Overview: Management Control in Multinational Companies
- Haim Ratzabi
- Oct 16, 2022
- 4 min read
One of the great challenges of multinational companies (MNCs) managements is executing Management Control (MC) across borders. In general, there are three types of models of MNC’s: (i) Centralized; (ii) Regional; (iii) Multinational.
There are various reasons why companies want to become MNC's, lower production costs, proximity to target international markets, avoidance of tariffs. Also, MNC's hire local workers who know the culture of their place and are thus able to give helpful insider feedback on what the locals want. The combination of locals and foreign workers enable to come up with products that are more creative and innovative.
What are multinational companies (MNCs)?
A multinational company is a company that operates in its home country, and its subsidiaries are in different countries. It maintains a central office located in one country, which coordinates the management of all its other units. Each unit operates in the specific context of its host country and interacts with local business networks like suppliers or buyers.
Mechanism of management control (MC)
Output Control
a. Use of performance management system and linked incentives;
● Performance management system (PMS) - To comply with specific country requirements, subsidiaries develop performance measures to supplement the global PMS of the MNCs. Non-financial measures often complement but do not replace financial figures.
● Incentives - can be based on financial performance or refer to non-financial measures. Monetary incentives for subsidiary managers are commonly linked to quantifiable measures, whereas career-related rewards are used to strengthen the identification of managers with the MNC.
● Financial figures - are widely used to measure performance due to their high acceptance and comparability across countries. These controls are scarcely adapted to country-specific conditions that subsidiaries are subjected to. To comply with specific country requirements, subsidiaries develop performance measures to supplement the global PMS of the MNCs.
b. Budgeting and budgeting controls
Budgeting processes draw on communication and information flows between headquarters and subsidiaries.
It seems to be strongly affected by the background of the respective country, in particular regarding the importance of budgeting and the level of detail. The participation of subsidiaries in the budgeting process seems to enhance the commitment of a subsidiary’s management to budgets.
c. Reporting
Serves as a pillar of MC at foreign subsidiaries as it allows headquarters to gain insights into local business figures. Reliable and timely reporting from subsidiaries requires detailed process descriptions. MNCs frequently use integrated systems to achieve consistency in reporting. Hence, efficient reporting requires a coordinated approach of different control mechanisms.
Process Control
A centralized management style - strives to intensely monitor operational business in order to inform decision makers at headquarters. Centralized MNCs place high emphasis on the transfer of the corporate culture to the subsidiaries. Introducing management information systems allows permanent information flow, which is essential for a centralized coordination of MNCs.
These systems allow real-time monitoring and coordination worldwide, which either reinforce centralization tendencies.
We can point that there are some processes that are prone to be centralized:
· Strategic decisions and capital expenditures.
· Global transfer pricing policies - in some cases triggered by tax compliance requirements - appear to reduce the autonomy of subsidiaries.
Social control
Social control mechanisms like training, informal communication and meetings help to initiate a performance-based culture at a subsidiary that conveys corporate values. (Social control - will not be discussed in this article).
What are the factors that influencing control mechanisms at MNCs
MNC characteristics
● A variety of MNC characteristics representing either demographic features or relating to strategy and corporate culture influence MC.
● A high degree of internationalization is related to tight control with a strong emphasis on financial and non-financial output controls.
● Highly internationalized firms rely on setting goals and evaluating performance
● Large and highly diversified MNCs are more likely to implement global environmental standards and central evaluation of environmental performance.
Relationships of subsidiaries within MNCs
● Cultural and geographical distance between headquarters and subsidiaries complicate communication at MNCs and affect various mechanisms of MC.
● Social relationships enable the implementation of control mechanisms; in particular, the success of a group-wide launch of a new PMS depends on social networks that are built on trust.
● The strategic importance of a subsidiary affects output control, which is tighter for subsidiaries with higher relevance within the MNC.
Subsidiary characteristics
● The age of a subsidiary influences the control.
● The form of establishment describes whether the MNC builds its foreign operations from scratch as a green-field investment, acquires a company, or forms a joint venture together with a foreign partner.
Conclusions
1. Output controls, especially financial figures, are widely understood and accepted across countries and sectors, which enables benchmarking.
2. Non-financial measures allow adjustment to local requirements and increase the significance of PMS under environmental uncertainty.
3. Nevertheless, PMS that are too complex lose influence due to their incomprehensibility.
4. Management control should be adapted to the environment of a subsidiary; especially market requirements, culture, legal frameworks, and languages should be taken into account when implementing Management Control System (MCS).
5. Training serves to transfer both knowledge and corporate culture to subsidiaries and ensures that MCSs are, on the one hand, applied correctly and, on the other hand, accepted by subsidiaries - both requirements for effective control.
6. However, the extensive use of such controls limits flexibility and adaptations to local requirements.
7. Process controls ensure that employees at subsidiaries comply with guidelines and act in line with the MNC’s goals.
8. Social relationships are important for implementing MCSs and enhancing the reliability of reporting. Management accountants should build and foster social ties with other departments and subsidiaries.
9. Cultural and local knowledge as well as managerial and technological skills are critical resources to establish control of foreign activities.
10. Understanding a subsidiary’s operations is a precondition for setting and monitoring targets.
Source - based on an open access publication article: " Management control in multinational companies: a systematic literature review " Martina Sageder ∙ Birgit Feldbauer‑Durstmüller
Comments