Chapter 9 - BUSINESS OPERATIONS

Objectives:

 Describe how exporting, importing and countertrade can be used to

facilitate business operations,
 Explain why production, outsourcing and logistics are important to
multinational businesses,
 Identify and solve global marketing issues and mistakes,
 Identify the importance of research and development strategy,
 Explain the barriers that hinders movement of global human resources
management,
 Analyze the role and importance of accounting to international business and trade, and
 Examine the different financing structure and options available to foreign subsidiaries.

Business Operations refer to activities that businesses engage in on a daily basis to increase the
value of the enterprise and earn a profit. The activities can be optimized to generate sufficient
revenues to cover the expenses and earn a profit for the owners of the business. Employees help
accomplish the business goals by performing certain functions such as marketing, accounting,
manufacturing, etc.
Business Operations in Different Industries
The operations of a business vary across
industries, and they are structured according to the
requirements of the specific industries. Mastering
the operations of a specific industry can help the
business achieve success. Here is an analysis of
business operations in different industries:
1. Retail industry
One of the main goals of a retail business
is to stock products that customers are looking for
and at a price that the customers are willing to pay. It means that the business must maintain an
efficient inventory system so that it knows what is in stock at any given time while reducing
instances of dead stock. Deadstock- refers to the products that the company has in stock but are
not in high demand.
In order to maximize revenues, the business should stock fast-moving items that customers
are willing and happy to pay for. The business should also negotiate friendly credit terms with
suppliers so that they can get the required products on credit to prevent stock outs.
2. Service industry
The business operations of a service business are divided into the front-end and back-end
side of the business. The management must ensure that the two divisions are running efficiently to
prevent laxity on one side, which can hinder the achievement of the company’s objectives. On the
front end, the business should focus on streamlining the service delivery to customers to increase

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their satisfaction. It should also formulate a means of receiving feedback and complaints from
customers to know their expectations and how to improve service delivery.
On the back end, the management should employ the right people in each department. For
example, the company should appoint trained and experienced staff to prepare forecasts for client
projects to prevent the actual costs from exceeding client budgets.
3. Manufacturing industry
Manufacturing companies are involved in turning raw materials into physical products,
which are then sold to consumers. One of the things that a manufacturing company can do to
achieve efficiency is to source quality raw materials from credible suppliers. For perishable and
edible products, the business should look into how raw materials are stored, processed, and shipped
to consumers.
The company can also eliminate bottlenecks that increase processing times to save time
during manufacturing and shipping. If the company is struggling with shipping logistics, it can
outsource shipping and concentrate on other areas of the business that it excels in.
4. Technology industry
The key to streamlining operations of a technology company is hiring the right staff and
training them on how to execute the tasks they are assigned. It means that the company should put
a hiring criterion in place that helps them hire the best candidates for the job. The company should
also come up with an internal training and mentorship program where senior staff works hand-in-
hand with junior staff to help them perfect their skills.
Another way of increasing efficiency is by collaborating the different tools such as apps,
websites, and systems that the company uses. The company’s management should continually
monitor internal and external processes to spot any glitches and address these issues quickly.
A. EXPORTING, IMPORTING AND COUNTER TRADE
The Philippines is an archipelago comprising of 7,641 islands. The country shares maritime
borders with China, Indonesia, Japan, Malaysia, Taiwan, Vietnam, and the island nation of Palau.
In 2015, the Philippines exported goods valued at US$77.9 billion and imported products worth
US$76.8 billion. The Philippines’ top export destinations are China, Japan, the United States, and
Singapore; and the country’s top import partners are China, Japan, Korea, the United States, and
Thailand. In this article we explain best practices for importing into and exporting out of the
Philippines.
Exporting is defined as the sale of products and services in foreign countries that are
sourced or made in the home country.
 The Philippines is the 37th largest export economy in the world and the 43rd most
complex economy according to the Economic Complexity Index (ECI). In 2017, the
Philippines exported $99B and imported $105B, resulting in a negative trade balance
of $5.9B. In 2017, the GDP of the Philippines was $313B and its GDP per capita was
$8.34k.
 The top exports of the Philippines are Integrated Circuits ($32.2B), Office Machine
Parts ($10B), Computers ($5.19B), Semiconductor Devices ($3.34B) and Insulated

