Disclosures by U.S., U.K., and Continental European Multinational Corporations”. Journal of International Business Studies, pp 555 – 572.
Salter, S. B. (1998), “Corporate Financial Disclosure in Emerging Markets: Does Economic Development Matter?” The International Journal of Accounting 33, no. 2, pp 221 – 234.
MODULE 3: ISSUES WITH MULTINATIONAL CORPORATIONS
3. Discuss the international perspective on consolidated financial statements.
3.0 MAIN CONTENT
3.1 WHAT IS A MULTINATIONAL CORPORATION?
A multinational corporation (MNCs) or multinational enterprise (MNE) is a corporation enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation.
The International Labour Organization (ILO) has defined an MNC as a corporation that has its management headquarters in one country, known as the home country and operates in several countries known as host countries.
Some multinational corporations are very big, with budgets that exceed some nation’s gross domestic products (GDPs). Multinational corporations can have a powerful influence in local economies, and even the world economy and play an important role in international relations and globalization.
It is important to distinguish a transnational corporation (TNC) from a traditional MNC. A
transnational corporation differs from a traditional MNC in that it does not identify itself with one national home while traditional MNCs are national companies with foreign subsidiaries. TNCs spread out their operations in many countries sustaining high levels of local responsiveness. An example of TNC is Nestle who employ senior executive from many countries and try to make decisions from a global perspective rather than from one centralized headquarters. However, the terms TNC and MNC are often used interchangeably.
SELF ASSESSMENT EXERCISE
What is the difference between multinational corporations and transnational corporation?
3.2 MOTIVES FOR DIRECT FOREIGN INVESTMENT
New MNCs do not pop up randomly in foreign nations. It is the result of conscious planning by corporate managers. Investment flows from regions of low anticipated profits to those of high returns.
1. Growth motive- a company may have reached a plateau satisfying domestic demand, which is not growing. Therefore, proceed to looking for new markets.
2. Protection in the importing countries- foreign direct investment is one way to expand bypassing protective instruments in the importing country. For example, European
community imposed common external tariff against outsiders. US companies circumvented these barriers by setting up subsidiaries.
3. Market competition- the most certain method of preventing actual or potential competition is to acquire foreign businesses.
4. Cost reduction- cheap foreign labour. Labour costs tend to differ among nations. MNCs can hold down costs by locating part of all their productive facilities abroad.
SELF ASSESSMENT EXERCISE
What are the motives for direct foreign investment?
3.3 INTERNATIONAL PERSPECTIVE ON CONSOLIDATED FINANCIAL STATEMENTS
Like you would recall, consolidated financial statements combine the separate financial statements of two or more companies to yield a single set of financial statements as if the individual companies were really one. Multinationals are often required by the countries in which they do business to set up a separate corporation in each country. The point is that a legal entity is not necessarily the same as an economic entity. From an economic point of view, the activities of these various legal entities are centrally administered from corporate headquarters. Thus, the intent of consolidated financial statements is to provide financial accounting information about the group of companies from an overall perspective.
Consolidated financial statements first appeared around the turn of the 20th century in the United States. This was a time of great economic expansion during which a number of corporations grew into economic giants. The era witnessed a wave of corporate mergers. It is said that J.P. Morgan was so proud of his US steel company (the first billion-dollar company in the world) that he insisted on preparing and disseminating consolidated financial statements since the company’s inception in 1901. Since holding companies first became important in the United States, it is not surprising that US accountants were the first to experiment with consolidated financial statements. These
statements are now a part of US generally accepted accounting principles.
Holding companies became important in Great Britain and Netherlands in the 1920s, so consolidated financial statements appeared there somewhat later than in the United States. Today, they are required in both countries. The practice moves much more slowly in the other European countries.
SELF ASSESSMENT EXERCISE
A legal entity is not the same thing as economic entity, explain.
4.0 CONCLUSION
Some argue that ownership is a key criterion. A firm becomes multinational only when the headquarters or parent company is effectively owned by nationals of two or more countries. For example, Shell and Unilever, controlled by British and Dutch interest are good example. However, by ownership test, very few multinationals are multinational. The ownership of most MNCs is uni-national. Therefore, ownership does not really matter.
5.0 SUMMARY
In this unit, we discussed the multinational corporations. We discussed what a multinational corporation is and what the motives that drive direct foreign investment are. We also discussed the international perspective on consolidated financial statements.
6.0 TUTOR MARKED ASSIGNMENT 1. What is a multinational corporation?
2. Explain the motives for direct foreign investment.
3. Discuss the international perspective on consolidated financial statements 7.0 REFERENCES/FURTHER READING
Davidson, R. A., Gerlardi, A. M. G., and Li, F (1996), “Analysis of the Conceptual Framework of China’s New Accounting System”. Accounting Horizons, pp58 – 74.
Gernon, H. and Meek, G. K. (2001), Accounting, An International Perspective, New York: McGraw-Hill Higher Education.
Gernon, H. and Wallace, R. S. O. (1995),” International Accounting Research: A Review of Its Ecology, Contending Theories and Methodology”. Journal of Accounting Literature 14, pp 54 – 106.
Mueller, G. G., Gernon, H. and Meek, G. (1991), Accounting, An International Perspective, Homewood: Irwin Richard D.
MODULE 3: ISSUES WITH MULTINATIONAL CORPORATIONS