developed a no-frills, simplified washing
machine for sale in developing economies.
[Link] products unassembled, as parts and components,
qualifying for lower import tariffs. Do final assembly in
the foreign market, often using low-cost labor; or
assemble in Foreign Trade Zones.
[Link] product re-classified using a different tariff
classification to qualify for lower tariffs. Imported goods
often fit more than one product category.
[Link] production or sourcing to another country to take
advantage of lower labor costs or favorable currency
rates.
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TRANSFER PRICING
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The pricing of intermediate or finished products
exchanged among the subsidiaries and affiliates
of
the same corporate family located in different
countries.
• May be used to repatriate profits from countries
that restrict MNEs from taking their earnings out
of the country.
• May be used to shift profits out of a high
corporate tax county into a low corporate tax
one, thereby increasing company-wide profits.
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THE FAVORED SUBSIDIARY IS
LIKELY TO BE IN A COUNTRY WITH:
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• Lower corporate income-tax rates
• High tariffs for the product in question
• Favorable accounting rules for calculating
income
• Political stability
• Little or no restrictions on profit
repatriation
• Strategic importance to the MNE
GRAY MARKETING
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Legal importation of genuine products into a
country by other than authorized intermediaries.
Gray marketers buy the product at a low price
in one country, import it into another country,
and sell it there at a higher price. Causes:
• Large difference in pricing of same product
between two countries, often the result of
company strategy.
• Exchange rate differences of products priced in
two different currencies.
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MANUFACTURER CONCERNS OVER
GRAY MARKETS
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• Risk of tarnished image when customers
realize the product is available at a lower
price through alternative channels.
• Strained manufacturer-distributor relations
as authorized distributors lose sales.
• May disrupt regional sales forecasting,
pricing strategies, merchandising plans,
and other marketing efforts.
STRATEGIES TO COPE WITH GRAY
MARKETS25
[Link] pricing across the firm’s markets within
the same region.
[Link] illicit intermediaries; Fire intermediaries who
break the rules.
[Link] flow of products into markets where gray
market brokers procure the product. E.g., Pfizer could
reduce the shipment of drugs to Canada.
[Link] products in individual countries. Design
products with exclusive features in each market.
[Link] the limitations of products obtained from gray
market channels.
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GLOBAL ACCOUNT MANAGEMENT
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Servicing a key global customer in a consistent and
standardized manner, regardless of where in the world it
operates.
• Wal-Mart is a key global account for P&G. Wal-Mart expects
consistent service including uniform prices for the same product
from P&G regardless of where in the world they are delivered.
• Emphasizes the use of cross-functional teams, specialized
coordination activities for specific accounts, and formalized
structures and processes.
• Each customer is assigned a global account manager, or team,
which provides a coordinated marketing support and service
worldwide.
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HUMAN RESOURCE MANAGEMENT IN THE GLOBAL
FIRM
CHALLENGES OF INTERNATIONAL
HUMAN RESOURCE MANAGEMENT
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• Recruiting, managing, and retaining human resources
at a firm with extensive global operations are especially
challenging.
• For example, in 2005, German firm Siemens had
460,800 employees in some 190 countries: 290,500
throughout Europe, 100,600 in the Americas, 58,000 in
the Asia-Pacific region, and 11,900 in Africa, the Middle
East, and Russia.
• Each of Volkswagen, Nestle, IBM, Unilever, Wal-Mart,
McDonald’s, and Matsushita has more than 150,000
employees outside the home country.
INTERNATIONAL HUMAN RESOURCE
MANAGEMENT
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• International human resource
management: the planning, selection, training,
employment, and evaluation of employees for
international operations.
• How a firm recruits, trains, and places skilled
personnel in its worldwide value chains sets it
apart from competition.
• The combined knowledge, skills, and
experiences of employees are distinctive and
provide myriad advantages to the firm’s
operations worldwide.
THREE EMPLOYEE CATEGORIES AT
THE MNE
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• Host-country nationals (HCNs): citizens of the
country where the subsidiary or affiliate is located.
HCNs make up largest proportion of employees that
the firm hires abroad. Examples: the labor force in
manufacturing, assembly, basic service activities,
clerical work, and other non-managerial functions.
• Parent-country nationals (PCNs): also known as
home-country nationals, PCNs are citizens of the
country where the MNE is headquartered.
• Third-country nationals (TCNs): employees who
are citizens of countries other than the home or host
country. Most work in management; have unique skills
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DIFFERENCES BETWEEN
DOMESTIC
34 AND INTERNATIONAL
IHRM
1. New HR responsibilities. E.g., international taxation,
international relocation and orientation, services for
expatriates, host government relations, language
translation services.
