Final Essay Stage Two ah W334 A.docx

Final Essay Stage Two
ah W
334: ARTH
Outline and Annotated Bibliography
June 27, 201
2
Outline & Annotated Bibliography
The option I chose for the final project was option (b), to select
and write about a feature length film made between 1970-2000.
The film I chose is a story by Stephen King, ‘The Green Mile’,
directed by Frank Darabont. Below I will outline my final paper
for the course, as well as list and discuss a few sources that I
will be citing.
· Introduction
· Discuss the making of the film
· The film’s success (box office/awards and nominations)
· Critical reaction to the film
· Personal reaction to the film (what I liked/did not like,

critique of main character roles and actors/actresses who played
them)
· Discuss direction of film (montage/sound and music)
· Discuss direction of film cont. (cinematography/ special
effects)
· Conclusion
· Bibliography
Cinematography of The Green Mile. (2014). Cinematography of
The Green Mile. Retrieved 27 June 2017, from
https://bnyce82.wordpress.com/
This reference is specific to the cinematography techniques
used in the film, ‘The Green Mile’. It provides insight into the
various aspects of cinematography, such as the tone of the film,
the camera angles and lighting, as well as the dialogue between
the characters. This reference will help backup the information I
will provide in my final paper.
Darabont, F. (1999). The Green Mile. Retrieved from
https://www.youtube.com/watch?v=VslrToVsu80
This reference is the actual film, ‘The Green Mile’, found
on YouTube. I will be watching the entire film to gather
information for my final paper. The information I will be
looking for while watching this film are the editing techniques
used by the director, as well as my personal reaction to draw a
general conclusion from.
Ebert, R. (1999). The Green Mile Movie Review & Film
Summary (1999) | Roger Ebert. Rogerebert.com. Retrieved 27
June 2017, from http://www.rogerebert.com/reviews/the-green-
mile-1999
The movie review of, ‘The Green Mile’, by the late Roger
Ebert is a perfect reference to gain insight to the critical review
of the film upon its release. I will be referencing opinions and
points made by the infamous film critic, as he discusses the
direction of the film, as well as the actors’ performance.
Kuhn, A., & Westwell, G.(2012). cinematography. In A
Dictionary of Film Studies. : Oxford University Press.

Retrieved 28 Jun. 2017, from
http://www.oxfordreference.com/view/10.1093/acref/978019958
7261.001.0001/acref-9780199587261-e-0124.
This general reference on cinematography is from the Oxford
Dictionary of Film Studies. I found this entry very useful during
week 4 of the course when it was presented and will use it as a
reference for my final paper, as well as future discussions. The
entry defines cinematography in film making as capturing
movement on film, as well as explains the role of a
cinematographer on a movie set.
Week 5 - Assignment: Analyze the Global Sourcing of Debt and
Equity
Research and analyze global financing alternatives and write a
paper to:
1. Describe the methods for sourcing equity funds from the
global financial market. Form a table that would assist a
multinational manager in summarizing the options with
characteristics of each option.
2. Summarize the methods for sourcing debt funds from the
global financial market. Form a table that would assist a
multinational manager in summarizing the options with
characteristics of each option.
3. Define and assess the cost of capital in a global context verse
a domestic environment. Describe some of the reasons why the
optimal capital structure might differ for a multinational firm.
Discuss the role of the demand for foreign securities and the
evidence of the cost of capital for multinationals verse domestic
forms.
Support your paper with at least five (5) resources. In addition
to these specified resources, other appropriate scholarly

resources, including older articles, may be included. Your paper
should demonstrate thoughtful consideration of the ideas and
concepts that are presented in the course and provide new
thoughts and insights relating directly to this topic. Your
response should reflect scholarly writing and current APA
standards.
Length: 5-7 pages (not including title and reference pages).
https://blogs.imf.org/2020/03/20/blunting-the-impact-and-hard-
choices-early-lessons-from-china/
Instructor’s Resource Manual
For
Multinational Business Finance
Fourteenth Edition
David K. Eiteman
University of California, Los Angeles
Arthur I. Stonehill
Oregon State University and University of Hawaii at Manoa
Michael H. Moffett
Thunderbird School of Global Management

at Arizona State University
Copyright 2016 Pearson Education, Inc.
Vice President, Product Management: Donna Battista
Acquisitions Editor: Kate Fernandes
Program Manager: Kathryn Dinovo
Team Lead, Project Management: Jeff Holcomb
Project Manager: Meredith Gertz
Copyright © 2016, 2013, 2010 Pearson Education, Inc., or its
affiliates. All Rights Reserved.
Manufactured in the United States of America. This publication
is protected by copyright, and permission
should be obtained from the publisher prior to any prohibited
reproduction, storage in a retrieval system,
or transmission in any form or by any means, electronic,
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otherwise. For information regarding permissions, request
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Pearson Education Global Rights and Permissions department,
please visit
www.pearsoned.com/permissions/.

www.pearsonhighered.com
ISBN-13: 978-0-13-387987-2
ISBN-10: 0-13-387987-9
©2016 Pearson Education, Inc.
Contents
Chapter 1 Multinational Financial Management: Opportunities
and Challenges .......................... 1
Chapter 2 The International Monetary System
.............................................................................. 7
Chapter 3 The Balance of Payments
............................................................................................
12
Chapter 4 Financial Goals and Corporate Governance
................................................................ 20
Chapter 5 The Foreign Exchange Market
.................................................................................... 25
Chapter 6 International Parity Conditions
................................................................................... 31

Chapter 7 Foreign Currency Derivatives: Futures and Options
................................................... 38
Chapter 8 Interest Rate Risk and Swaps
...................................................................................... 43
Chapter 9 Foreign Exchange Rate Determination
....................................................................... 48
Chapter 10 Transaction Exposure
...............................................................................................
. 55
Chapter 11 Translation Exposure
...............................................................................................
.. 60
Chapter 12 Operating Exposure
...............................................................................................
..... 64
Chapter 13 The Global Cost and Availability of Capital
............................................................. 68
Chapter 14 Raising Equity and Debt Globally
............................................................................. 72
Chapter 15 Multinational Tax Management
................................................................................ 79
Chapter 16 International Trade Finance
....................................................................................... 85
Chapter 17 Foreign Direct Investment and Political Risk
........................................................... 89

