International Business Management Control - Literature review Example

International Business Management Control Introduction Globalisation has been the common term heard everywhere from the year 1990 and in today’s world there is no chance of the globalisation to get diminished. Globalisation means growth in the trade and business along with the expansion in the international market. In order to build a successful business in the global market, it is very important to set the business policies and strategies in such a way that it can accommodate the international business finance environment. The technological developments have made the international communication easier. This is helping the individuals to know the events that are happening outside their home land. This increased awareness of the individuals is leading to the increase in the international trade and also the number of business that are running outside the domestic land. This shows that the economies all around the world are closely linked. In order to sustain in the global market, it is very important for the business managers to remain conscious that the operation market, the suppliers, the business partners, the investors and the competitors will not be restricted to the domestic country only. They can belong to the international market as well. A successful business will anticipate the future downfalls and will always make proper utilisation of the opportunities to achieve competitive advantage in the market. The managers should understand the similarities and the differences existing across the national boundaries in order to grab the opportunities and cope up with the potential downfalls. In order to develop appropriate strategies for operating in the global market, the managers need to consider the advantages as well as the disadvantages of the globalisation. A global strategy should be developed after taking into account the global events as well as the events in the home country. International strategy is the management technique that helps the companies to achieve competitive advantage across national boundaries. The top managers of different companies rely on every level of management in order to develop the global strategies and implement them successfully. Some companies enter into partnership business with the companies located in the international market; others acquire different companies across national boundaries. Some companies develop different products and services to supply to the customers in different countries. There has been a growth in the international companies from the developing countries. This trend will increase in future. There are increasing political, legal and other environmental barriers related to the businesses operating in the international market. Effective measures should be taken by the business managers in order to achieve competitive advantage in the market. Literature Review Many research have been made on the management of business policies in order to accommodate with the international business finance environment. There should be maintenance of transparency in the business activities and the business policies should be followed by the managers in order to avoid the international business barriers. a) It is very important for a business to assess the management goals and objectives semi annually in order to achieve competitive advantage in the changing market and the regulatory international environment. The main objective of a firm is to gain competitive advantage in the market. Researchers like Horngren et al. (2005) stated that management accounting is a method which can influence the behaviour of the managers and enhance the achievement of the organizational objectives. A firm needs to allocate and utilise its resources effectively in order to reach its objectives. The short term resources are reflected in the operating budget of the firms. The short term resources are obtained from the bank credits, trade credits etc. The long term resources are reflected in the capital budget of the firms. The long term resources are allocated by a firm by the issue of equity shares, preference shares, creditor ship securities, loan financing, internal financing etc. Scarce resource is one of the problems which act as a barrier when the accountants plan to develop new techniques for the companies entering into a partnership (Ha°kansson and Lind, 2004). Traditional methods of reporting and budgeting should be adapted to show the varying input and the output. Moreover, the standards of performances should be created which will measure and also verify the inputs and the contributions to the business processes. If the companies enter into partnership networks in the international market, then these companies need to establish transparent profit sharing rules and proper business incentives. Moreover, the accountants also need to implement new costing and billing techniques that will satisfy the needs of the network partners. The methods of management accounting that are implemented in a business network should comply with the situations of the environment in which the business is operating and should also fulfil the diverging business objectives of the business partners. Coordination between the business partners as well as their willingness and agreement to share the risks and the rewards is very important. The objective of every firm to gain competitive advantage over the competitors should be achieved by them individually. The objective set up by a firm helps to improve its performance in the domestic as well as the international land. If a company expands its operations into a new and international market by entering into a partnership business with a company existing in that market, then gaining the competitive advantage would not be possible individually. Mutual trust and coordination, combining the business objectives by the partners and sharing the risks as well as the rewards equally will help the firms to gain competitive advantage. b) The next step is to ensure that the risk management policy is comprehensive and is assessing and managing the risk related to the international business environment efficiently. Both strategic and corporate management is very important for the management of the environmental risks. A large number of literature are available for strategic management as well as corporate management (Hofer, 1977; Argenti, 1980; Ansoff, 1987; Chaffee, 1985; Chandler, 1997; Mintzberg and Waters, 1985; Quinn, 