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 Wire ($2.42B), using the 1992 revision of the HS (Harmonized System) classification.
Its top imports are Integrated Circuits ($12.1B), Refined
Petroleum ($5.64B), Cars ($4.77B), Crude Petroleum ($3.15B) and Industrial
Printers ($2.5B).
 The top export destinations of the Philippines are China ($20B), Hong
Kong ($14.8B), the United States ($13B), Japan ($11.4B) and Germany ($5.3B).
Importing refers to buying goods and services from foreign sources and bringing them
back into the home country.
 Imports to the Philippines fell by 7.6% yoy to USD 8.22
billion in December 2019, following a 8 percent decline
in November. Purchases shrank for iron & steel (-38%),
cereals and cereal preparations (-30.8%), industrial
machinery and equipment (-21.9%), plastics in primary
and non-primary forms (-21.5%), other food and live
animals (-11.5%), electronic products (-7.1%) and
transport equipment (-1.2%). Conversely, imports grew for telecommunication
equipment and electrical machinery (64.2%), miscellaneous manufactured articles
(8.1%) and mineral fuels, lubricants and related materials (6.5). By country, purchases
declined from Japan (12%), South Korea (17.1%), the US (-12.9%), Thailand (-22%),
Taiwan (-5.2%) and the ASEAN countries (-7.3%).
 In contrast, imports went up from China (3%), Singapore (6.5%), Indonesia (2.7%) and
the EU (11.5%).
Counter Trade is an import / export relationship between nations or large companies in
which good and/or services are exchanged for goods and services instead of money. In some cases
monetary evaluations are made for accounting purposes.
Types of Counter Trade
1. Barter – it is the exchange of goods and services for goods and services without any need
for money.
2. Switch Trading - In this method one company trades products and services or, in some
cases, builds infrastructure like roads, railway lines, hospitals with another nation and, in
turn, are obligated to make a purchase from that nation. One such example is a deal
proposed by the Philippine Government where they offer to trade Philippine coffee for
essential products.
3. Counter Purchase - A foreign company, or country, trades with a nation with the promise
that in the future they will make purchase of a specific product from the nation. A recent
example of this is the ongoing trade between Congo and China where infrastructure is
being traded for a supply of metals.
4. Buyback - In this type of counter trade, a company builds a plant, supplies technology,
training, etc. In exchange they take a part of output of the plant. For example, a company
based in the USA sets up a lets say an automobile factory in X country. They take a part of

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 the total produce as their own but they have setup the industry, provided the technology
and the training to X country.
5. Offset - This is an agreement by one nation to buy a product from a company in another.
The terms of contract are subject to the purchase of some or all of the components and raw
materials from the buyer of the finished product, or the assembly of such product in the
buyer nation. This is more common in terms of defense equipment's or aircrafts.

There can be several reasons for a nation to choose counter trade over cash exports and
imports. Some of them are:
1. Money: sometime the shortage of cash resources leads nation towards counter trade.
Developing nations, particularly, have very limited cash resources but they generally are
abundant in natural resources. By engaging in counter trade these nations ensure that the
resources available to them are fully utilized and they are also able to fulfill their
requirements without spending cash.
2. Protect local industries: by engaging in counter trade, nations ensure that as they give
business to a foreign nation they also create business and job opportunities for their own
people by promoting the traded commodity.
3. Balance of trade: Maintaining a positive balance of trade is very important for every
nation. Counter trade is a great way for nations to ensure that the import and exports in the
nation are balanced as every commodity that is being bought is equaled with some
commodity being sold.
 Counter trade consists of transactions which have as a basic characteristic a linkage,
legal or otherwise, between exports and imports of goods or services in addition to, or
in place of, financial settlements. Counter trade can be used as an effective
international business tool. Counter trade plays a part in 20-25 percent of world trade.