2. Need for a broader perspective. E.g., establishing
a fair and comparable compensation scale when there
is a mix of PCNs, HCNs, and TCNs.
3. Greater involvement in employees’ personal
lives. E.g., housing arrangements, health care,
children’s education, safety, security, proper
compensation, higher living costs abroad.
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DIFFERENCES BETWEEN
DOMESTIC AND INTERNATIONAL IHRM
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(CONT.)
4. Managing the mix of expatriates versus locals.
The firm may staff each location with HCNs, PCNs, and
TCNs. The mix of staff mainly depends on the firm’s
international experience, cost-of-living abroad, local
laws, and availability of qualified local staff.
5. Greater risk exposure. Exposure to political risk and
terrorism may require increased compensation and
security arrangements.
6. External influences of the nation and culture. E.g.,
taxes, local work regulations, unique cultural
circumstances, traditional work practices.
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KEY TASKS OF IHRM
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1. Staffing – activities directed at recruiting, selecting,
and placement of employees.
2. Training and developing employees.
3. Performance appraisal; involves providing
feedback necessary for the employee’s professional
development.
4. Compensation or remuneration of employees
including formulation of benefit packages that vary
greatly from country to country.
5. Management of labor unions and collective
bargaining processes, known as industrial
relations.
6. Achieving diversity in the workplace.
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STAFFING: SEARCHING FOR
TALENT
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• Recruitment: searching for and locating
potential job candidates to fill the firm’s needs.
• Selection: gathering information to evaluate
and decide who to employ in particular jobs.
• Managers must proactively identify potential
candidates and groom them to become
corporate leaders, train personnel to meet
evolving business needs, and ensure the talent
supply keeps pace with the growth of the firm.
EMPLOYEE CHARACTERISTICS THAT
FACILITATE INTERNATIONAL
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EFFECTIVENESS
• Technical Competence. Must have adequate managerial and
technical capabilities.
• Self-Reliance. Entrepreneurial, proactive mindset; expatriate
managers function with considerable independence, and limited
support from headquarters.
• Adaptability. Ability to adjust to foreign cultures, cultural
empathy, flexibility, diplomacy, and a positive attitude.
• Interpersonal Skills. Ability to build relationships is key.
• Leadership Ability. Must view change positively, and
proactively manage threats and opportunities.
• Physical and Emotional Health. Life abroad is stressful.
• Spouse / Dependents Prepared for Living Abroad
EXPATRIATE
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• An employee who goes to work abroad for an extended
period, usually years
• Repatriation: return of the expatriate to the home
country. Requires advance preparation. Unless managed
well, returning expatriate may encounter problems, such
as career disruptions and ‘reverse culture shock’.
• Expatriate failure: the premature return of an
expatriate, due to an inability to perform well abroad.
Costly to the firm (lost productivity and relocation costs)
and to expatriates themselves (family stress and career
disruption).
CULTURE SHOCK
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• The confusion and anxiety, often akin to mental
depression, that can result from living in a foreign
culture for an extended period. Often affects family
members most.
• A leading cause of expatriate failure.
• Especially a factor for those assigned to culturally
dissimilar countries, such as China, Yemen.
• Can be reduced via advance preparation, training,
language skills, deep interest in the new country.
• Regular exercise, relaxation techniques, or keeping
a detailed journal of experiences are helpful.
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THREE COMPONENTS OF TRAINING
PERSONNEL FOR INTERNATIONAL
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ASSIGNMENTS
1. Area studies: factual knowledge of the
historical, political and economic environment
of the host country;
2. Practical information: knowledge and skills
necessary to function effectively in a country,
including housing, health care, education, and
daily living;
3. Cross-cultural awareness: ability to interact
effectively and appropriately with people from
different language and cultural backgrounds.
TRAINING
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• In order of increasing rigor, training methods
include: videos, lectures, assigned readings, case
studies, books, Web-based instruction, critical
incident analyses, simulations, role-playing,
language training, field experience, and long-term
immersion.
• Role-playing and simulations involve the employee
acting out typical encounters with foreigners.
• Long-term immersion places the employee in the
country for several months or more, often for
language and cultural training.
CULTIVATING A GEOCENTRIC
ORIENTATION
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• Ethnocentric views are common in many MNEs.
• More progressive MNEs follow a geocentric
orientation, staffing HQ and subsidiaries with
the most competent personnel, regardless of
nationality. Characterized by an openness to,
and articulation of, multiple cultural and
strategic realities on both global and local levels.
• Best to hire, develop, nurture, and recognize
employees who possess a global mindset and
offer global leadership potential.
