PASIG CATHOLIC COLLGE MKTG 26 : International Marketing Chapter 4 :International Finance and Accounting1 Professor: Mr. A. T. Quiwa, MBA
Objective of this session Explain the implication of financial decisions on international strategy Describe the perspectives of international money management Discuss how international investment decisions are made. Compare U.S. accounting practices with those followed in other nations.2
Introduction The financial objective of a corporation typically constrain the latitude of a marketing manager. Marketers are affected by their companies’ money management - the raising of money, the investing of money, the maintenance of liquidity, even lesser factors like the repatriation of funds from subsidiaries to parent corporations. The decision of marketing managers also are affected by accounting consideration.3
Implication of Financial Decision on Marketing Marketing is affected both directly and indirectly by the international financial policies of the parent corporation. A good classic example is transfer pricing which means setting of prices for the transfer of goods, services and technology between related affiliates in different countries.4
Affected by Intrafirm Transfer Pricing Fund positioning income taxes tariffs quotas managerial incentives evaluations the interest of joint venture partners corporate bargaining power with suppliers5 and/or financial institutions.
Multinational Financial ManagementThe financial function has two principal aspects: 1. To provide the monetary to do business. 2. To ensure an adequate financial return on the assets of the company commensurate with its objectives.6
Problems related to management funds and investment What financial return is adequate ? How should the return be defined? What sources of funds should be tapped? Where should funds be used? Note: Finance management must not only deal with different currencies and their fluctuating rates, but also allow for the vagaries of the economic and political environment of the nations with varying7 perspective.
Financial Objectives Consider the financial objectives of a MNC that manufactures different types of parts and accessories for the automobile industry and related markets. Target profit performance shall consist of: 1. A competitive return on capital employed with a basic minimum pretax return of 15%, which shall be inflation adjusted from time to time. 2. An annual growth rate of pretax of at least 12%8
Financial Limitations Investment in net working capital of less than 35% of annual sales; investment in net fixed assets of less than 25% of annual sales. Dividend payments of approximately 40% of earnings. No significant dilution of shareholders ownership.9
Money Management Money management deals with sources and uses of funds. Money management involves such consideration as how funds should be obtained ( equity vs debt); in which currency a corporate or subsidiary should be responsible for raising funds. Prudent international money management require the formulation and revision of capital structure decisions for different entities, and budgets for intercompany funds transfer.10
The three risks related to money management The political risk of assets being taken over by the host country. The exchange risk whereby the value of the U.S. dollar changes with reference to the host-country currency. The translation risk whereby the corporate financial statements are required by SEC regulations to be based on historical costs rather than current value.11
Repatriation of Funds In domestic business, an important financial decision made by a corporation is the establishment of dividend policy; Likewise, a multinational firm needs to formulates a strategy on remission of dividends from overseas affiliates to headquarters. The international dividend policy is determined by the following six factors: 1. Tax implications 4. Age and size of affiliate 2. Political risk 5. Availability of funds 3. Foreign exchange risk 6. Presence of joint venture.12
Making International Investments Successful international companies continue to be interested in growth prospects. Different sources for investment 1. Company employees 2. Unknown host country firms 3. Licensees 4. Distributors 5. Joint-venture partners13
Making International Investments Essentially, two processes of an investment proposal determine its fate: the selling of the proposal and its review. Proposal selling and reviewing go through a variety of formal and informal human interactions. The process are significantly affected by the firm’s internal and politics-that is, factors such as who is backing the proposal, what the company’s organization is, how company personalities interact - and by factors outside the firm. Ultimately, the winning strength of a proposal depends on the diligent work of those who prepare it.14
Selling an Investment Proposal The selling job begins at the middle-management level in the international division or department. When opportunity arises the manager of international development, begins checking with colleagues (manufacturing, marketing, and legal departments) the following: 1. Sales projection 2. Manufacturing estimates 3. Patents 4. Taxes15
Selling an Investment Proposal It is important to concentrate on the really critical matters involved during investigatory period prior formal presentation of the proposal to an international executive. Once the investigation has been completed, a formal proposal is developed and submitted to the head of the international section.16
Selling an Investment Proposal The international head will make a more detailed study of the proposed project with the objective of strengthening the proposal. The location of the investment, market estimates and sales forecasts, equipment costs, total capital required, sources of funding, raw materials availability, and human resources will be examined. On the basis of this examination, the proposal is completed for submission to the corporate headquarters. Accompanied by a letter, the final proposal will include an appropriation request, an engineering report, the project proposal, and financial analysis. The letter activates the formal review procedure, first through committee, and then through the board of directors.17
Reviewing the Investment Proposal While the review procedure may vary, all corporations strive to determine whether the investment will be sound and provide a long- term, lasting benefit for the owners. It is important that the chief executive or another top officer participate actively in the review process of individual major investment decision from the viewpoint of the long-term strategic posture of the company.18
International Accounting An international accounting system serves the same two basic purposes as domestic accounting. It provide information on the business conducted during a certain period and the results obtained. The first purpose is achieved through the income statement. The second purpose is accomplished through the balance sheet, which shows the position of the business, its assets, and its liabilities at a particular time.19
International Accounting Report The income statement and the balance sheet mainly constitute accounting reports all over the world. In the U.S.A. the income statement is of primary interest because most large corporations are publicly owned. While in Europe, Latin America and Asia, the major concern are the ownership of wealth ( than the generation of income) and the position of the firm vis- à-vis its assets and the claims against them. Its means that Europeans, Latin Americans, and Asians give20 primary importance on the balance sheet.
Harmonization of International Accounting It is argued that harmonization of accounting would permit better communication of information in a form that could be interpreted and understood internationally. Multinational firms raised capital in different countries. It is desirable, therefore, that investors and creditors be provided common information in order to shaper their investment decisions. ICA ( International Congress of Accountants ) established ICCAP ( International Coordination Committee for the Accounting Profession) to provide leadership in the harmonization effort.21
Harmonization of International Accounting One of the outcomes of ICCAP’s efforts was the 1973 formation of the International Accounting Standards Committee(IASC), which was formed to; (1) Develop basic standards to be observed in presenting audited financial statements and (2) promote worldwide acceptance and observance of these standards. As expected IASC must issue statements that either develop broad accounting principles acceptable to most countries or require disclosures that would enable users to compare more easily multinational enterprises22
Consolidation of Accounts Most MNC’s consolidate the accounting information from their different entities to present a single income statement and balance sheet for both parent and affiliates. The consolidation process is based on legal requirements of the parent company, information available from subsidiaries, and the practice established over time within the corporation. Most corporations have standard procedures for the subsidiaries to report their accounting information. Thus, the management of subsidiaries not only have to satisfy the host country requirement but also the required format demanded by their corporate headquarter.23