B. GLOBAL PRODUCTION, OUTSOURCING AND LOGISTICS

Global Production
Global Production Networks (GPN) is a concept in developmental literature which
refers to "the nexus of interconnected functions, operations and transactions through which a
specific product or service is produced, distributed and consumed."
Global Production Advantages:
•Increased outward orientation
•Technology transfer
•Productivity spillovers
•Improved production Processes
•Increased Competitiveness in Domestic Industry

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 Global production networks can be structured into two categories;
multi-domestic and globally integrated structures:
1. Multi-domestic. Concerns operations where each market is serviced
independently. Can relate to simple products that are easy to replicate but costly
to transport over long distances. Production can be integrated globally, while
the marketing is multi-domestic, reflecting cultural and consumer preferences
differences. The goal is therefore to better answer the needs of every market.
This implies an independency in productivity, meaning that the efficiencies and productivities
achieved in each market are unrelated to those taking place in other markets.
2. Globally integrated Systems of production located in several countries and commonly
involving complex products. Logistics activities are highly important as production and
distribution capabilities need to be effectively reconciled. This implies an interdependency in
productivity, as each component of the supply chain directly impacts the cost and the quality of
the final product.
Four major locational strategies for Global Production Networks can be identified:
1. Centralized global production. The entire production occurs within only one nation (or
region) and is exported thereafter on the global market. This is particularly the case for
activities that are difficult to relocate, such as goods linked to the location of resources,
difficult to reproduce (e.g. luxury and craft) or depending on massive economies of scale.
2. Regional production. Takes place within each region that manufactures a good with the
size of the production system related to the size of the regional market. This system depends
more on a regional accessibility than on economies of scale. It particularly applies to well
known manufacturing technologies and/or to products having high distribution costs (e.g.
soft drinks).
3. Regional specialization. This global produc tion network involves a spatial division of the
production based on comparative advantages. Each region specializes in the production of
a specific good and imports from other regions what it requires.
4. Vertical transnational integration. This global production network is another variant of
specialization. Different stages of the production occur at locations offering the best
comparative advantages. Raw materials are extracted from locations where they are the
most accessible, while assembly is performed in regions having low labor costs or high
skill levels depending on the type of product or the stage in its manufacturing.
 Each production sectors has a different production network. The automotive and
electronics sectors are good examples of vertical integration. For instance, the
manufacture of a television generally implies stages of research and development in
the United States and Japan (as well as being important markets). Several nations, such
as England, South Korea and Germany provide components. The assembly takes place
in low wages countries such as China, Mexico and Thailand. Labor costs are a key
element of this system, but also the required level of know how.

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Outsourcing is a business practice in which a company hires another company or an individual
to perform tasks, handle operations or provide services that are either usually executed or had
previously been done by the company's own employees.
 Outsourcing opportunities in the Philippines is not limited to multi-billion-dollar
companies. Small businesses also stand to benefit from the country’s attractive
outsourcing climate, as is demonstrated by Human Proof Designs’ success story. Its
COO, Brad Vandenberg, witnessed the company grow from a small staff of 15
members to have 200 employees in less than 18 months. And he attributes this growth
to outsourcing to the Philippines. More than just growing their staff, Human Proof
Designs also managed to expand the range of services they offer.

Why outsource to the Philippines?

 The success of the outsourcing industry in the Philippines can be attributed to the many
advantages the country offers to investors. Learn more about the factors that make the
Philippines the best outsourcing destination:
1. Cost efficiency - By working with contractors in the Philippines, businesses can save 60%
to 80% of operational costs. This is because of the low cost of living in the country. The
salary of fresh graduates in the Philippines is a small fraction of their counterparts in the
West. The daily salary of Filipino professionals can amount to only the hourly salary of an
employee in Europe or the US.
2. Cultural compatibility - A country formerly colonized by the Spanish, Americans, and
Japanese, the Philippines continues to show remnants of its past. Western culture is still
entrenched in people’s everyday lives, and Filipinos remain to be highly adaptable to
foreign cultures. Moreover, hospitality is an integral part of Filipino culture and tradition.
These factors make Filipinos easy to socialize and work with.
3. English proficiency - Around seventy percent of Filipinos are fluent in English. Most
local children learn the language even before they start going to school. Their English
proficiency is further reinforced once they start getting a formal education. English is the
medium of instruction used in schools in the Philippines and is the primary language for
local commerce.
 The sixth edition of EF’s English Proficiency Index ranked the Philippines in the 13th
place for English proficiency worldwide. The country ranks third in Asia, bested only
by Malaysia and Singapore.
4. Highly skilled workforce - The Philippines has a large young population that is growing
faster than the country’s dependent children and retired workforce. The median age of this
young population is 23 years old. Beyond just resulting in an abundant supply of
manpower, the statistics also amount to a highly educated workforce boasting a literacy
rate of 97.5%.
5. Flexible workforce - Building an offshore team in the Philippines allows you scale quickly
and efficiently without any capital investment or infrastructure requirements. You can
expand a team quickly and cost efficiently. Equally, you can shrink your team again, if