PERFORMANCE APPRAISAL
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• Performance appraisal: formal process of assessing
how effectively employees perform their jobs.
• Helps identify problem areas where an employee
needs to improve and additional training is warranted.
• Determines compensation and company performance.
• MNEs devise procedures to assess the performance of
individual employees; ascertain if any problems are
attributable to inadequate skill levels; provide
additional training and resources; and terminate
employees who consistently fail to achieve goals.
• Often very challenging in international business.
COMPENSATION OF PERSONNEL
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• Compensation varies internationally due to
differences in legally mandated benefits, tax
laws, cost of living, local tradition, and culture.
• Employees posted abroad expect to be
compensated at a level that allows them to
maintain their usual standard of living, which
can make compensating expatriates very costly.
• Includes base remuneration, benefits (e.g.,
health care plans), allowance (e.g., for housing,
children’s education, travel), incentives
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LABOR UNIONS AND COLLECTIVE
BARGAINING
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• Management and workers determine the job
relationships that will be in effect at the workplace.
• Collective bargaining involves negotiations between
management and workers regarding wages and
working conditions.
• Labor regulations vary substantially, with minimum
regulations in Africa and India to very detailed
regulations in Northern Europe.
• Union membership has declined in most countries,
but remains high in several European countries.
• Strikes can disrupt international operations.
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TRENDS IN INTERNATIONAL
LABOR
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• Mobility of labor across national borders has
increased substantially. Reasons:
• Growing interconnectedness of national economies;
• Rapid expansion of multinational firms;
• Rise of international collaborative ventures; and
• Greater emphasis on global teams.
• Many countries are coping with an influx of
immigrants, both legal and illegal, who compete with
established workers by providing low-cost labor.
Trend is significant in Europe, Persian Gulf countries,
and the United States (but not in Japan).
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WOMEN IN INTERNATIONAL
BUSINESS
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• Women currently occupy relatively few top
management positions (in Europe, women occupy only
15% of senior executive posts)
• Reasons for scarcity of women in international jobs:
• Senior managers often assume women do not make
suitable leaders abroad (e.g., due to cultural challenges)
• Some female managers prefer to remain in the home
country, to fulfill family obligations or avoid disrupting
partner’s career.
• Most companies do not accommodate child-rearing or other
family responsibilities.
• There are fewer women with sufficient experience to be
sent abroad for senior jobs.
RECENT POSITIVE TRENDS
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• Many more women are obtaining university
degrees in business.
• Female graduates account for some 50% of
recruits joining European firms
• Businesswomen increasingly form their own
networks, such as Women Directors on Boards in
the United Kingdom, and The Alliance of
Business Women International in the United
States ([Link]).
• Overall trend is positive (except in strongly
Islamic countries).
SUCCESS STRATEGIES FOR WOMEN
IN IB
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• In many countries, being a foreign woman can be an
advantage. Women stand out more, and competent
women earn respect. Smart women leverage their
gender to their advantage.
• Women overcome biases abroad by acquiring
managerial, language, and international skills.
• Over time, managerial competence wins out over bias.
• Gaining substantial experience as a domestic
manager or in short international assignments can
greatly improve prospects for working abroad.
• Once abroad, women report the reaction of surprise is
often replaced by professionalism and respect.
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FINANCIAL MANAGEMENT AND ACCOUNTING IN THE
GLOBAL FIRM
INTERNATIONAL FINANCIAL
MANAGEMENT
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The acquisition, management, and use of funds for
cross-national trade, investment, and other
commercial activities. It involves:
• Conducting transactions in various currencies;
• Operating in environments characterized by
significant risk, capital flow restrictions, and
varying accounting and tax systems;
• Seeking and accessing funds from banks, bond
markets, stock exchanges, venture capital firms,
and intra-corporate sources, located worldwide.
INTERNATIONAL FINANCIAL
MANAGEMENT TASKS
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1. Decide on the Capital Structure. Determine the ideal
long-term mix of debt versus equity financing.
2. Raise funds for the firm. Acquire equity, debt, or intra-
corporate financing for funding activities and investments.
3. Working Capital and Cash Flow Management. Manage
funds passing in and out of the firm’s value-adding activities.
4. Capital Budgeting. Assess financial attractiveness of major
investment projects (e.g., foreign market expansion).
5. Currency Risk Management. Manage multiple-currency
transactions and exposure to exchange-rate fluctuations.
6. Manage the Diversity of international Accounting and
Tax Practices. Operate in a global environment with diverse
accounting practices and international tax regimes.