1980; Porter, 1980; Steiner, 1979). These literature state the different strategies that should be implemented for the assessment and the management of the political as well as the other environmental risks. Recently, it has been seen that the increasing political as well as the administrative practises made by the national governments possesses an adverse effect on the international business operations mainly. This is a threat to the multinational companies. For example- the detection of the existing and the proposed foreign investments have increased to a great extent resulting in the disinvestment codes in several countries. The government either directly regulates the international business environment or acts as the direct partners in joint venture in the international businesses. Increase in the regulations and control related to the pricing, conversion of the capital and the earnings from the foreign currency to the currency of own country, job security of the employees and the exchange restrictions have resulted in the increased traditional risks. A recent research has stated that the political risk assessments that are made by the multinational companies are imperfect (Kraar, 1980). The uncertainty in the political events of a country affects the businesses operating there to a great extent. When the change is gradual and reflects the continuation of the same government policies, then the political risk associated with the businesses is low. On the other hand when the unanticipated political changes result in the discontinuity in the existing business environment, then the political risk associated with those businesses is very high. The political risk related to the international business finance environment has been classified into macro political risk and micro political risk (Simon, 1982). Macro risks occurs from the policies at all foreign companies operating in the host country whereas micro risks occurs from the policies related to selected firms and industries. The revolution, strikes, civil wars, work slowdowns etc involve the public created macro political risks and the restrictions on the business policies such as the repatriation of earnings and capital involve the government created macro political risks. However, it is more difficult to identify the micro risks as they vary depending upon the investment sector. The dynamic industries which depend on the import of the technology have a low political risk as compared to the natural resources projects which possess high political risks. Several studies have shown that the subsidiary companies, the regional managers etc are the most important resources that help to assess the political risks involved in the business environment. Among them the banking community, the international organizations or the external consultants are the high rated external sources (Blank, 1980). When the budget is prepared for the estimation of the capital expenditure related to the new venture while planning for the firm’s long term investment plans or plans to execute an international operational strategy, then a political risk assessment is conducted. In a recent survey it was noticed that 80 percent of the risk assessment takes place in case of initial investment, 71 percent in case of strategic planning, 67 percent while planning for re-investment, 48 percent during the disinvestment decisions and 26 percent during the day to day observation and monitoring of various operations (Kobrin, 1982). More advanced analysis systems are being developed to monitor the recent social systems and the political changes in the international business environment. This system will involve analysis of the quality of the financial management, the industrial relations, the patent laws, the exchange rate controls and also the changes in the government policies. The firms operating in the international market are making attempts to adapt various intelligence systems in order to detect the political and the social conditions of the country where its business is operating on a regular basis (Micallef, 1981). The management of political risk in the multinational companies is required to be combined in the corporate planning procedure to successfully manage the risks in all phases related to the investment decision making, the pre investment plans, logistics, finance, other ownership plans and different operational activities to guide, protect and nourish the current or existing operations. It will also help in the disinvestment phase to withdraw the investment effectively. A large number of political risk assessment models have been created and applied by the multinational firms for different purposes. These models are classified into three main categories. They are qualitative approaches, quantitative approaches and firm specific models. These systems and models have achieved success in predicting a firm’s long range exposure to the social, political and other environmental events occurring in a country. Research made on this issue indicate that these systems were not being able to predict a firm’s short term exposure to the immediate changes that were occurring in the business environment. The reliance on the mathematics based econometric models has been a major communication problem. These models project the future changes of a country based on their past behaviour without giving much consideration on the sudden changes that might take place in the government policy. This is another problem in the risk assessment using these applications (Fairlamb and Sender, 1983). The business policies should provide the guidelines to devise various strategies to reduce the exposure of a firm under different political scenarios. Shapiro has found four separate techniques that a firm can implement to reduce its exposure (Shapiro, 1981). Avoidance of investment in environmentally affected countries is not taken as a strategy in the favour of the businesses as it ignores the high returns from the investments which can be realised under manageable risks. Sometimes the inexperienced international managers apply ethnocentric standards resulting in the firm losing the profitable investment opportunities due to their unfamiliarity with the political system of the country rather than the political risks there (Robock and Simmonds, 1983). The insurance of these exposed assets is considered to be a suitable strategy as it allows the companies to focus fully on managing the business activities to face the challenges