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 you have seasonal work, or your business takes a turn for the worse. Generally you can
arrange agreements with outsourcing suppliers for low commitments and very flexible
terms.
6. Reduced legal liabilities and management issues - Employing staff in any country comes
with a lot of regulation, compliance, administration, tax and cost implications. Some
countries and sectors are more burdensome than others. Hiring offshore staff via a
Philippine outsourcing supplier means that you can protect yourself from the exposure and
recourse of employing people in-house, or direct.
7. Data security and privacy - The Philippines has been an outsourcing destination of choice
for 30 years. In that time it has built an incredibly sophisticated industry, and a string
regulatory environment in support of the sector. The Philippines outsourcing sector has
been processing highly sensitive client data for over two decades now. Everything from
US health insurance, medical records, and personal financial data – for some of the world’s
biggest public and private companies – is all processed by Philippine outsourcing
industry. The Philippines can provide any kind of compliant environments and work
systems, and the country has adopted one of the most stringent data privacy acts (modeled
on the European GDPR).
8. 24/7 staffing – time zone neutral - The Philippines workforce is highly geared towards
24/7 coverage. So regardless of your company’s time zone, or the time zone of your clients
– the Philippines can cover your requirements.
9. Economic growth - According to the 2017 KPMG Philippine Consumer Market Report,
Filipinos are now enjoying stronger purchasing power because of the country’s robust
economy. Foreign investors stand to benefit from the business environment that is
conducive for growth and scalability.
10. Track record of the BPO industry - Now spanning a history of over 25 years, the business
process outsourcing industry in the Philippines saw its beginnings in the year 1992. The
industry has since earned a ten-fold increase in its total revenue. The country’s BPO sector
has a global market share of 10%, which is a three-fold increase since 2004. This global
market share is estimated to be at 15% by 2022.
11. Government support - Recognizing the BPO sector as one of the top contributors to the
country’s economic growth, the local government provides the industry with strong support
by way of regulations and incentives that encourage companies to choose the Philippines
for their offshore operations. To provide such incentives, the Philippine government
established the Philippine Economic Zone Authority (PEZA) and special economic zones
(SEZ).
12. Fringe benefits - Outsourcing allows you to adopt a “follow the sun” workflow strategy.
This means you have staff working round the clock. While your onshore employees are
sleeping, your offshore operation from halfway across the world has people getting things
done. This speeds up your delivery cycle for faster production and reduced process
development duration.