Chapter 18 Multinational Capital Budgeting and Cross-Border
Acquisitions ........................... 101
© 2016 Pearson Education, Inc.
CHAPTER 1
MULTINATIONAL FINANCIAL MANAGEMENT:
OPPORTUNITIES AND CHALLENGES
1. Globalization Risks in Business. What are some of the risks
that come with the growing
globalization of business?
Exchange rates. The international monetary system, an eclectic
mix of floating and managed
fixed exchange rates, is constantly changing. For example, the
growth of the Chinese yuan is now
changing the global currency landscape.
Interest rates. Large fiscal deficits, including the current
eurozone crisis, plague most of the major
trading countries of the world, complicating fiscal and monetary
policies, and ultimately, interest

rates and exchange rates.
Many countries experience continuing balance of payments
imbalances, and in some cases,
dangerously large deficits and surpluses, all will inevitably
move exchange rates.
Ownership, control, and governance vary radically across the
world. The publicly traded
company is not the dominant global business organization—the
privately held or family-owned
business is the prevalent structure—and their goals and
measures of performance vary
dramatically.
Global capital markets that normally provide the means to
lower a firm’s cost of capital, and even
more critically, increase the availability of capital, have in
many ways shrunk in size and have
become less open and accessible to many of the world’s
organizations.
Financial globalization has resulted in the ebb and flow of
capital in and out of both industrial and
emerging markets, greatly complicating financial management
(Chapters 5 and 8).
2. Globalization and the MNE. The term globalization has
become widely used in recent years. How

would you define it?
Narayana Murthy’s quote is a good place to start any
discussion of globalization:
“I define globalization as producing where it is most cost-
effective, selling where it is most
profitable, and sourcing capital where it is cheapest, without
worrying about national
boundaries.”
Narayana Murthy, President and CEO, Infosys
3. Assets, Institutions, and Linkages. Which assets play the
most critical role in linking the major
institutions that make up the global financial marketplace?
The debt securities issued by governments. These low risk or
risk-free assets form the foundation for
the creation, trading, and pricing of other financial assets like
bank loans, corporate bonds, and
equities (stock). In recent years, a number of additional
securities have been created from the existing
2 Eiteman/Stonehill/Moffett | Multinational Business Finance,
14th Edition

securities—derivatives, whose value is based on market value
changes in the underlying securities.
The health and security of the global financial system relies on
the quality of these assets.
4. Currencies and Symbols. What technological change is even
changing the symbols we use in the
representation of different country currencies?
As currency trading has shifted from verbal telephone
conversations to electronic and digital trading,
currency symbols (many of which were not common across
alphabetic platforms, like the British
pound, £) have been replaced with the ISO-4217 codes, three-
letter currency codes like USD, EUR,
and GBP.
5. Eurocurrencies and LIBOR. Why have eurocurrencies and
LIBOR remained the centerpiece of the
global financial marketplace for so long?
Eurocurrencies and LIBOR (and there are LIBOR rates for all
eurocurrencies) reflect the “purest” of
market-driven currencies and instrument rates. They are largely
unregulated and, therefore, reflect
freely traded assets whose value is set by the daily global
marketplace.
6. Theory of Comparative Advantage. Define and explain the

theory of comparative advantage.
The theory of comparative advantage provides a basis for
explaining and justifying international trade
in a model world assumed to enjoy free trade, perfect
competition, no uncertainty, costless
information, and no government interference. The theory
contains the following features:
Exporters in Country A sell goods or services to unrelated
importers in Country B.
Firms in Country A specialize in making products that can be
produced relatively efficiently,
given Country A’s endowment of factors of production: that is,
land, labor, capital, and
technology. Firms in Country B do likewise, given the factors
of production found in Country B.
In this way, the total combined output of A and B is maximized.
Because the factors of production cannot be moved freely from
Country A to Country B, the
benefits of specialization are realized through international
trade.
The way the benefits of the extra production are shared
depends on the terms of trade, the ratio at
which quantities of the physical goods are traded. Each
country’s share is determined by supply

and demand in perfectly competitive markets in the two
countries. Neither Country A nor
Country B is worse off than before trade, and typically both are
better off, albeit perhaps
unequally.
7. Limitations of Comparative Advantage. Key to understanding
most theories is what they say and
what they don’t. Name four or five key limitations to the theory
of comparative advantage.
Although international trade might have approached the
comparative advantage model during the
nineteenth century, it certainly does not today, for the following
reasons:
Countries do not appear to specialize only in those products
that could be most efficiently
produced by that country’s particular factors of production.
Instead, governments interfere with
comparative advantage for a variety of economic and political
reasons, such as to achieve full
employment, economic development, national self-sufficiency
in defense-related industries, and
and Challenges 3

protection of an agricultural sector’s way of life. Government
interference takes the form of
tariffs, quotas, and other non-tariff restrictions.
At least two of the factors of production, capital and
technology, now flow directly and easily
between countries, rather than only indirectly through traded
goods and services. This direct flow
occurs between related subsidiaries and affiliates of
multinational firms, as well as between
unrelated firms via loans and license and management contracts.
Even labor flows between
countries, such as immigrants into the United States (legal and
illegal), immigrants within the
European Union and other unions.
Modern factors of production are more numerous than in this
simple model. Factors considered in
the location of production facilities worldwide include local and
managerial skills, a dependable
legal structure for settling contract disputes, research and
development competence, educational
levels of available workers, energy resources, consumer demand
for brand name goods, mineral
and raw material availability, access to capital, tax differentials,
supporting infrastructure (roads,
ports, communication facilities), and possibly others.
Although the terms of trade are ultimately determined by

supply and demand, the process by
which the terms are set is different from that visualized in
traditional trade theory. They are
determined partly by administered pricing in oligopolistic
markets.
Comparative advantage shifts over time as less developed
countries become more developed and
realize their latent opportunities. For example, during the past
150 years, comparative advantage
in producing cotton textiles has shifted from the United
Kingdom to the United States to Japan to
Hong Kong to Taiwan and to China.
The classical model of comparative advantage did not really
address certain other issues, such as
the effect of uncertainty and information costs, the role of
differentiated products in imperfectly
competitive markets, and economies of scale.
Nevertheless, although the world is a long way from the
classical trade model, the general principle of
comparative advantage is still valid. The closer the world gets
to true international specialization, the
more world production and consumption can be increased,
provided the problem of equitable
distribution of the benefits can be solved to the satisfaction of
consumers, producers, and political
leaders. Complete specialization, however, remains an
unrealistic limiting case, just as perfect

competition is a limiting case in microeconomic theory.
8. International Financial Management. What is different about
international financial management?
Multinational financial management requires an understanding
of cultural, historical, and institutional
differences, such as those affecting corporate governance.
Although both domestic firms and MNEs
are exposed to foreign exchange risks, MNEs alone face certain
unique risks, such as political risks,
that are not normally a threat to domestic operations.
MNEs also face other risks that can be classified as extensions
of domestic finance theory. For
example, the normal domestic approach to the cost of capital,
sourcing debt and equity, capital
budgeting, working capital management, taxation, and credit
analysis needs to be modified to
accommodate foreign complexities. Moreover, a number of
financial instruments that are used in
domestic financial management have been modified for use in
international financial management.
Examples are foreign currency options and futures, interest rate
and currency swaps, and letters of
credit.
14th Edition

9. Ganado’s Globalization. After reading the chapter’s
description of Ganado’s globalization process,
how would you explain the distinctions between international,
multinational, and global companies?
The difference in definitions for these three terms is subjective,
with different writers using different
terms at different times. No single definition can be considered
definitive, although as a general
matter the following probably reflect general usage.
International simply means that the company has some form of
business interest in more than one
country. That international business interest may be no more
than exporting and importing, or it may
include having branches or incorporated subsidiaries in other
countries. International trade is usually
the first step in becoming “international,” but the term also
encompasses foreign subsidiaries created
for the single purpose of marketing, distribution, or financing.
The term international is also used to
encompass what are defined as multinational and global in the
following two paragraphs.
Multinational is usually taken to mean a company that has
operating subsidiaries and performs a full
set of its major operations in a number of countries, i.e., in
“many nations.” “Operations” in this
context includes both manufacturing and selling, as well as

other corporate functions, and a
multinational company is often presumed to operate in a greater
number of countries than simply an
international company. A multinational company is presumed to
operate with each foreign unit
“standing on its own,” although that term does not preclude
specialization by country or supplying
parts from one country operation to another.
Global is a newer term that essentially means about the same as
“multinational,” i.e., operating
around the globe. Global has tended to replace other terms
because of its use by demonstrators at the
international meetings (“global forums?”) of the International
Monetary Fund and World Bank that
took place in Seattle in 1999 and Rome in 2001. Terrorist
attacks on the World Trade Center and the
Pentagon in 2001 led politicians to refer to the need to
eliminate “global terrorism.”
10. Ganado, the MNE. At what point in the globalization
process did Ganado become a multinational
enterprise (MNE)?
Ganado became a multinational enterprise (MNE) when it began
to establish foreign sales and service
subsidiaries, followed by creation of manufacturing operations
abroad or by licensing foreign firms to
produce and service Trident’s products. This multinational
phase usually follows the international
phase, which involved the import and/or export of goods and/or
services.

