Gray, Salter & Radebaugh Chapter 1 Global Accounting and Control: A Managerial Emphasis   Sidney J. Gray, University of New South Wales   Stephen B. Salter, University of Cincinnati   Lee H. Radebaugh, Brigham Young University Slides Prepared by: Jennifer Anne Salter

CHAPTER ONE GLOBAL BUSINESS: ACCOUNTING AND CONTROL ISSUES

Gray, Salter & Radebaugh Chapter 1 INTRODUCTION Doing business in the global economy takes place through:   trade   strategic alliances   foreign direct investment (FDI)   portfolio investment

Gray, Salter & Radebaugh Chapter 1 DOING BUSINESS IN THE GLOBAL ECONOMY - Trade   The most important of all international business activities   World trade has grown 34.3 times from 1970 to 2005

Gray, Salter & Radebaugh Chapter 1 World Trade: 1970 and 2005

Gray, Salter & Radebaugh Chapter 1 DOING BUSINESS IN THE GLOBAL ECONOMY - Trade Many major companies earn a major portion of their income outside their home country, e.g., Procter and Gamble

Gray, Salter & Radebaugh Chapter 1 Procter & Gamble Segment Analysis Billions of U. S. dollars 47% 23% 4% 26%

Gray, Salter & Radebaugh Chapter 1 DOING BUSINESS IN THE GLOBAL ECONOMY - Strategic Alliances Companies grow by several types of alliances   cross-shareholder deals   licensing   franchising   joint ventures   informal cooperative agreements

Gray, Salter & Radebaugh Chapter 1 DOING BUSINESS IN THE GLOBAL ECONOMY Foreign Direct Investment (FDI)   FDI is the direct investment by a company from one country, in another country.   emerged from the 1980s as a major component of international business.   can include mergers and acquisitions   constitutes a major portion of capital flows around the globe.

Gray, Salter & Radebaugh Chapter 1 Foreign Direct Investment Inflows and Outflows 1990 to 2000

Gray, Salter & Radebaugh Chapter 1 DOING BUSINESS IN THE GLOBAL ECONOMY FDI continued Many countries are recipients of inward investment as well as investors in other countries.

Gray, Salter & Radebaugh Chapter 1 DOING BUSINESS IN THE GLOBAL ECONOMY Portfolio Investment What is Portfolio Investment?   It’s the flow of capital between countries for the purpose of investing in the shares of a company

Gray, Salter & Radebaugh Chapter 1 DOING BUSINESS IN THE GLOBAL ECONOMY Portfolio Investment Continued How is this done?   It is usually carried out by a private investor who purchases a mutual fund or unit trust specializing in a particular: Country Region or Investment Portfolio

Gray, Salter & Radebaugh Chapter 1 CHOOSING A METHOD OF BUSINESS INVOLVEMENT IN GLOBAL ECONOMY   TRADE   STRATEGIC ALLIANCES & COLLABORATION   FOREIGN DIRECT INVESTMENT

Gray, Salter & Radebaugh Chapter 1 Choosing a Method of Business Involvement Trade Why Trade?   Companies need a larger market   Companies need to use up excess production capacity   Companies may have a comparative advantage in terms of the price or availability of raw materials and labor…...

Gray, Salter & Radebaugh Chapter 1 Choosing a Method of Business Involvement Trade Consider the natural advantages of particular countries, e.g.:   Dominican Republic - labor   India - computer skills   USA - venture capital   Australia - raw materials (aluminum, wool, gold, electric power)

Gray, Salter & Radebaugh Chapter 1 Choosing a Method of Business Involvement Strategic Alliances Why a Strategic Alliance?   It facilitates entry into foreign markets.   It allows for sharing or costs and risks.   It brings together complimentary skills.

Gray, Salter & Radebaugh Chapter 1 Choosing a Method of Business Involvement FDI Why FDI? Because you are:   following a customer   seeking raw materials   circumventing trade barriers   taking advantage of patents and technology

Gray, Salter & Radebaugh Chapter 1 MULTINATIONAL ENTERPRISES What are they? Multinational enterprises (MNE’s) are entities that do a significant portion of their business in more than one country.

Gray, Salter & Radebaugh Chapter 1 MULTINATIONAL ENTERPRISES How Important are they?   Globally, in the 1990s, more than 37,000 MNEs controlled 200,000 affiliates.   Some MNEs have annual revenues of more than a medium sized country.   The USA, European Union, and Japan are home to most of the world’s largest MNEs.

Gray, Salter & Radebaugh Chapter 1 MNEs - Bigger than some countries, when comparing annual sales and GDP

Gray, Salter & Radebaugh Chapter 1 Home Country of World’s Largest Multinationals Ranked by Sales

Gray, Salter & Radebaugh Chapter 1 The World’s Largest Multinationals - EU

Gray, Salter & Radebaugh Chapter 1 The World’s Largest Multinationals - Other

Gray, Salter & Radebaugh Chapter 1 The World’s Most Multinational Enterprises

Gray, Salter & Radebaugh Chapter 1 Index of Transnationality (TNI) Foreign Sales + Foreign Assets + Foreign Employees = TNI Total Sales Total Assets Total Employees 3

Gray, Salter & Radebaugh Chapter 1 ACCOUNTING AND CONTROL IN GLOBAL BUSINESS There are two types of issues:   Those affecting day to day management of the firm   Those arising from preparation of external financial reports or analyses of reports

Gray, Salter & Radebaugh Chapter 1 Accounting, Control and Corporate Global Investment There is a step by step strategy of engagement for an MNE:   Foreign trade   Enter into a strategic alliance   Enter into FDI   Global listing of shares   Global structure of production.

Gray, Salter & Radebaugh Chapter 1 Accounting, Control and Corporate Global Investment Cont’d There are accounting issues which result from exposure to international accounting:   problems with the buyer’s financial statements   language and currency problems   differences in terminology   differences in types and amount of information   differences in procedures leading to final figures.

Gray, Salter & Radebaugh Chapter 1 Accounting, Control and Corporate Global Investment Cont’d What is the impact of foreign exchange on receivables?   The value in domestic currency of a foreign currency A/R fluctuates as foreign currency rates change   This affects the balance sheet and income statement.

Gray, Salter & Radebaugh Chapter 1 Accounting, Control and Corporate Global Investment Cont’d Corporate strategies and control systems have to adjust to operating globally because of the need to:   Deal with multiple tax authorities.   Develop financial statement using laws of other countries. .  Adjust to foreign GAAP.