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Logistics is defined as the integration of transport, warehousing, freight forwarding and
information services. Along with competitiveness of products and services, efficient logistics
services can significantly contribute to a country’s economy.
 In the Philippines, transportation and logistics are considered main catalysts of
economic growth. The country’s transport system is intermodal in character, which
includes inter-island as well as intra-island mobility, and typically combines air, sea
and road transport modes.
 The Department of Trade and Industry (DTI) underscored the importance of having an
efficient logistics system. It noted on its Web site, “Effective logistics development is
one of the strategies that is seen to greatly facilitate trade and connectivity; contribute
to the lowering cost and clearance time of imports and exports; and ensure the smooth
flow of commodities. Once perceived to be stable and reliable, it would encourage
market expansion and improvement of the investors’ confidence in transporting goods
and services.”
 In the course of time, the increasing globalization, competition and trade require greater
movement of goods and services, which then necessitates the need for a more efficient
logistics system.
 However, the Philippine logistics industry has been lagging behind its neighboring
countries. In a policy note published in March 2018 by the Philippine Institute for
Development Studies (PIDS) titled “Regulatory Challenges in the Philippine logistics
industry,” Research Consultant Jose L. Tongzon noted that the Philippines currently
has the highest logistics cost among the member-states of the Association of Southeast
Asian Nations (ASEAN) — even trailing behind Vietnam, which is considered one of
ASEAN’s transitional economies.
 While Philippine logistics market has still managed to grow as a result of the country’s
strong economic growth, growing outsourcing sector and rising globalization,
according to the report, it has remained fragmented and dominated by foreign
transnational players.
 In a separate report, DTI stated that the country’s logistical costs account for 24% to
53% of wholesale prices, while shipping and port handling costs cover 8% to 30%,
depending on the goods’ route, and roughly 5% of the retail price of goods.
 Moreover, the Philippines ranked 71st out of 160 countries in the Logistics Performance
Index of World Bank. The international scorecard ranks countries based on a set of
criteria including efficiency of the clearance by border control agencies, including
customs; quality of trade and transport-related infrastructure; ease of arranging
competitively priced shipments; competence and quality of logistics services; ability to
track and trace consignments; and timeliness of shipments in reaching destination
within the scheduled or expected delivery time.
 The report indicated that the country’s weak performance was attributed to its
inadequate and relatively poor quality of infrastructure, inefficient customs, poor
competency of logistics providers, along with their limited ability to track and trace
shipments.
 “One factor behind the poor performance and low international competitiveness of the
Philippine logistics sector is its restrictive and incoherent regulatory framework, as can
be seen in the case of the Philippine ports,” the PIDS report stated. “The efficiency of
the ports matters because their costs account for a large part of maritime transport costs,

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 which providers and shippers usually shoulder by way of increased shipping charges.
Delays due to port inefficiency can also lead to higher inventory costs and even loss of
business opportunities.”

C. GLOBAL MARKETING AND RESEARCH AND DEVELOPMENT

Marketing and Research and Development is extremely important in global organizations
because; Understanding new markets and cultures through extensive research is essential for
success Intel have successfully achieved this Changing marketing campaigns isn't always enough
when reaching foreign consumers.
Global Marketing is the application of a single marketing strategy in the worldwide
market, for a product or service.
Global Marketing Issues and Mistakes
 Companies, especially their marketing teams, often face the following issues and
mistakes when expanding worldwide. These can become hurdles in achieving
international success.

1. Non-Specification of Countries
 Many business persons usually think of foreign markets vaguely, like they want to shift
to Asia or they want to increase their growth by offering their products to Europe.
2. No Focus on Internal Information
 You have to conduct specialized and complicated market research when you are going
to create a global market entry strategy. You would need to consider the potential
opportunity in the market, how easy or hard it would be for your business to work in
that market, and how successful you already are in the market.
3. Lack of Adaptation of Sales and Marketing Channels
 Most Western companies think that they can go into new markets by doing the same
things that brought them success domestically.
4. No Adaptation of Product Offerings
 Business can only attain a fit between their product and the market one at a time.
However, more often than not, businesses attempt to launch the same products in
varying markets. In essence, they are ignoring that they are interacting with a
different set of consumers.
5. Non-Usage of Local Team Leads
 Perhaps one of the usual mistakes companies make in global marketing is failing to
consider the input of strong and competent employees in their foreign markets,
especially when establishing strategic decisions.
6. Lack of Knowledge on Global Logistics
 Marketers often make use of software that allows them to publish website content,
send email, publish updates on social media, and accomplish other marketing-related
activities. However, these tools do not always support each market. For example, you
have payment solutions only for a couple of countries, but your customer relationship
management system has many contacts coming from a hundred countries. Marketers
have to guarantee that they could market to customers in the countries they are
entering. They should consider how to display the local currency, how to email