11. Role of Market Imperfections. What is the role of market
imperfections in the creation of
opportunities for the multinational firm?
MNEs strive to take advantage of imperfections in national
markets for products, factors of
production, and financial assets.
Imperfections in the market for products translate into market
opportunities for MNEs. Large
international firms are better able to exploit such competitive
factors as economies of scale,
managerial and technological expertise, product differentiation,
and financial strength than their
local competitors are.
MNEs thrive best in markets characterized by international
oligopolistic competition, where these
factors are particularly critical.
and Challenges 5

Once MNEs have established a physical presence abroad, they
are in a better position than purely
domestic firms are to identify and implement market
opportunities through their own internal
information network.
12. Why Go. What do firms become multinational?
1. Entry into new markets, not currently served by the firm,
which in turn allow the firm to grow
and possibly to acquire economies of scale
2. Acquisition of raw materials, not available elsewhere
3. Achievement of greater efficiency, by producing in countries
where one or more of the factors of
production are underpriced relative to other locations
4. Acquisition of knowledge and expertise centered primarily in
the foreign location
5. Location of the firms’ foreign operations in countries deemed
politically safe
13. Multinational Versus International. What is the difference
between an international firm and a
multinational firm?
A multinational firm goes beyond simply selling to or trading
with firms in foreign countries
(international), by expanding its intellectual capital and

acquiring a physical presence in foreign
countries. This allows the firm to expand and deepen its core
competitiveness and global reach to
more markets, customers, suppliers, and partners.
14. Ganado’s Phases. What are the main phases that Ganado
passed through as it evolved into a truly
global firm? What are the advantages and disadvantages of
each?
a. International trade. Two advantages are finding out if the
firms’ products are desired in the
foreign country and learning about the foreign market. Two
disadvantages are lack of control
over the final sale and service to final customer (many exports
are to distributors or other types of
firms that in turn resell to the final customer) and the
possibility that costs and thus final customer
sales prices will be greater than those of competitors that
manufacture locally.
b. Foreign sales and service offices. The greatest advantage is
that the firm has a physical presence
in the country, allowing it great control over sales and service
as well as allowing it to learn more
about the local market. The disadvantage is the final local sales
prices, based on home country
plus transportation costs, may be greater than competitors that
manufacture locally.

c. Licensing a foreign firm to manufacture and sell. The
advantages are that product costs are based
on local costs and that the local licensed firm has the knowledge
and expertise to operate
efficiently in the foreign country. The major disadvantages are
that the firm might lose control of
valuable proprietary technology and that the goals of the foreign
partner might differ from those
of the home country firm. Two common problems in the latter
category are whether the foreign
firm (that is manufacturing the product under license) is a
shareholder wealth or corporate wealth
maximizer, which in turn often leads to disagreements about
reinvesting earning to achieve
greater future growth versus making larger current dividends to
owners and payments to other
stakeholders.
d. Part ownership of a foreign, incorporated, subsidiary, i.e., a
joint venture. The advantages and
disadvantages are similar to those for licensing: Product costs
are based on local costs and that the
local joint owner presumably has the knowledge and expertise
to operate efficiently in the foreign
14th Edition

country. The major disadvantages are that the firm might lose
control of valuable proprietary
technology to its joint venture partner, and that the goals of the
foreign owners might differ from
those of the home country firm.
e. Direct ownership of a foreign, incorporated, subsidiary. If
fully owned, the advantage is that the
foreign operations may be fully integrated into the global
activities of the parent firm, with
products resold to other units in the global corporate family
without questions as to fair transfer
prices or too great specialization. (Example: the Ford
transmission factory in Spain is of little use
as a self-standing operation; it depends on its integration into
Ford’s European operations.) The
disadvantage is that the firm may come to be identified as a
“foreign exploiter” because
politicians find it advantageous to attack foreign-owned
businesses.
15. Financial Globalization. How do the motivations of
individuals, both inside and outside the
organization or business, define the limits of financial
globalization?
If influential insiders in corporations and sovereign states
continue to pursue the increase in firm
value, there will be a definite and continuing growth in
financial globalization. But if these same
influential insiders pursue their own personal agendas, which

may increase their personal power,
influence, or wealth, then capital will not flow into these
sovereign states and corporations. The result
is the growth of financial inefficiency and the segmentation of
globalization outcomes creating
winners and losers.
The three fundamental elements—financial theory, global
business, management beliefs and
actions—combine to present either the problem or the solution
to the growing debate over the benefits
of globalization to countries and cultures worldwide.
CHAPTER 2
THE INTERNATIONAL MONETARY SYSTEM
1. The Rules of the Game. Under the gold standard, all national
governments promised to follow the
“rules of the game.” What did this mean?
A country’s money supply was limited to the amount of gold
held by its central bank or treasury. For
example, if a country had 1,000,000 ounces of gold and its fixed
rate of exchange was 100 local

currency units per ounce of gold, that country could have
100,000,000 local currency units
outstanding. Any change in its holdings of gold needed to be
matched by a change in the number of
local currency units outstanding.
2. Defending a Fixed Exchange Rate. What did it mean under
the gold standard to “defend a fixed
exchange rate,” and what did this imply about a country’s
money supply?
Under the gold standard, a country’s central bank was
responsible for preserving the exchange value
of the country’s currency by being willing and able to exchange
its currency for gold reserves upon
the demand by a foreign central bank. This required the country
to restrict the rate of growth in its
money supply to a rate that would prevent inflationary forces
from undermining the country’s own
currency value.
3. Bretton Woods. What was the foundation of the Bretton
Woods international monetary system, and
why did it eventually fail?
Bretton Woods, the fixed exchange rate regime of 1945–73,
failed because of widely diverging
national monetary and fiscal policies, differential rates of
inflation, and various unexpected external
shocks. The U.S. dollar was the main reserve currency held by

central banks and was the key to the
web of exchange rate values. The United States ran persistent
and growing deficits in its balance of
payments requiring a heavy outflow of dollars to finance the
deficits. Eventually the heavy overhang
of dollars held by foreigners forced the United States to devalue
the dollar because it was no longer
able to guarantee conversion of dollars into its diminishing
store of gold.
4. Technical Float. What specifically does a floating rate of
exchange mean? What is the role of
government?
A truly floating currency value means that the government does
not set the currency’s value or
intervene in the marketplace, allowing the supply and demand
of the market for its currency to
determine the exchange value.
5. Fixed versus Flexible. What are the advantages and
disadvantages of fixed exchange rates?
Fixed rates provide stability in international prices for the
conduct of trade. Stable prices aid in
the growth of international trade and lessen risks for all
businesses.
Fixed exchange rates are inherently anti-inflationary, requiring
the country to follow restrictive

