Capital budgeting practices in compagnies with activity abroad : the evolution of the use of tools through time

This paper, constructed as pedagogical notes, serves two complementary targets. On the one hand, it belongs to the initial part of a global applied research that should bring new arguments to the recurrent results obtained by previous studies, i.e. the observation that almost invariably, American corporations, multinationals and large companies have been found to have more sophisticated and advanced approaches to project evaluation than non-US, small-sized and country-focused (as opposed to international) ones.1 On the other hand, the authors are concerned about the current disparity of academic opinion on the evolution of decision tools for project evaluation. Some scholars believe in an increasing sophistication and others don't. Therefore, such a paper should be considered as an invitation to keep up with the latest academic theory and tools used by organisations to evaluate projects. Material that is taught to our readers today will surely be complemented through the decades to come, just as it was in the past. An original chronological approach has been chosen in order to emphasize this last point.

Multinational Firms, Monopolistic Competition and Foreign Investment Uncertainty

This is a model of multinational firms, which introduces option value of foreign direct investment, into a framework of Dixit-Stiglitz type monopolistic competition. Starting from a pure trading equilibrium and solving for the optimal investment rule gives a scale-up factor which implies existence of a wedge between markup revenues and foreign investment costs. Greater volatility and risk aversion increase this scale-up over foreign investment costs implying a delay in the exercise of FDI option, while growing market size and national income facilitate early exercise. The model is extended to include a Poisson jump process, which has policy implications for FDI reforms and explains 'wait and watch' behaviour of multinational firms better than a pure comparative advantage-trade cost framework does. While investment under uncertainty literature is based on the theory of call options, I solve 'FDI option' as a put option, thereby also enriching the theory of real options.Multinational firm, monopolistic competition, foreign investment uncertainty,FDI option

The Manufacturing Flexibility to Switch Products: Valuation and Optimal Strategy

This paper applies a dynamic programming methodology to the valuation problem for the flexibility to switch. In our model, flexibility provides an investor with the right, or option, to perform a switch between a less profitable and a more profitable project at no cost. In contrast to previous analyses, the option to switch can be exercised in the future at any time during the decision horizon. We present the solution methodology that allows to determine the value of the flexibility and to identify the optimal timing of the switching decision. Comparative statics demonstrate how changes in the input parameters affect the values of the problem"s solution. The results partially explain why investing in flexible manufacturing systems is reported to have both low profitability and rate of diffusion.manufacturing flexibility, real option, capital budgeting

Operational budgeting using fuzzy goal programming

Having an efficient budget normally has different advantages such as measuring the performance of various organizations, setting appropriate targets and promoting managers based on their achievements. However, any budgeting planning requires prediction of different cost components. There are various methods for budgeting planning such as incremental budgeting, program budgeting, zero based budgeting and performance budgeting. In this paper, we present a fuzzy goal programming to estimate operational budget. The proposed model uses fuzzy triangular as well as interval number to estimate budgeting expenses. The proposed study of this paper is implemented for a real-world case study in province of Qom, Iran and the results are analyzed

Management control in the transfer pricing tax compliant multinational enterprise

This paper studies the impact of transfer pricing tax compliance on management control system (MCS) design and use within one multinational enterprise (MNE) which employed the same transfer prices for tax compliance and internal management purposes. Our analysis shows immediate effects of tax compliance on the design of organising controls with subsequent effects on planning, evaluating and rewarding controls which reveal a more coercive use of the MCS overall. We argue that modifications to the MCS cannot be understood without an appreciation of the MNEs’ fiscal transfer pricing compliance process

Cross-Border Lending Contagion in Multinational Banks

We study the interdependence of lending decisions in different country branches of a multinational bank. This is done both theoretically and empirically. First, we formulate a model of a bank that delegates the management of its foreign unit to a local manager with non-transferable skills. The bank differs from other international investors due to a liquidity threshold which induces a depositor run and a regulatory action if attained. Therefore, lending decisions are influenced by delegation and precautionary motives. We then show that these two phenomena create a separate channel of shock propagation, a function of bank shareholder and manager incentives. The workings of this channel can lead to either “contagionâ€, meaning parallel reactions of the loan volumes in both countries to the parent bank home country disturbance, or standard “diversificationâ€, when the reactions of a standard international portfolio optimizer within the two country units go in opposite directions. In particular, it can happen that the impact of an exogenous shock on credit has a different sign in the “relationship†as opposed to the “arm’s-length†banking environment. Second, we construct a large sample of multinational banks and their branches/subsidiaries and look for the presence of lending contagion by panel regression methods. We obtain mixed results concerning contagion depending on the parent bank home country and the host economy of cross-border penetration. While the majority of multinational banks behave in line with the contagion effect, more than one-third do not. In addition, the presence of contagion seems to be related to the geographical location of subsidiaries.Delegation, diversification, lending contagion, multinational bank, panel regression.

