Multinational Organizations

Objectives
To understand the differences in cultures Transfer pricing and its impact Use of different transfer pricing methods Exchange rates and types of exposures Subsidiary units, its performance and management.

Cultural differences
Cultural difference can not affect the control system directly but they affect the information used for the control system. The cultural difference can be classified into four parts, they are 1. collectivism: refers to the degree to which employees place the collective interest of their firm ahead of their personal interest. For eg. Guatemala, Ecuador, Panama. While, in Individualism people focus on their own interest and the people close to them. Tasks more important than relationships. E.g. U.S., UK, Canada 2. Uncertainty avoidance: the degree to which employees feel uncomfortable with uncertainty.

Contd.
3. Power distance: the degree to which employees accept centralized decisions. Large Power Distance: Society accepts the unequal distribution of power. Respect for authority. Emphasis on titles and ranks. Subordinates want to be told what to do. Centralization emphasized. Small Power Distance: Society less accepting of power. Employees are more open to discussion with the superior. Less emphasis on authority, titles, and ranks. Inequality minimized. Decentralization emphasized. 4. Masculinity vs. femininity: material success vs. quality of life. 5. LONG-TERM ORIENTATION Characterized by hard work and perseverance. Savings driven SHORT-TERM ORIENTATION Less emphasis of hard work and perseverance. Consumption driven.

Transfer Pricing
Taxation Government regulations Tariffs Foreign exchange controls Funds accumulations Joint ventures

Transfer pricing methods

1. Comparable uncontrolled price method: Transfer price = price paid in comparable uncontrolled sales +/adjustments - In a controlled sale the transaction between two members of controlled group and uncontrolled sales means two parties are not member of the controlled group. 2. Resale price method: Transfer price = applicable resale price appropriate markup +/adjustments Applicable resale price is the price where the property is purchased in the controlled and resold in the uncontrolled group.

Contd.
3. Cost plus method: Transfer price= cost + appropriate mark up +/- adjustments Legal consideration on transfer pricing systems.

Exchange rate mechanism

1. 2. 3. Exchange rate mechanism Different types of exchange rate exposure: Transaction exposure Translation exposure Economic exposure

Performance of the subsidiary Management of the subsidiary