monetary and fiscal policies. This restrictiveness, however, can
often be a burden to a country
14th Edition
wishing to pursue policies that alleviate continuing internal
economic problems, such as high
unemployment or slow economic growth.
Fixed exchange rate regimes necessitate that central banks
maintain large quantities of
international reserves (hard currencies and gold) for use in the
occasional defense of the fixed
rate. As international currency markets have grown rapidly in
size and volume, increasing reserve
holdings has become a significant burden to many nations.
Fixed rates, once in place, may be maintained at rates that are
inconsistent with economic
fundamentals. As the structure of a nation’s economy changes,
and as its trade relationships and
balances evolve, the exchange rate itself should change.
Flexible exchange rates allow this to
happen gradually and efficiently, but fixed rates must be
changed administratively—usually too
late, too highly publicized, and at too large a one-time cost to

the nation’s economic health.
6. De facto and de jure. What do the terms de facto and de jure
mean in reference to the International
Monetary Fund’s use of the terms?
A country’s actual exchange rate practices is the de facto
system. This may or may not be what the
“official” or publicly and officially system commitment, the de
jure system.
7. Crawling Peg. How does a crawling peg fundamentally differ
from a pegged exchange rate?
In a crawling peg system, the government will make occasional
small adjustments in its fixed rate of
exchange in response to changes in a variety of quantitative
indicators, such as inflation rates or
economic growth. In a truly pegged exchange rate regime, no
such changes or adjustments are made
to the official fixed rate of exchange.
8. Global Eclectic. What does it mean to say the international
monetary system today is a global
eclectic?
The current global market in currency is dominated by two
major currencies, the U.S. dollar and the

European euro, and after that, a multitude of systems,
arrangements, currency areas, and zones.
9. The Impossible Trinity. Explain what is meant by the term
impossible trinity and why it is in fact
“impossible.”
Countries with floating rate regimes can maintain monetary
independence and financial
integration but must sacrifice exchange rate stability.
Countries with tight control over capital inflows and outflows
can retain their monetary
independence and stable exchange rate but surrender being
integrated with the world’s capital
markets.
Countries that maintain exchange rate stability by having fixed
rates give up the ability to have an
independent monetary policy.
10. The Euro. Why is the formation and use of the euro
considered to be of such a great
accomplishment? Was it really needed? Has it been successful?
The creation of the euro required a near-Herculean effort to
merge the monetary institutions of
separate sovereign states. This required highly disparate
cultures and countries to agree to combine,

Chapter 2 The International Monetary System 9
giving up a large part of what defines an independent state.
Member states were so highly integrated
in terms of trade and commerce that maintaining separate
currencies and monetary policies was an
increasing burden on both business and consumers, adding cost
and complexity, which added sizable
burdens to global competitiveness. The euro is widely
considered to have been extremely successful
since its launch.
11. Currency Board or Dollarization. Fixed exchange rate
regimes are sometimes implemented through
a currency board (Hong Kong) or dollarization (Ecuador). What
is the difference between the two
approaches?
In a currency board arrangement, the country issues its own
currency but that currency is backed
100% by foreign exchange holdings of a hard …
Government Effectiveness and the Global Financial Crisis 65
Government Effectiveness, the Global
Financial Crisis, and Multinational

Enterprise Internationalization
Christopher Williams and Candace A. Martinez
ABSTRACT
This study examines the influence of national institutions on
multinational enterprise entry mode behavior during eco-
nomic downturns. Drawing on institutional and transaction cost
theories, the authors propose (1) alternative hypothe-
ses for the effect of host-country government effectiveness (a
spatial institution) and (2) hypotheses for a direct and an
indirect effect of a global financial crisis (a temporal event
affecting all countries) on firms’ internationalization strategy.
With a sample comprising 624 foreign expansion investments
conducted by Dutch multinational enterprises between
2004 and 2009 into 66 countries, this investigation confirms
that majority control more likely occurs when host-
country government effectiveness is high or when the
investment is made during a global financial crisis. The authors
also find support for a hypothesized moderating effect of a
global financial crisis. Concluding remarks discuss the impli-
cations of these findings for scholars and practitioners.
Keywords: institutions, financial crisis, government
effectiveness, internationalization, multinational enterprises
I
nstitutions—or rules of the game—delineate individu-
als’ and organizations’ choice sets. Weak institutions
are especially problematic for multinational enterprises
(MNEs) as they seek new markets in developing coun-
tries. When the regulations that govern political, social,
and economic business transactions are less transparent,
more poorly specified, or more weakly enforced than
those in societies with effective regulatory regimes,
uncertainty results (Henisz 2000; Ramamurti and Doh

2004). Multinational enterprises use many interrelated
firm- and country-level strategies to cope with uncertain
environments in their overseas operations (Agarwal
1994). These plans of action can range from a system-
atic sequencing of internationalization stages through
gradual commitment of resources (Johanson and Vahlne
1977, 1990), to internal processes of learning and net-
work development (Welch and Welch 1996), to tech-
nology transfer and knowledge management (Cui, Grif-
fith, and Cavusgil 2005). Indeed, it has been argued that
an MNE’s performance in foreign environments is
linked to the degree of integration in its foreign sub-
sidiaries and to its market responsiveness—that is, its
ability to evaluate changing, exogenous market condi-
tions and make informed strategic decisions (Anderson
and Coughlan 1987; Lee 2010; Luo 2001; Prahalad and
Doz 1987; Yip, Gomez Biscarri, and Monti 2000).
External pressures may arise not only within the borders
of one country, however. A firm’s choice of entry mode
when venturing into foreign markets can also be driven
by outside forces that are not under the control of the
MNE’s host or home country. Although academic
research has examined the role of the host-country insti-
tutional environment in determining firms’ preference
for full or shared ownership (Brouthers 2002; Delios
and Beamish 1999; Gatignon and Anderson 1988;
Henisz and Macher 2004), little scholarly attention has
been directed at the impact of national institutions on
Christopher Williams is Assistant Professor, Richard Ivey
School of
Business, University of Western Ontario (e-mail:
[email protected]).
Candace A. Martinez is Assistant Professor, John Cook School

of
Business, Saint Louis University (e-mail: [email protected]).
Journal of International Marketing
©2012, American Marketing Association
Vol. 20, No. 3, 2012, pp. 65–78
ISSN 1069-0031X (print) 1547-7215 (electronic)
66 Journal of International Marketing
firm-level responses to the internationalization process
during times of worldwide volatility, such as the recent
global financial crisis. On the aggregate level, reports
have observed changing patterns as well as severe
declines in foreign direct investment (FDI) inflows and
outflows (Lairson 2011; United Nations Conference on
Trade and Development 2011). Global merger-and-
acquisition activity dropped sharply in 2008 and 2009
(Multilateral Investment Guarantee Agency 2011;
Organisation for Economic Co-operation and Develop-
ment 2008; World Bank Group 2009). Yet a downturn
in FDI does not mean that all MNEs cease committing
resources to foreign markets or stop establishing foreign
subsidiaries and international joint ventures. Some
firms, for example, persistently invest in innovation dur-
ing worldwide economic recessions, while others do not
(Filippetti and Archibugi 2011). It is also known that
firms exhibit heterogeneous decision making in good
times, that they use different strategies for different mar-
kets, that their ability to respond to change differs, and
that the national institutional setting influences their
behavior and performance (Douglas and Craig 2011;
Freeman 1995; North 2005). What is not known, how-
ever, is the impact of institutional forces on firm