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 consumers in particular time zones, and how to support the languages of the
consumers.
Research and Development (R&D) is a valuable tool for growing and improving your business.
R&D involves researching your market and your customer needs and developing new and
improved products and services to fit these needs. Businesses that have an R&D strategy have a
greater chance of success than businesses that don't. An R&D strategy can lead to innovation and
increased productivity and can boost your business's competitive advantage.
Developing an R&D strategy;
 Your R&D strategy depends on the size of your business. In small businesses, R&D tends
to focus more on product improvement because of budget and cost limitations. Larger
businesses may be able to dedicate
more time and resources to R&D to
introduce new products as well as
improve existing ones. The benefits of
R&D are often long-term, so it's
important to remember that your
investment in it may not result in short-
term profits. As well as product
development and improvement, R&D
can help you develop more efficient
processes and new ways of delivering services.
 Spending more time and money on R&D does not guarantee it will be successful. The key
to successful R&D is extensive market research to identify the needs and desires of your
customers. You will need to revisit this research regularly as customer preferences
frequently change.

D. GLOBAL HUMAN RESOURCES MANAGEMENT

Global Human Resources Management is the discipline of taking care of workforces in a public
or private company, for organizations that operate in more than one country or continent. It means
supporting, managing and engaging employees around the world, deploying common policies but
also taking into account local legislation, customs and culture.
Objectives of Global HRM as follows:
 Create a local appeal without compromising upon the global identity.
 Generating awareness of cross cultural sensitivities among managers globally and hiring
of staff across geographic boundaries.
 Training upon cultures and sensitivities of the host country.

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Barriers to Global Human Resource Management
 Political & Legal Factors
- Throughout the world, the political & legal systems are diversified. The
organizations deal with the political & legal systems that are fairly stable,
particularly in the developed countries of Europe. On the other hand, in certain
other countries, there are relatively unstable political & legal systems. The
governments of certain countries face coups, corruption & dictatorial rules that are
all badly affecting the legal & business environment. Due to internal politics, the
legal systems in certain countries are also becoming unstable. In this way the
variations in the political & legal systems around the world become as a hurdle in
the effective global human resource management.
 Cultural factors
- Every country has its own unique culture which is slightly similar to the cultures of
other countries of the world. The global human resource management should apply
such policies & procedure in the organization which are in accordance with the
local culture of the country or region. Even most of the employees of the foreign
subsidiary should be hired from the host country. There may be certain cultural
norms that are allowed in one country but are prohibited in another country. So,
cultural factor becomes a barrier for the smooth working of the global human
resource management of any organization. Therefore the expatriates of the
organization should also take into account the cultural norms & values of the host
country to some extent. The management should make ensure that the implemented
wider corporate culture is being followed in all the subsidiaries of the globally
operating organization.
 Economic Factors
- The economic factor is also regarded as a barrier for the effective global human
resource management because there is not any single economic system operating
globally. In case of the capitalist system, the efficiency & productivity are focused
by the management of the organization by making such policies & procedures that
promote efficiency. On the other system of economics, which is the socialist, the
elimination of unemployment is concentrated by the management of the
organization by sacrificing the productivity & efficiency which is definitely
harmful for the organization. So before development & implementation of any
human resource policy or practice of the management of the organization, the
economic barrier of the global operations should be properly comprehended by the
organization. Moreover, the difference in the labor costs around the world becomes
a serious problem for a global business.

 Labor/Management Relations Factor

The policies & procedures of the global human resource management are affected by the
relations of workers & employees with the management because the nature of these
relations varies from one country to another country of the world.

