pcc mktg 26 intl. mktg chapter 4

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  • 1. PASIG CATHOLIC COLLGE MKTG 26 : International MarketingChapter 4 :International Finance and Accounting1Professor: Mr. A. T. Quiwa, MBA

2. Objective of this session Explain the implication of financial decisions oninternational strategy Describe the perspectives of international moneymanagement Discuss how international investment decisionsare made. Compare U.S. accounting practices with thosefollowed in other nations.2 3. Introduction The financial objective of a corporation typicallyconstrain the latitude of a marketing manager. Marketers are affected by their companiesmoney management - the raising of money, theinvesting of money, the maintenance of liquidity,even lesser factors like the repatriation of fundsfrom subsidiaries to parent corporations. The decision of marketing managers also areaffected by accounting consideration.3 4. Implication of Financial Decision onMarketingMarketing 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 5. 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. 6. 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 theassets of the company commensurate with itsobjectives.6 7. Problems related to management fundsand investmentWhat 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. 8. Financial ObjectivesConsider the financial objectives of a MNC thatmanufactures different types of parts and accessoriesfor the automobile industry and related markets.Target profit performance shall consist of:1. A competitive return on capital employed with abasic minimum pretax return of 15%, which shall beinflation adjusted from time to time.2. An annual growth rate of pretax of at least 12%8 9. Financial LimitationsInvestment 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 10. Money Management Money management deals with sources and usesof funds. Money management involves such considerationas how funds should be obtained ( equity vs debt);in which currency a corporate or subsidiary shouldbe responsible for raising funds. Prudent international money management requirethe formulation and revision of capital structuredecisions for different entities, and budgets forintercompany funds transfer.10 11. The three risks related to money management The political risk of assets being taken over bythe host country. The exchange risk whereby the value of the U.S.dollar changes with reference to the host-countrycurrency. The translation risk whereby the corporatefinancial statements are required by SECregulations to be based on historical costs ratherthan current value.11 12. 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 13. 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 14. Making International Investments Essentially, two processes of an investment proposaldetermine its fate: the selling of the proposal and itsreview. Proposal selling and reviewing go through a variety offormal and informal human interactions. The process are significantly affected by the firms internaland politics-that is, factors such as who is backing theproposal, what the companys organization is, howcompany personalities interact - and by factors outside thefirm. Ultimately, the winning strength of a proposal depends onthe diligent work of those who prepare it.14 15. 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 16. Selling an Investment Proposal It is important to concentrate on the really criticalmatters involved during investigatory period priorformal presentation of the proposal to an internationalexecutive. Once the investigation has been completed, a formalproposal is developed and submitted to the head of theinternational section.16 17. 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 18. Reviewing the Investment Proposal While the review procedure may vary, allcorporations strive to determine whether theinvestment will be sound and provide a long-term, lasting benefit for the owners. It is important that the chief executive oranother top officer participate actively in thereview process of individual major investmentdecision from the viewpoint of the long-termstrategic posture of the company.18 19. International Accounting An international accounting system serves thesame two basic purposes as domestic accounting. It provide information on the business conductedduring a certain period and the results obtained. The first purpose is achieved through the incomestatement. The second purpose is accomplished through thebalance sheet, which shows the position of thebusiness, its assets, and its liabilities at aparticular time.19 20. International Accounting Report The income statement and the balance sheet mainlyconstitute accounting reports all over the world. In the U.S.A. the income statement is of primaryinterest because most large corporations are publiclyowned. While in Europe, Latin America and Asia, the majorconcern are the ownership of wealth ( than thegeneration of income) and the position of the firm vis--vis its assets and the claims against them. Its meansthat Europeans, Latin Americans, and Asians give20primary importance on the balance sheet. 21. Harmonization of InternationalAccounting It is argued that harmonization of accounting would permitbetter communication of information in a form that could beinterpreted and understood internationally. Multinational firms raised capital in different countries. It isdesirable, therefore, that investors and creditors be providedcommon information in order to shaper their investmentdecisions. ICA ( International Congress of Accountants ) establishedICCAP ( International Coordination Committee for theAccounting Profession) to provide leadership in theharmonization effort.21 22. Harmonization of International Accounting One of the outcomes of ICCAPs efforts was the 1973 formation of the International Accounting Standards Committee(IASC), which was formed to;(1) Develop basic standards to be observed inpresenting audited financial statements and(2) promote worldwide acceptance and observanceof 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 23. Consolidation of Accounts Most MNCs consolidate the accounting informationfrom their different entities to present a single incomestatement and balance sheet for both parent and affiliates. The consolidation process is based on legal requirementsof the parent company, information available fromsubsidiaries, and the practice established over time withinthe corporation. Most corporations have standard procedures for thesubsidiaries to report their accounting information. Thus,the management of subsidiaries not only have to satisfythe host country requirement but also the requiredformat demanded by their corporate headquarter.23 24. END OF CHAPTER 424