responses to foreign market expansion when the volatil-
ity is not concentrated within the host country alone but
rather is diffused at the global level as represented by an
international economic decline.
We address this lacuna by investigating how host-
country government effectiveness influences MNE
entry mode choice, a strategy affecting the crucial
make-or-buy decision for firms’ global supply chain,
and how the presence of a global financial crisis directly
and indirectly affects MNE internationalization strate-
gies as firms cross borders for new market opportuni-
ties (Lee 2010). We apply institutional and transaction
cost theoretic logics to underpin our hypotheses (North
1990, 2005; Scott 1995; Williamson 1975, 1983). We
also hypothesize an interaction effect between govern-
ment effectiveness in the host country and the presence
of a global financial crisis. We posit that in a volatile
financial period, relatively lower levels of government
effectiveness do not deter MNEs from choosing
majority control to the degree they might in the absence
of financial uncertainty. Our analysis is based on 624
foreign expansions of Dutch MNEs listed on the AEX
(Amsterdam Stock Exchange) into 66 developed and
developing countries between 2004 and 2009. Control-
ling for a range of firm-, country-, and industry-level
factors, we find support for our direct and indirect
effects hypotheses.
We contribute to research on the relationship among
host-country institutions, international sources of risk,
and MNE choice of entry mode in international mar-
kets. First, we enhance understanding of how MNEs
pursue international market expansion in the face of
exogenous (to the firm) uncertainty, a topic of keen
interest in the international business and marketing

fields (Agarwal 1994; Barkema, Bell, and Pennings
1996; Brouthers 2002; Malhotra, Agarwal, and Ulgado
2003; Yip, Gomez Biscarri, and Monti 2000). In par-
ticular, we are among the first to document the impact
of the recent global financial crisis on MNE entry mode
choice. Second, we extend institutional theory as it has
been applied to the relationship between a host coun-
try’s governance mechanisms and the internationaliza-
tion strategy of an MNE. By revealing a statistically sig-
nificant interaction between national-level governance
and a temporal financial crisis, we contend that institu-
tional theory should be extended in the context of MNE
market internationalization to include not only local
sources of risk in the host-country environment but also
exogenous global sources of risk that change over time.
THEORY AND HYPOTHESES
Both transaction cost and institutional theories are
appropriate lenses through which to view MNE entry
mode choices across countries with differing institu-
tional contexts (Henisz 2002; Yiu and Makino 2002).
According to transaction cost analysis, MNEs reduce
the transaction costs of arm’s-length contractual
arrangements by internalizing intermediate product
markets (Buckley and Casson 1976; Coase 1937; Rug-
man and Verbeke 2003; Williamson 1975, 1983). The
two principal behavioral assumptions of transaction
cost analysis—namely, bounded rationality (the limits of
human cognition) and opportunism between exchange
partners (the risk of self-interest-seeking behavior)—
have direct implications for the way MNEs approach
international markets. Transaction cost theory uses an
efficiency argument to explain and predict alternative
governance structure choices (Hennart 1982; Kogut
1988). Among its most salient arguments is that firms

will opt for minority or shared ownership to lessen the
negative impact of environmental uncertainty and to
minimize the likelihood of opportunistic behavior.
Institutional theory similarly reasons that in countries in
which the institutional environment—the fundamental
legal, political, and socioeconomic ground rules—does
not inspire confidence (i.e., institutions are weak), firms
will show a preference for ownership modes with less
control (Davis and North 1971; North 1990). Weak-
nesses in the institutional environment refer to condi-
tions that undermine property and contract rights, thus
increasing investment risk. When these conditions exist
in the host country, firms are less willing to make large
resource commitments because increased ownership and
control also implies commensurate responsibility and
risks (Ahmed 1977; Brouthers 2002). As such, the
nature of the institutional environment influences the
comparative efficiency of governance structures; the
firm’s ownership structure choice will vary with the
need to safeguard its assets and minimize risks across
differing institutional environments.
We follow previous scholars in defining institutions as
the regulative, normative, and cognitive structures that
form the boundary conditions for individual and orga-
nizational behavior and that establish a society’s ability
to uphold the rule of law (North 1990; Scott 1995).
Research into the role of shared ownership is consistent
with both transaction costs and institutional predic-
tions. On the one hand, firms may join forces with a

partner for purely efficiency reasons (e.g., to access
locally based assets) (Hennart 1988). Scholars have
found an association between the foreign parent’s
decreasing level of ownership and an increased need to
source complementary host-country assets (Beamish
1987; Gomes-Casseres 1989). On the other hand, firms
may opt for a minority controlling stake to mitigate the
potential downside risk of opportunistic behavior by
host governments (Agarwal and Ramaswami 1992;
Delios and Henisz 2003), the logic being that host gov-
ernments treat joint ventures with a local partner more
favorably, all else being equal. Empirical evidence sug-
gests that when institutions are not well specified, mon-
itored, or enforced, MNEs will forgo full or majority
ownership for their affiliates abroad (and the greater
control over decision making it implies) and select
arm’s-length arrangements or a minority ownership
stake to compensate for their exposure to institutional
risk (Delios and Beamish 1999; Gomes-Casseres 1990;
Hill, Hwang, and Kim 1990; Kim and Hwang 1992).
Baseline Hypotheses: Government
Effectiveness and MNE Entry Choice
One of the unique mandates of national governments is
their ability to draft and enact binding laws that guide
the conduct of individuals and organizations. The
notion that some corporations wield (or seek to wield)
as much or more power than some nation-states in a
post-Westphalian world has received attention in the
popular press and in academic journals (Kobrin 2009,
2011; Litan 2005; The New York Times 2010). Govern-
ments make laws, and citizens and organizational actors
(i.e., firms) follow them under penalty of fines, sanc-
tions, or worse. In the context of transacting business

across borders, a crucial element of the formal institu-
tions (rules and regulations) that affect local firms and
MNEs is that laws are perceived as fair and are
enforcea ble (North 1990; Williamson 1996). This
notion of credible and enforceable laws backed by
meaningful deterrents is what we refer to as government
effectiveness. Government effectiveness is part and par-
cel of a strong institutional environment.
Government effectiveness undergirds most, if not all,
aspects of business ventures—starting a business, paying
taxes, trading across borders, accessing credit, drafting
contracts, and liquidating a business. When a multi-
national firm faces the quintessential internationaliza-
tion decision of how much commitment and control to
use when establishing new ventures abroad, it must con-
sider the extent to which local laws will protect its inter-
ests. If the host government does not have comprehen-
sive or adequate legislation in place, or if it is not willing
or able to uphold its own laws, this lack of government
effectiveness will represent an important source of
uncertainty and potential cost for the firm.
What are the implications of this? One line of reasoning
argues that firms will have a preference for more control
in their international new ventures when they view host-
country institutions, policy formulation, and policy
implementation as reliable and effective. Because MNEs
tend to trust the legal system, they will be more willing
to make greater resource commitments. According to
institutional theory, greater government effectiveness will
make it less likely that assets committed to the foreign
market will be expropriated because governments will
not pursue such action outside their own laws. Greater
government effectiveness will also make it easier for the
firms to set up the operation, engage in international