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Five Main Functions of Global Human Resource Management
1. Recruitment and On boarding Process - Attracting, hiring and retaining a skilled
workforce is perhaps the most basic of the human resources functions. There are several
elements to this task including developing a job description, interviewing candidates,
making offers and negotiating salaries and benefits. Although a complex task for any
business, it is made more complex in the international arena due to differences in
educational systems from one country to the next and, of course, difference in languages.
2. On-the-Job Training - Even when an organization hires skilled employees, there is
normally some level of on-the-job training that the human resources department is
responsible for providing. This is because every organization performs tasks in a slightly
different way. One company might use computer software differently from another, or it
may have a different timekeeping method. Whatever the specific processes of the
organization, human resources has a main function in providing this training to the staff.
3. Continuing Professional Development - Closely related to training is HR's function in
professional development. But whereas training needs are centred around the
organization's processes and procedures, professional development is about providing
employees with opportunities for growth and education on an individual basis.
Development often entails moving an employee between departments so that he or she
gains skills in multiple areas. For an international operation, this may also mean moving
employees across boundaries.
4. Benefits and Compensation - While the management of benefits and compensation is
a given for human resources, the globalization of companies in the twenty-first century has
meant that HR must now adapt to new ways of providing benefits to an organization's
employees. Non-traditional benefits such as flexible working hours, paternity leave,
extended vacation time and telecommuting are ways to motivate existing employees and
to attract and retain new skilled employees. Balancing compensation and benefits for the
organization's workforce is an important HR function because it requires a sensitivity to
the wants and needs of a diverse group of people.
5.Ensuring Legal Compliance - The final function of human resource management is
perhaps the least glamorous but arguably of utmost importance. Ensuring legal compliance
with labor and tax law is a vital part of ensuring the organization's continued existence.
The federal government as well as the state and local government where the business
operates impose mandates on companies regarding the working hours of employees, tax
allowances, required break times and working hours, minimum wage amounts and policies
on discrimination.
E. ACCOUNTING AND FINANCE IN INTERNATIONAL BUSINESS AND TRADE
Accounting - is the language of business. it is the way firms communicate their financial
positions. Accounting is more complex for international firms because of differences in accounting
standards from country to country (differences make it difficult for investors, creditors, and
governments to evaluate firms). It is difficult to compare financial reports from country to country
because of national differences in accounting and auditing standards.

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 National Accounting Standards - are rules for preparing financial statements Auditing
standards specify the rules for performing an audit Importance of International Accounting
Standards The growth of transnational financing and transnational investment has created a need
for transnational financial reporting Standardization of accounting practices across national
borders is probably in the best interests of the world economy.
The International Accounting Standards Board (IASB) is a major
proponent of standardization of accounting standards Accounting
Influences Control Systems. The control process in most firms is usually
conducted annually and involves three steps:
1. Subunit goals are jointly determined by the head office and subunit
management.
2. The head office monitors subunit performance throughout the year.
3. The head office intervenes if the subsidiary fails to achieve its goal, and
takes corrective actions if necessary Budgets and performance data are
usually expressed in the corporate currency Exchange Rates Influences
Control System.

Importance of International Accounting Standards

●The growth of transnational financing and transnational investment has created a need for
transnational financial reporting
●Standardization of accounting practices across national borders is probably in the best
interests of the world economy
●The International Accounting Standards Board (IASB) is a major proponent of
standardization of accounting standards

Accounting Influences Control Systems

 The control process in most firms is usually conducted annually and involves three steps
 Budgets and performance data are usually expressed in the corporate currency
Exchange Rates Influences Control System
The Lessard-Lorange Model -firms can deal with the problems of exchange rates and
control in three ways:
1. The initial rate - the spot exchange rate when the budget is adopted
2. The projected rate - the spot exchange rate forecast for the end of the budget picture
3. The ending rate - the spot exchange rate when the budget and performance are being
compared.

Accounting and finance play an essential role in the management of any business. Companies operate
on money, and if you don't control that money, you don't control your business. By properly
accounting for your company's income and expenses, you can manage the flow of money and thereby
direct the course of your business.

Importance To International Business

The importance of accounting and finance is to provide an understanding of the international dimension of
finance and accounting and how this impacts upon business so that you are better able to appreciate the
workings and operation of currency derivatives markets, the international money and capital markets and
the principles of currency risks management.

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The Role of Accounting in International Business
The purpose of accounting is to communicate the organization’s financial position to company
managers, investors, banks, and the government. Accounting standards provide a system of rules and
principles that prescribe the format and content of financial statements. Through this consistent reporting,
a firm’s managers and investors can assess the financial health of the firm. Accounting standards cover
topics such as how to account for inventories, depreciation, research and development costs, income taxes,
investments, intangible assets, and employee benefits. Investors and banks use these financial statements
to determine whether to invest in or loan capital to the firm, while governments use the statements to ensure
that the companies are paying their fair share of taxes.
As countries developed different cultures, languages, and social and economic traditions, they
developed different accounting practices as well. In an increasingly globalized world, however, these
differences are not optimal for the smooth functioning of international business.