in the international business environment rather than making strategies for protecting the investment. There are various government agencies like Overseas Private Investment Corporation and private insurers like Lloyds of London who provide environmental risk insurance services to the multinational companies. Another risk diversification strategy is making joint venture investments with the international companies. Any political action such as expropriation would amount to a certain amount of tax for the stock holders of the host country. Even if the government tries to provide compensation to these stockholders, it will lead to the increase in the cost of the nationalisation for the government of the host country which is an addition to the risk reduction (Micallef, 1981). Aven et al (2007) stated that risk is considered as the combination of two dimensions. One dimension arises from the possible consequences and the other arises from the uncertainties. The development in the various fields like information and communication technologies along with the reduction of the trade barriers have altered the business relationships and have enhanced the exposure of risks (Ritchie and Brindley, 2000). The risk assessment and its management require the ascertainment of the profitability as well as the losses that are arising from that risk by implementing a semi quantitative scale (Hallikas et al., 2004). A firm can employ supply management, product management, demand management and information management to reduce the risk related to an international business environment (Tang, 2006). Thus the implementation of various business strategies along with the amendment in the business policies will help to reduce and manage the political, social and environmental risks affecting the business operating in an international market. Performance Evaluation of the managers The managers are an important part of the organisation. They plan and develop the business strategies to achieve competitive advantage in the international market. These strategies are developed after predicting the environmental, social and the political risks that might arise in the international market where the business is operating. Thus the managers play an important role in the achievement of success by the company. The managers should be rewarded for their performances. This acts as a motivation to the managers which encourage them to perform in an efficient manner. Rewards can be given in the form of bonus, salary raise, promotion, gifts and several other kinds of tangible rewards. This form of reward is known as extrinsic reward. The intrinsic rewards can also be provided in the form of trust, recognition in the organization, empowerment etc. Intrinsic rewards give a separate recognition to the managers inside the organization whereas extrinsic rewards help the managers to concentrate more on the better performances. The process of rewarding the managers based on their performances helps the firm to achieve success in the domestic as well as the international market. Conclusion The aim of this project was to focus on the areas of the risk assessment and its management in the international business environment. There are various issues related to the international environment which can affect the businesses operating there. The basic issues which should be kept into consideration while expanding the businesses into a new market are cultural barriers related to the investment purpose, the ability to achieve competitive advantage with new investment etc. The political system of a country can also be a reason for the financial instability in a business. The legal framework of a country can affect the businesses operating there. Thus, it is very important to develop business strategies and policies which will help the businesses to sustain successfully in the international business finance environment. References Ansoff, I., 1987. Corporate Strategy. Harmondsworth: Penguin Books. Argenti, J., 1980. Practical Corporate Planning. London: George Allen & Unwin. Aven, T., Vinnem, J.E. and Wiencke, H.S., 2007. A decision framework for risk management with application to the offshore oil and gas industry. Reliability Engineering and System Safety, 92, pp. 433-48. Blank, S., 1980. Assessing the Political Environment: An Emerging Function in International Companies. New York: The Conference Board. Chaffee, E.E., 1985. Three models of strategy. Academy of Management Review, 10, pp. 89. Chandler, A.D., 1997. Strategy and Structure. Cambridge: MIT Press. Fairlamb, D. and Sender, H., 1983. How Good Are Country Risk Forecasters? Duns Business Month, May, pp. 66-71. Ha°kansson, H. and Lind, J., 2004. Accounting and network coordination. Accounting, Organizations and Society, 28, pp. 51-72. Hallikas, J. et al., 2004. Risk management processes in supplier networks. International Journal of Production Economics, 90(1), pp. 47-58. Hofer, C.W., 1977. Conceptual Constructs for Formulating Corporate and Business Strategy. Boston: H.B.S. Case Services. Horngren, C.T., Bhimani, A., Foster, G. and Datar, S., 2005. Management and Cost Accounting, New York: Prentice-Hall. Kobrin, S.J., 1982. Managing Political Risk Assessment. Berkeley: The University of California Press. Kraar, L., 1980. The Multinationals Get Smarter About Political Risk. Fortune, March, pp. 86-98. Micallef, J., 1981. Political Risk Assessment. Columbia Journal of World Business, Summer, pp. 8-12. Micallef, J., 1981. Political Risk Assessment. Columbia Journal of World Business, Summer, pp. 10. Mintzberg, H. and Waters, J.A., 1985. Of strategies, deliberate and emergent. Strategic Management Journal, 6, pp. 257. Porter, M.E., 1980. Competitive Strategy: Techniques for Analysing Industries and Competitors. New York: Free Press and Macmillan. Quinn, J.B., 1980. Strategies for Change: Logical Incrementalism. Homewood, IL: Richard D. Irwin. Ritchie, B. and Brindley, C., 2000. Disintermediation, disintegration and risk in the SME global supply chain. Management Decision, 38(8), pp. 575-83. Robock, S.H. and Simmonds, K., 1983. International Business and Multinational Enterprises. Homewood: R.D. Irwin. Shapiro, A.C., 1981. Managing Political Risk: A Policy Approach. Columbia Journal of World Business, 16(3), pp. 32-9. Steiner, G.A., 1979. What Every Manager Must Know. New York: The Free Press. Tang, C.S., 2006. Perspectives in supply chain risk management. International Journal of Production Economics, 103(2), pp. 451-88. Read More