trade from the location, access credit, and conduct other
business on foreign soil. This institutional argument sug-
gests, however, that when government effectiveness is
inadequate, MNEs will choose lower (minority) control
stakes and initially commit fewer resources in the host
country (Brouthers 2002; Delios and Henisz 2003). This
leads to the following hypothesis:
H1: The higher the level of government effective-
ness in a host country, the more likely an
MNE is to choose a majority control stake in
its internationalizing strategy.
An alternative perspective reasons that an MNE will
likewise prefer a majority stake when the level of gov-
ernment effectiveness is low. According to this line of
reasoning, because good, sound institutions engender
strong incentives for lawful conduct (which in turn are
upheld by good, sound institutions), partners are less
likely to act in a self-interested and unlawful manner. In
the absence of safeguards that signal a host govern-
ment’s credible commitment toward a functioning legal
system, however, this counterargument follows transac-
tion cost logic: Without the threat of perceived penalties
in a context of incomplete contracts and bounded
rationality, actors could resort to opportunistic behavior
(Williamson 1975, 1985). A partner has better knowl-
edge and appreciation of the political system in the host
country and is better positioned to avoid legal reprisals,
potentially at the expense of the investing MNE, both of
which are factors that could expose MNE assets to part-

ner opportunism. Coupled with an ineffective host-
country legal system, MNEs would avoid partnering
and seek control over the venture (Agarwal and
Ramaswami 1992; Brouthers and Brouthers 2000). This
leads to an alternative hypothesis:
H1alt: The lower the level of government effective-
ness in a host country, the more likely an
MNE is to choose a majority control stake
in its internationalizing strategy.
New Hypotheses: The Global Financial Crisis
and MNE Entry Choice
Many observers consider the recent global financial cri-
sis the worst economic recession in modern history. The
center of the crisis marked a global “credit crunch,” in
which banks were reluctant to lend money and govern-
ments, private-sector firms, and consumers worldwide
were negatively affected by worsening liquidity and
decreasing confidence in international financial mar-
kets. Large financial institutions collapsed in various
developed countries, and many national governments
needed to bail out their financial institutions and recap-
italize them to secure stability in the financial system.
We argue that such types of unstable conditions in inter-
national markets have a profound impact on the way
MNEs approach their internationalization strategies. Dur-
ing times of worldwide financial crises, firms’ revenues are
put under pressure and equity prices are down. As a result,
more host-country firms, which may be undervalued
because of the dire economic conditions, become possible
targets for acquisition (Agrawal and Jaffe 2003). The
value destruction that a global financial meltdown induces

thus may represent a ripe investment opportunity for
MNEs to gain valuable assets at an attractive price. If
majority ownership is consistent with MNEs’ internation-
alization strategy, the crisis may tempt them to acquire (or
gain a controlling interest of) firms overseas that, absent
the financial crisis, they would not have considered.
A global financial crisis represents additional transac-
tion costs for the MNE that may cause it to reassess the
risks of partnering with minority control and seek
majority control as the most optimal governance
arrangement (Shelanski and Klein 1995). The potential
partners the MNE seeks in its cross-border expansions
are also affected by the economy’s tighter credit and
lending conditions. Therefore, the number of potential
joint venture partners that have the capability and will-
ingness to undertake new ventures with an investing
MNE will be reduced. As a result, the MNE will have at
its disposal a smaller and more challenging pool from
which to select potential partners, increasing its search
and monitoring costs as well as the likelihood of more
uncertain outcomes if it decides to partner (Williamson
1975, 1983). This process will induce the MNE to
reevaluate the advisability of minority versus majority
control modes of entry (Gulati 1998).
In addition to these issues, sovereign debt and corporate
default risks are especially germane concerns for firms in
times of financial turbulence (Vaaler and McNamara
2004). The MNE will be less inclined to get involved in
minority control partnering in new ventures because of
the increased ex ante search and monitoring costs
incurred when assessing the level and impact of part-
ners’ credit worthiness and their associated financial sta-
bility. Moreover, after the partnership is underway,
unforeseen contingencies (not contracted for ex ante)

are more likely to surface in tandem with an increase in
ex post transaction costs linked to partners’ exposure to
the global financial crisis. Prolonged haggling, monitor-
ing, dispute settling, and bonding expenses may result
(Moschandreas 1997). These concerns may also lead the
MNE to prefer majority ownership stakes that allow it
to control operations and avoid becoming hostage to
partner-related risks (Jap and Anderson 2003). Thus:
H2: In times of a global financial crisis, an MNE is
more likely to choose a majority control stake
in its internationalizing strategy.
Moderating Effect of a Financial Crisis
Previously, we presented two alternative hypotheses (H1
and H1alt) for the relationship between government
effectiveness and MNE entry mode preference. We also
posited a positive association between the worldwide
economic downturn and an MNE’s choice of majority
control entry mode (H2). We now extend these predic-
tions by arguing that when an MNE internationalizes
during a global financial crisis, the transaction cost logic
of H1alt becomes more important than the institutional
logic of H1. The external transaction costs related to
partnering in a new international venture will be higher
during a global financial crisis because of the increased
difficulties in searching for partners, writing contracts,
and establishing credible commitments and other safe-
guards (e.g., trust) in an inherently unstable environ-
ment (Dyer 1997). The question then arises: Will gov-
ernment effectiveness in a host country alleviate the

additional transaction costs brought about by the pres-
ence of a global financial crisis in an MNE’s choice of
internationalization strategy?
When MNEs consider entry into countries with low
government effectiveness during a financial crisis, they
will be less inclined to use minority control modes. The
liquidity problems facing potential partners need to be
assessed and contracts written in a changing and
uncertain context for both the investing MNE and the
partners. Host governments operating in weak institu-
tional environments will be ineffective in helping the
MNE resolve any co-ownership issues with joint ven-
ture partners in an efficient and expeditious manner or
deal with additional transaction costs. Not only will
the government have little influence over the course of
events in global markets, but it will also likely have
few capabilities to reassure the investing MNE that
legal safeguards are adequate enough to compensate
for the additional risk that the MNE is assuming.
However, when considering other countries with
higher levels of government effectiveness during a
financial crisis, the MNE will be more inclined to use
minority control modes. In this situation, the govern-
ment can be trusted to deal with any unforeseen or
negative consequences arising from additional transac-
tion costs. Thus:
H3: In the presence of a global financial crisis,
there is a negative relationship between gov-
ernment effectiveness and the likelihood of an
MNE choosing a majority control stake in its
internationalizing strategy.
METHODOLOGY
Sample