Cross-border lending contagion in multinational banks

We study both theoretically and empirically the inter- dependence of lending decisions in different country branches of a multinational bank. First, we model a bank that delegates the management of its foreign unit to a local manager with non-transferable skills. The bank differs from other international investors due to a liquidity threshold which induces a depositor run and a regulatory action if attained. A separate channel of shock propagation exists since lending decisions are influenced by delegation and precautionary motives. This can entail “contagion”, i.e. parallel reactions of the loan volumes in both countries to the parent bank home country disturbance. Second, we look for the presence of lending contagion by panel regression methods in a large sample of multinational banks and their affiliates. We find that the majority of multinational banks behave in line with contagion effect. In addition, the presence of contagion seems to be related to the geographical location of subsidiaries. JEL Classification: F37, G21, G28, G31delegation, diversification, lending contagion, Multinational bank, panel regression

Transfer pricing or formula apportionment? Tax-induced distortions of multinationals' investment and production decisions

Multinational groups (MNGs) produce a major part of global output. Further, a substantial fraction of international transactions happens to be internal, i.e., intermediate products and services are traded between group members. Thus, the problem of co-ordinating economic decisions like investment or production within such large entities has been widely recog-nized in the theoretical and empirical literature. The findings suggest that transfer prices are a widespread device for splitting up complex decision situations and allocating the responsibility for the resulting subproblems to several decision makers. Apart from its co-ordination function transfer pricing is also used for tax purposes. Legally independent group members realize intra-group sales and contribute to a single product. Taxable group profits are often allocated among the participating companies by means of transfer prices. In this case, from the group's perspective, transfer pricing is a device of international tax planning. Of course, national tax authorities have been aware of potential misuse. In Europe, the problem has become especially severe since the mid-European countries joined the EU. Due to the emerging large tax rate differentials, tax revenues of high-tax legislations eroded. For mitigating this problem formula apportionment (FA) is discussed intensively. Under FA, a common tax base is calculated and divided among the host countries in accordance with given apportionment factors. As a consequence, earnings management fails to re-allocate profits to low-tax legislations and tax base erosion seems to be stopped. However, FA could even be more harmful than transfer pricing because under FA income shifting would require changing economic decisions instead of just taking advantage of accounting options. In addition to the erosion of tax revenues, capital investments and employment could decrease in high-tax legislations. The goal of our paper is to analyze the impact of different international tax allocation regimes on the MNG's investment and production decisions. In our theoretical model, we derive optimal decisions under transfer pricing and FA. A prominent result of our analysis is that FA offsets the advantages of decision decentralization as it reverses the separation of responsibility areas. It is not clear whether FA is desirable from a fiscal or an entrepreneurial perspective. We show that the effects of FA compared to transfer pricing depend strongly on the parameter setting under consideration. One of the most important determinants is the internal decision procedure within the MNG. --Capital budgeting,Formula apportionment,International Taxation,Investment Incentives,Multinational Groups,Transfer Pricing

Determinants and consequences of budget reallocations

We investigate the determinants and consequences of budget reallocations, i.e., corrective actions to the budget made during the year. Using proprietary data of a large consumer goods manufacturer, we analyze the extent to which allocation decisions regarding the initial budget drive subsequent reallocations. Whenever scarce resources need to be allocated among a number of individuals, power struggles and politicking behavior are likely to arise, which potentially affects the outcome of the allocation process. We hypothesize and find that one important driver of reallocation decisions is the firm's aim to correct for systematic deviations from the optimal initial budget allocation that are driven by successful lobbying activities during the initial budgeting process. In a more exploratory analysis, we show that such reallocations do not have the desired effects on market-place performance. In particular, budget cuts are negatively associated with a product's change in market share. More surprisingly, while budget boosts do help product lines internally to achieve their sales targets in the last quarter, they do not have a (positive) effect on the change in market share. Most importantly, our results demonstrate that efficient investment planning ex ante is essential to achieve an improvement in market-place performance, highlighting the value of budgeting.Series: Department of Strategy and Innovation Working Paper Serie