TASK ONE: DECIDE ON THE
CAPITAL STRUCTURE
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• Capital structure: the mix of long-term equity
financing and debt financing firms use to
support their international activities.
• Firm obtains equity financing by selling
shares of stock to investors or by retaining
earnings.
• Shares of stock provide an investor with an
ownership interest, that is, equity, in the firm.
• Debt financing comes from either loans from
banks and other financial intermediaries or
money raised from the sale of corporate bonds.
TASK TWO: RAISING FUNDS
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Global money market: financial markets where firms
and governments raise short-term financing.
Global capital market: financial markets where firms
and governments raise intermediate-term and long-
term
financing.
• Most funding is longer term. The global capital
market is the meeting point of those who want to
invest money and those who want to raise funds.
• Main advantage of the global capital market: ability
to access funds from a wider range of sources at
lower cost.
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THE GLOBAL CAPITAL MARKET
IS HUGE AND GROWING (AS OF
64
2006) issues of equity in world securities
• International
markets were about $380 billion, up from $83b in
1996 and just $14b in 1986.
• Stock of cross-national bank loans and deposits
was $18,916b, up from $7,205b ten years earlier.
• There were $17,574b in outstanding international
bonds and notes, up from $3,081b in 1996.
• This is the ‘globalization of finance’.
• Main facilitating factors: Deregulation of global
finance; advanced ICTs; globalization of business
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SOURCES OF FUNDING 1: EQUITY
FINANCING
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• The firm obtains capital by selling shares of
stock. In exchange, the shareholders obtain
a percentage of ownership in the firm and,
often, a stream of dividends.
• Global equity market: the worldwide
market for equity financing -- stock
exchanges worldwide where investors and
firms meet to buy and sell shares of stock.
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SOURCES OF FUNDING 2: DEBT
FINANCING
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• In debt financing, a firm borrows money from a
creditor in exchange for repayment of principal and
an agreed upon interest amount in the future.
Debt financing is obtained from loans and bonds.
• International Loans. The firm may borrow money
from banks in its home market or abroad.
• Eurocurrency Market is money deposited in banks
outside its country of origin, mainly U.S. dollars,
“eurodollars”. Other eurocurrencies include euros,
yen, and pounds, banked outside the home country
BONDS: A MAJOR SOURCE OF DEBT
FINANCING
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• A bond enables the issuer (borrower) to raise capital by
promising to repay the principal along with interest at a
specified date.
• Global bond market is the international marketplace
where bonds are bought and sold, primarily via banks and
stockbrokers.
• Foreign bonds are sold outside the bond issuer’s country
and denominated in the currency of the country in which
they are issued.
• Eurobonds are sold outside the bond issuer’s home country
and denominated in its own currency (e.g., when Toyota
sells yen-denominated bonds in Europe)
SOURCES OF FUNDING 3:
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INTRA-CORPORATE
FINANCING
• Funds provided from sources inside the firm in
the form of equity, loans, and trade credits.
Trade credit arises when a supplier of goods and
services grants the customer the option to pay
later.
• Advantages: Often the lowest-cost capital;
minimizes the transactions costs typical of
obtaining funds from other sources; has little
effect on the parent firm’s balance sheet; avoids
risk of debt financing; avoids ownership-diluting
effects of equity financing.
TASK THREE: WORKING CAPITAL
AND CASH FLOW MANAGEMENT
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• Working capital: the current assets of the firm.
• Working capital management aims to ensure cash
is available where and when it is needed.
• Cash flow needs arise from everyday business
activities, such as paying for labor or materials.
• Cash is generated from various sources and must
be transferred from one part of the MNE to another.
• International financial managers devise various
strategies for transferring funds within the firm’s
worldwide operations, to optimize global
operations.
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METHODS FOR TRANSFERRING
FUNDS WITHIN THE MNE
72
• Through trade credit, a subsidiary defers payment for
goods and services received from the parent.
• Royalty payments: remuneration paid to the owners
of intellectual property, as parents often ‘license’ the
use of assets to subsidiaries.
• Fronting loan: a loan between the parent and its
subsidiary, channeled through a bank. The parent
deposits a sum in a foreign bank, which then transfers
the funds to the subsidiary as a loan.
• Transfer pricing: the prices that subsidiaries and
affiliates charge one another for transferred goods and
services within the same MNE.
MULTILATERAL NETTING
73
• Strategic reduction of cash transfers within the MNE
family via elimination of offsetting cash flows.
• Involves three or more subsidiaries that hold
accounts payable or accounts receivable with each
other. MNEs with many subsidiaries may establish a
netting center.
• The center advises each subsidiary of the amounts to
pay and receive from other subsidiaries on a
specified date.