To test our hypotheses, we used MNEs from a single
developed home country that invested in a wide range of
host countries. We collected data from the entire universe
of 24 MNEs that were listed on the Dutch AEX index in
2004 and traced their expansion activities for all years
from 2004 through 2009. Although the economy of
Netherlands is smaller than that of other developed
countries (e.g., the United States, Japan), its geographic
and historical legacy as an important trading hub make
it one of Europe’s most important countries in terms of
FDI activity (Central Intelligence Agency 2011). As of
2009, the Netherlands was among the top ten countries
in the world in terms of its inward and outward FDI lev-
els (De Nederlandsche Bank 2011). In 2010, its MNEs’
direct investments in Latin America, for example, made
it the second-largest investor in the region, surpassed
only by the United States and followed by China in third
place (Economic Commission for Latin America 2011).
For foreign affiliates owned by BRIC-country parents
(Brazil, Russia, India, China), the Netherlands is the
third most important internationalization choice after
Germany and the United Kingdom (Groot et al. 2011),
and FDI levels in the Netherlands from Chinese and
Indian firms in particular are higher than would be
expected for a country of a size comparable to that of
the Dutch economy (Groot et al. 2011).
High FDI activity translates into a sizable universe from
which to draw a sample of international strategy deci-
sions. For this study, we chose the Netherlands’ AEX-
listed companies because they tend to be large, interna-
tionally focused MNEs with foreign investment located
not only in other developed countries but also in devel-
oping countries. Furthermore, because AEX-listed firms
are obligated by law to publish audited annual reports,

foreign expansion data are transparent and available.
We identified new expansion data by manually entering
relevant key words (e.g., “acquisition,” “start-up,”
“joint venture”) into the English version of the firms’
corporate reports for each of the six years. We screened
the acquisitions that resulted from earlier joint ventures
within the time frame of analysis, thus distinguishing
initial expansion from subsequent expansion and omit-
ting the latter from our final sample.
To ensure the robustness and reliability of the data, we
conducted an interrater reliability test on approximately
33% of the sample and a systematic check of company
press releases to verify entry mode of the cases we had
deemed to be “ambiguous” during the first round of
data collection. We omitted the few cases whose entry
mode data remained questionable from the final sample.
The frequency of observations (i.e., Dutch MNEs’ over-
seas investments) by year is as follows: 76 in 2004, 86
in 2005, 137 in 2006, 136 in 2007, 134 in 2008, and 55
in 2009.
Variables
Dependent Variable. In line with the theoretical under-
pinnings of our hypotheses, the dependent variable
measures two types of entry mode: majority and
minority control stakes. We define majority control as a
51% or greater ownership stake in the overseas sub-
sidiary by the multinational parent company and
minority control as less than a 51% control. We identi-

fied 23 cases of 50% investment by the focal MNE and
coded them as minority control joint ventures. The
dummy variable was coded as 1 for majority control
and 0 for minority control. A positive sign on the
explanatory and control covariates therefore indicates
that majority ownership is more likely.
Independent Variables. Government effectiveness and
financial crisis are the key variables of interest in this
study. To test H1 and H1alt, we operationalized govern-
ment effectiveness by using the World Governance Indi-
cator composite measure (Kaufmann, Kraay, and Mas-
truzzi 2007). Taken from myriad data sources, this
operationalization captures the essence of what we are
interested in—namely, the government’s ability to for-
mulate and implement policy and the credibility of the
government’s commitment to uphold and enforce such
policies. This measure also includes the quality of pub-
lic and civil services and the degree of a government’s
independence from political pressures. Composite meas-
ures, such as government effectiveness, are both valid
and useful for making cross-country comparisons over
time. We used the scores for the government effective-
ness measure from the corresponding year of entry for
each observation in the data set, with relatively higher
values corresponding to better outcomes. On average,
the countries in our sample were evenly distributed on
this measure.
For H2, we used a dichotomous variable to test the
influence of a global financial crisis on an MNE’s pref-
erence for a majority- or minority-controlling stake in
its international operations. Experts concur that late
2007 to early 2008 marked the temporal boundary of
the worldwide financial meltdown (Lairson 2011;

United Nations Conference on Trade and Development
2011; World Bank Group 2009). We coded Dutch MNE
expansions abroad in 2008 and 2009 as 1 (crisis years)
and those in 2004 through 2007 as 0 (pre-crisis years).
Finally, to test the hypothesized moderating role of the
financial crisis in terms of its impact on the relationship
between government effectiveness and MNEs’ prefer-
ence for majority ownership stake, we created an inter-
action term between government effectiveness (stan-
dardized) and financial crisis.
Control Variables. To account for alternative explana-
tions for MNE internationalization strategy in times of
a global financial crisis, we used several control
variables. We controlled for host government laws or
reforms that influence a country’s level of FDI inflows.
We used the mean of a survey question taken from the
World Economic Forum’s (2006) Global Competitive-
ness Report that asks, “To what extent do rules govern-
ing [FDI] encourage or discourage it?” Rankings ranged
from 1 to 7, with higher values referring to national leg-
islation that encourages FDI. Next, we controlled for
the cultural distance between the home and host mar-
kets. Some scholars have found that cultural distance
can increase MNEs’ transaction costs and, consequently,
their preference for shared ownership modes of entry
(Erramilli and Rao 1993; Kogut and Singh 1988). Oth-
ers have provided empirical support that attests to the
role of cultural distance in encouraging MNEs to choose
majority control (Barkema, Bell, and Pennings 1996;
Gatignon and Anderson 1988). To measure the cultural
distance between the home country (the Netherlands)
and the host countries in our sample, we applied Hof-
stede’s (1980) four dimensions of culture—power dis-
tance, individualism, masculinity, and uncertainty
avoidance—to Kogut and Singh’s (1988) cultural dis-

tance formula.
Another alternative explanation that we controlled for
is the market size of the host country. Previous empiri-
cal research has found that the attractiveness of an over-
seas location for MNEs depends partly on the size of the
host-country market (Delios and Henisz 2003; Dha-
naraj and Beamish 2004), suggesting that MNEs are
more willing to enter a host country with a shared own-
ership structure if the potential demand (market power)
of the host country counterbalances their loss of control
and likewise fills …
CF Vol 10 (2), 2012
180
Business Process, Financial Performance and Data Management
Kayla Summerville, Alfred University
Zong Dai, Alfred University
EXECUTIVE SUMMARY
Business process and financial performance enabled by strategic
data management has not been well documented in the
literature. This paper examines how a business firm develops

their strategic data management system to create new business
processes and to enhance financial performance.
Keywords: Strategic data management, Competitive advantage,
Business process, Financial performance
INTRODUCTION
Data is a corporate resource (e.g. Levitin & Redman, 1998) and
effective strategic data management yields competitive
advantage (e.g. Vesely, 1990). However, the relationship
between strategic data management and business process and
financial performance has not been well documented in the
literature. This paper is intended to examine how business firms
develops their strategic data management system to create
competitive advantage and to financial performance.
The research methodology employs a fact-based principle that
combines quantitative and qualitative methods. Company
access includes information retrieval from the company’s
website and interviews conducted with Kathryn Beaton, a
Systems
Development Manager at Paychex, Inc. Mrs. Beaton is in
charge of the Enterprise Data Warehouse and is responsible for
updating and maintaining the tools that allow it to function
properly. Data was collected and analyzed at the corporate level
of the subject organization. The paper begins with an
introduction, followed by a literature review, then a case study,
and
concludes with a section of findings.
LITERATURE REVIEW

