25.1 INTRODUCTION. The budgeting and control process for a multinational
company is basically no different from that for domestic operations, except that it
must recognize diverse environments as well as the addition of one major element—
the impact of currencies.
In this chapter, two broad areas of budgeting and control systems will be dis-
cussed—capital budgeting and operations budgeting, or profit planning. In both
cases, the process is one that forms part of a company’s overall planning process.
Many companies have express or implied mission or vision statements—objec-
tives which they wish to achieve. These may be financial or operational in nature; fi-
nancial objectives run the gamut from achieving specific rates of return to reducing
the debt/capital ratio to a given percentage, while operational objectives include en-
tering into additional countries, introducing new products, increasing market pene-
tration, or containing costs and expenses, and so forth. The capital budget ratios cash
disbursements for such assets as buildings, machinery, equipment, and other long-
term projects. The profit plan sets income targets that, together with investment (cap-
ital) expenditures and financing transactions, will hopefully meet or exceed the an-
nual segments of the company’s overall multiyear objectives.
As indicated above, both capital budgeting and profit planning in a multinational
environment are not fundamentally different from those for domestic operations. The
two factors that will, however, pervade this chapter are nationalistic and currency as-
pects—matters that do not apply to purely domestic operations. Additional factors af-
fecting the capital budgeting decision are described in Chapter 4.
When we talk about nationalist factors, we mean the legal and behavioral elements
that are present in dealing with operations in other countries. The most obvious ele-
ment is that the operations are carried out in a number of countries, each of which has
its own laws, specific jurisdictions, tax statutes, and operating practices that differ
from those in the United States. Thus, while the chairman or managing director of a
foreign subsidiary company “reports” nominally to a domestic senior executive, in
fact, he or she is subject to the laws of his or her country and, in all likelihood, to the
power and control of a local board of directors or equivalent supervisory body. Gen-
uine diplomacy being a desired necessity, we shall refer to foreign subsidiaries as “af-
filiates.” In fact, executives and other employees abroad neither regard themselves as
“foreigners” nor look upon their company as a “subsidiary,” since it is incorporated
in their own country and is, therefore, independent. The American parent’s 100% or
majority ownership is looked upon as a relationship aspect that requires constant ne-
gotiation and renegotiation, particularly in the budgeting processes.
The currency factor is perhaps the most visible difference between domestic and
multinational budgeting. It requires the forecasting of exchange rates for, first estab-
lishing capital budgets and profit plans and, second, controlling them later on.
25.2 FORECASTING EXCHANGE RATES
(a) Floating Exchange Rates. The present environment of floating exchange rates
has accentuated the importance of accurately forecasting exchange rates, although
some would say that the combination of “accurate” and “forecasting” is a contradic-
tion in terms. Nevertheless, the forecasting process has imposed a discipline—first,
to identify and quantify those economic, political, and social variables which influ-
ence a currency’s value and, second, to predict the direction, magnitude, and timing
of a currency’s change in value.
25 • 2 MULTINATIONAL BUDGETING AND CONTROL SYSTEMS