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Multinational Organizations

Management Control Systems


Chapter 15

September 2014

Iwan Pudjanegara SE., MM.

Cultural Differences
4 Dimensions of Cultural Differences
1) Power Distance : the extent to which
power is unequally distributed and
centralized.
High power distance cultures: Philippines,
Venezuela, and Mexico.
Low power distance cultures: Israel,
Denmark, and Austria
September 2014

Iwan Pudjanegara SE., MM.

Cultural Differences
2) Individualism/Collectivism : the extent
to which people define themselves as
individuals or as part of a larger group.
Highly individualistic cultures: USA,
Australia, and Great Britain.
Highly collectivistic cultures: Saudi Arabia,
Venezuela, and Peru.

September 2014

Iwan Pudjanegara SE., MM.

Cultural Differences
3) Uncertainty Avoidance : the extent to
which people feel threatened by
ambiguous situations. (ambiguous=dua arti)
Highest uncertainty avoidance cultures:
Japan, Portugal, and Greece.
Lowest uncertainty avoidance cultures:
Singapore, Hongkong, and Denmark.

September 2014

Iwan Pudjanegara SE., MM.

Cultural Differences
4) Masculinity/Feminity : the extent to which
dominant values emphasize assertiveness
(=ketegasan) and materialism (masculine) vs
concern for people and quality of life
(feminine).
Highly masculine cultures: Austria,
Switzerland, and Italy.
Highly feminine cultures: Sweden, Norway,
Netherlands, and Denmark.
September 2014

Iwan Pudjanegara SE., MM.

Transfer Pricing
Taxation
Government Regulations
Tariffs
Foreign Exchange Controls
Funds Accumulation
Joint Ventures
September 2014

Iwan Pudjanegara SE., MM.

Pricing Methods
1. Comparable Uncontrolled Price
Method
2. Resale Price Method
3. Cost-plus Method

September 2014

Iwan Pudjanegara SE., MM.

Pricing Methods
Comparable Uncontrolled Price Method
Transfer Price = Price paid in
comparable uncontrolled sales +/Adjustments

September 2014

Iwan Pudjanegara SE., MM.

Pricing Methods
Resale Price Method
Transfer Price = Applicable Resale Price
Appropriate Markup +/- Adjustments
Appropriate markup = Applicable resale price x
Appropriate markup percentage
Appropriate markup percentage = Percent of Gross
Profit earned by the buyer/reseller or by another party
in an uncontrolled purchase and resale similar to
controlled resale
September 2014

Iwan Pudjanegara SE., MM.

Pricing Methods
Cost-plus Method
Transfer Price = Costs + Appropriate
markup +/- Adjustments
Appropriate markup = Costs x Appropriate
Gross Profit Percent
Appropriate Gross Profit Percent = gross profit
percent earned by seller or another party on
uncontrolled sales similar to controlled sale
September 2014

Iwan Pudjanegara SE., MM.

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Exchange Rates*
An Exchange Rate : the price of one
currency in terms of another currency.
An exchange rate can be expressed as :
the number of units of the home currency that
are needed to buy one unit of foreign currency :
Direct Quote*.
The number of units of the foreign currency that
are needed to buy one unit of the home currency
: Indirect Quote*.
September 2014

Iwan Pudjanegara SE., MM.

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Exchange Rates
Exchange rates that usually quoted : Nominal
Exchange Rates.
The nominal exchange rate that prevails on a given day
: Spot exchange rate.
The spot exchange rate after adjusting for inflation
differentials between two countries: Real exchange
rate.
The exchange rate known today at which transaction
can be entered into for completion at some future time:
Forward exchange rate.
September 2014

Iwan Pudjanegara SE., MM.

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Exchange Rate Exposure


Translation exposure: the Income
Statement and Balance Sheet on MNEs to
changes in nominal exchange rates.
Transaction exposure: the exchange rate
exposure that the firm has in its cross-border
transactions when such transactions are
entered into today but payment to settle the
transaction are made at some future time.
September 2014

Iwan Pudjanegara SE., MM.

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Exchange Rate Exposure


Economic exposure: the exchange rate
exposure of the firms cash flows to real
exchange rate changes.
Economic exposure is also referred to
as operating exposure or competitive
exposure to exchange rates.

September 2014

Iwan Pudjanegara SE., MM.

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Management Considerations
In designing performance evaluation
systems of MNE subsidiaries, companies
could use the following guidelines :
Subsidiary managers should not be held
responsible for translation effects.
Compare budgets and actual results using
the same metric and isolate inflation-related
effects through variance analysis.
September 2014

Iwan Pudjanegara SE., MM.

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Management Considerations
Transaction effects are best handled
through centralized coordination of the
MNEs overall hedging needs.
Cheaper and simpler
Prevents the subsidiary manager from
becoming a foreign exchange rate forecaster
and speculator.

September 2014

Iwan Pudjanegara SE., MM.

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Management Considerations
The subsidiary manager should be held
responsible for the dependence effects of
exchange rates resulting from economic
exposure.
Evaluation of the subsidiary as a basis for a
decision to locate operations in a country or
to relocate operations from a country should
reflect the consequences of translaltion,
transaction, and economic exposure.
September 2014

Iwan Pudjanegara SE., MM.

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Case 15-4 Hindustan Lever

Team Presentation!!!

September 2014

Iwan Pudjanegara SE., MM.

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