In quest of competitive advantage, the resource-based view of
firm (RBV) has suggested that competitive advantage is
derived from a bundle of strategic resources and focuses on
individual resources while under-exploring multiple resources
interactions (e.g., Barney, 1986, 1991; Dierickx & Cool, 1989;
Peteraf, 1993; Rumelt, 1984, 1987; Smith, Vasudevan, &
Tanniru, 1996). According to Barney, a resource must possess
four attributes of value, rareness, inimitability, and non-
substitutability, in order for it to provide a firm with the source
of sustained competitive advantage (Barney 1991).
In recent years, many studies in information technology have
adopted the RBV as a theoretical framework (e.g. Mata et al.,
1995; Duncan, 1995; Ross et al., 1996; Sambamurthy & Zmud,
1997; Feeny & Willcocks, 1998; Bharadwaj, 2000). Vesely
(1990) suggests that strategic data management is the key to
corporate competitiveness. A recent global survey by
Investment
Weekly News supports this statement. The importance of the
relationship between strategic data management and corporate
performance warrants more empirical research (Investment
Weekly News, 2011).
Yin (1994) suggests that the case study method is deemed
proper for a research project that is exploratory in nature. The
purpose of this paper is to substantiate that a strategy-driven
data management can be a possible source of competitive
advantage.
CF Vol 10 (2), 2012

181
PAYCHEX, INC.
Company Background
Paychex, Inc. offers payroll, human resource, and benefits
services to small and medium sized business. The company was
founded in 1971 by B. Thomas Golisano, who was the only
employee at the time. Paychex now employs more than 12,000
people and serves more than half a million businesses in the
United States. With more than 100 office locations in the US,
the company has gone international and has 4 offices in
Germany. Paychex went public in 1983 and is currently traded
on
the NASDAQ Stock Market and is a member of the S&P 500.
Paychex implemented an Enterprise Data Warehouse in 2005.
Figure 1 Paychex Data Management System shows the flow
of data through the data warehouse. Each “Source System”
brings together different aspects of all of the products and
services offered by the company. For example, “Source System
1” is client payroll data and “Source System 2” is client
Human Resource Services data. Data from each source system
is collected, but all of it is in different codes, therefore the
data is run through an “Extract, Transform, and Load” (ETL)
tool. This tool translates everything into one common data
dictionary and then loads the data into the data warehouse. The
data warehouse contains two targets, one of which is loaded
weekly and the other is loaded monthly. The data is then
retrieved by analysts within the company to perform an
examination using a business intelligence tool. This tool offers
a user friendly interface for non-IT users. The analysts then

transform the data into information.
FIGURE 1
Paychex Data Management System
Organizational
Development
Business Intelligence Tool
ETL Tool
Enterprise Data Warehouse
CF Vol 10 (2), 2012
182
Strategic Data Management
The analysts’ extraction of data from the data warehouse allows
them to gain valuable knowledge and create competitive
advantages. The four major ways in which this information is
used is in identifying revenue producing clients, new product
packages, key performance indicators, and key risk indicators.
Each process is discussed as follows.
Identifying revenue producing clients allows the company to
focus on the customer service of specific clients. Customer

service is, of course, supplied to all clients, but once major
revenue producing clients are identified, it becomes the
company’s business to keep that client with Paychex. Losing
these clients would have a devastating impact on the
company’s overall financial performance, especially on revenue.
Identifying new product packages is done in order to appeal to
more potential clients as well as the company’s current
clients. Since 2005, Paychex has added several new products
and services, such as Paychex Premier Human Resources,
Health Savings Accounts, Tax Credit Services, and Time and
Labor Online. These products and services were found to be
sought after by clients through the use of the data warehouse.
Because the data is all translated into one format, it isn’t hard
to put the data together into a useful piece of information.
Identifying key performance indicators (KPI) is helpful in
assessing the health of the company. The analysts have an
existing method to identify KPIs. The important part is that by
having all data readily available, it becomes quite easy to
identify new KPIs in an ever changing environment.
Identifying key risk indicators is important in Enterprise Risk
Management. Due to the ease of which data is extracted
from the data warehouse, this division of the company can
compile data on a monthly basis and see where security should
be
increased or where fraud must be decreased. By identifying
these risk indicators, the company can watch particular areas
and
react efficiently and effectively.
Each of these identifications can create a competitive advantage
if used properly.

Financial Performance
Figure 2 shows some of the financial aspects of Paychex, Inc.
The company’s revenue has been stable since 2008, while
their equity and total assets dropped around 2008 when the
stock market crashed and the economy entered this recession. It
is presumed that this is because of the Enterprise Data
Warehouse and the significant advantages discussed previously.
This
company has managed to keep its annual revenue on a relatively
steady incline and is rebounding in most other financial
areas without a bailout.
FIGURE 2
Paychex Financial Performance (In Thousands)
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Revenue Total Assets
Stockholders' Equity Cash&Cash Equivalents
Source: Paychex (2011), based on the financial data retrieved
from the Paychex. Inc website at http://www.paychex.com/,
accessed in December 2011.
CF Vol 10 (2), 2012
183
FINDINGS AND IMPLICATIONS
As described above, it is clear that the data management system
provides a fundamental platform on which Paychex has
sustained competitive financial performance as evidenced for
the past ten years by both quantitative and qualitative financial
measurements. If such a system has made Paychex so
successful, what is really the relationship between and
interactions of
data management and the performance? What are most
important factors that make the company so successful? Can any
other company build a similar system? What are the most
important experiences or lessons (successes or failures) in
building
a similar strategic data management system?
First, at Paychex, IT initiative is driven and guided by business
requirements and strategies, i.e. business processes created by

data management, instead of just looking for sheer technology
fashion.
Second, Paychex management is acutely sensitive to challenges
and opportunities brought by newer technology and continue
sto upgrade and advance its IT capabilities to catch business
opportunities by technology drivers.
Third, Paychex’s data management system is fully integrated
with its key business processes. This integration creates a
unique and valuable corporate resource. Because the integration
process of IT and business is usually implemented under the
contexts of the very unique historical, business, and
technological situations, with the intrinsic and contextual
complexities
and causal ambiguity, this would make the capacity of managing
the integration very difficult and even impossible to be
imitated by competitors.
Thus the capacity of managing the strategic integration of IT
and business would be a possible source of competitive
advantage for the organization which implements an enterprise
system. This issue has not been well addressed in the
literature.
RECOMMENDATIONS FOR FUTURE RESEARCH
A growing trend is that firms in all sizes, large or small, will
implement an enterprise system such as the ERP, which
typically contains the attributes of integration, modularity, and
IT personnel skills. Thus, an existing competitive enterprise
system will eventually become either a strategic necessity

(Clemons & Kimbrogh, 1986; Clemons & Row, 1991; Powell &
Dent-Micallef, 1997), or a prerequisite for staying in IT-enabled
business (Porter, 1985; Hamel & Heens, 1994), but not the
potential for competitive advantage.
It is the uses of IT that ultimately create competitive advantage.
It is the business-driven integration of business processes and
IT, which is illogical or difficult for rivals to imitate.
Thus, what is essential is the ability to manage, to apply IT for
a well-defined specific business strategy under a unique
context, and to implement a cross-functional and/or cross-
activity integration, which is much beyond the technical system
integration. It is this type of ability to manage IT that may be
one sustainable source of competitive advantage. Thus, this
type of managerial IT capability needs to be considered as the
core of the firm’s IT capacity and warrants further empirical
studies.
REFERENCES
Schwandt, T.A. (1997). Qualitative inquiry. Thousand Oaks,
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Yin, R.K. (1994). Case study research: Design and method.
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Barney, J. B. (1991). Firm resources and sustained competitive
advantage. Journal of Management, 17(1), 99-120.

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