• Firms like Philips saves millions each year in
transaction costs due to multilateral netting.
TASK FOUR: CAPITAL BUDGETING
74
• Helps managers decide which international
expansion projects are economically desirable.
• The decision to accept or reject an investment
project depends on the project’s initial
investment requirement, its cost of capital, and
the benefits the project is expected to provide.
• Involves net present value analysis.
• Can be very complex, because there are many
variables to consider.
• Facilitated by spreadsheet analysis
TASK FIVE: CURRENCY RISK
MANAGEMENT
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• Currency risk: the peril resulting from adverse
unexpected fluctuations in exchange rates.
• Exporters and licensors face currency risk
because foreign buyers pay in their own
currencies.
• Foreign direct investors face currency risk
because they receive both payments and incur
obligations in foreign currencies.
• Managers of foreign investment portfolios face
currency risk as the value of stocks fluctuate.
THREE TYPES OF CURRENCY
RISK
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• Transaction exposure. Arises when outstanding
accounts receivable or payable are denominated in
foreign currencies.
• Translation exposure. Results financial statements
denominated in a foreign currency are translated into
the functional currency of the parent, as part of
consolidating international financial results.
• Economic exposure. Results from exchange rate
fluctuations affecting the pricing of products, the cost
of inputs, and the value of foreign investments.
FOREIGN EXCHANGE TRADING
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• A small number of currencies facilitate international
trade and investment. Some 2/3 of foreign reserves
are in U.S. dollars, 25% in euros, 7% in yen and British
pounds, and only 2% in the world’s 150 other
currencies.
• Volume of currencies exchanged is huge. As of 2007,
some $3 trillion worth of currency was traded
everyday, 10 times the value of daily stock and bond
turnover, and 100 times the value of daily merchandise
trade. One-third of all currency trading, about $1 trillion
per day, takes place in London.
SPECIALIZED TERMINOLOGY FOR
CURRENCY TRADING
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• Spot rate: the exchange rate applicable to
the trading of foreign currencies in which the
current rate of exchange is used and
delivery is considered ‘immediate.’
• Forward rate: the exchange rate applicable
to the collection or delivery of foreign
currencies at some future date, but a rate
specified at the time of the transaction.
EXCHANGE RATE FORECASTING
AND HEDGING
79
• Firms attempt to forecast exchange rate
fluctuations.
• Firms attempt to proactively manage
exchange rate exposure via hedging.
• Forecasts are available from banks and
business news sources.
• Online sources include the Bank for
International Settlements ([Link]), the
World Bank ([Link]), and the
European Central Bank ([Link]).
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TASK SIX: MANAGE THE DIVERSITY OF
INTERNATIONAL ACCOUNTING AND TAX
81
PRACTICES
• The firm’s accounting systems must identify,
measure, and communicate financial information,
often in complex multi-country operations, with
much variation in national accounting systems.
• For example, there are dozens of approaches for
determining R&D expenditures, cost of goods
sold, asset valuation, net profits, etc.
• Financial statements prepared according to the
rules of one country may be difficult to compare
with those prepared in another country.
TRANSPARENCY IN FINANCIAL
REPORTING
82
• Transparency is the degree to which firms regularly
and comprehensively reveal substantial information
about their financial condition and accounting
practices.
• In order to increase transparency in the United States,
the federal government passed the Sarbanes-Oxley
Act in 2002, making CEOs and CFOs personally
responsible for the accuracy of annual reports and
other financial data.
• In general, accounting standards are becoming more
standardized worldwide.
CONSOLIDATING FINANCIAL
STATEMENTS
83 OF SUBSIDIARIES
• Involves “translating” data denominated in foreign currencies
into the firm’s functional currency on headquarters financial
statements.
• Current rate method -- all foreign currency balance-sheet
and income statement items are translated at the current
exchange rate -- the spot exchange rate in effect on the day
the statements are prepared.
• Temporal method -- the choice of exchange rate depends on
the underlying method of valuation. If assets and liabilities are
normally valued at historical cost, then they are translated at
the historical rates. If assets and liabilities are normally valued
at market cost, they are translated at the current rate of
exchange.
INTERNATIONAL TAXATION
84
• A direct tax is imposed on income derived from the
firm’s business activities.
• An indirect tax applies to firms that license or franchise
products and services, or who charge interest. In effect,
the local government withholds some percentage of
payments as tax.
• A sales tax is a flat percentage tax on the value of
goods or services sold, and paid by the ultimate user.
• A value-added tax (VAT) is payable at each stage of
processing in the value chain of a product or service. It is
common in Canada, Europe, and Latin America.
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