International Accounting Standards

Historically, countries have followed different accounting standards. If different accounting

standards are used, however, it’s difficult for investors or lenders to compare two companies or determine
their financial condition. There are two accounting standard and this are the following:

1. International Financial Reporting Standards (IFRS)

The International Accounting Standards Board (IASB) is the major entity proposing
international standards of accounting. Originally formed in 1973 as the International Accounting
Standards Committee (IASC) and renamed the International Accounting Standards Board in
2001, the IASB is an independent agency that develops accounting standards known
as International Financial Reporting Standards (IFRS). Firms based in the European Union
(EU) follow standards adopted by the International Accounting Standards Board (IASB) known as
international financial reporting standards (IFRS).

* The IASB is composed of fifteen representatives from professional accounting firms from many
countries. These board members formulate the international reporting standards. For a standard to
be approved, 75 percent of the board members must agree. Often, getting agreement is difficult
given the social, economic, legal, and cultural differences among countries. As a result, most IASB
statements provide two acceptable alternatives. Two alternatives aren’t as solid or straightforward
as one, but it’s better than having a dozen different options.

2. Generally Accepted Accounting Principles (GAAP)

The United States doesn’t mandate using the IFRS. Instead, the United States has the Financial
Accounting Standards Board (FASB), which issues standards known as generally accepted
accounting principles (GAAP). The US currently mandates following GAAP. However, the FASB
and IASB are working on harmonizing the accounting standards; many IASB standards are similar
to FASB ones.
--- The primary reason for adopting one standard internationally is that if different accounting
standards are used, it’s difficult for investors or lenders to compare the financial health of two
companies. In addition, if a single international standard is used, multinational firms won’t have to
prepare different reports for the different countries in which they operate.

Financial Statements in International Business

Multinational firms often organize as separate legal entities (i.e., companies) in different countries
to gain advantages, such as limiting liability or taking advantage of local corporate tax regulations. Also,

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many countries mandate that companies that do business in their country set up a separate company in that
country. As a result, a multinational company may have numerous foreign subsidiaries, all owned by the
parent. A consolidated financial statement brings together all the financial statements of a parent and its
subsidiaries into a single financial statement. The consolidated financial statement must reconcile all the
investment and capital accounts as well as the assets, liabilities, and operating accounts of the firms.
Consolidated financial statements demonstrate that firms—although legally separate from the parent and
each other—are in fact economically interdependent. Most of the developed nations require consolidated
statements so that losses can’t be hidden under an unconsolidated subsidiary. The International Accounting
Standards Board (IASB) standards mandate the use of consolidated financial statements.

Consolidating financial statements of subsidiaries located in different countries poses problems

because of the different currencies used in different countries. Companies must decide on what basis they
will translate those different currencies into the home currency of the parent company.

Currency Risk
Currency values fluctuate from day to day relative to each other. Companies can mitigate currency
risk by engaging in hedging. Hedging refers to using financial instruments to reduce adverse price
movements by taking an offsetting position. Specifically, a firm can lock in a guaranteed foreign exchange
rate through a forward contract. In a forward contract, a firm agrees to pay a specific rate at the beginning
of the contract for delivery at a future date.

Currency Translation
When multinational companies consolidate their subsidiaries’ financial statements, they must
translate all the currencies into the currency used by the parent company in its home country. There are two
methods which a company can use for currency translation—the current-rate method or the temporal
method.
 Current-Rate Method
The current-rate method is a method of foreign-currency translation in which items in the
subsidiaries’ financial statements are translated into the currency of the parent corporation at the current
exchange rate (i.e., the rate on the date when the statements are prepared). In this case, the current value
may be different on the day it’s translated than on the date when the assets were originally purchased.
Although this difference is only a paper gain or loss, it nonetheless affects the valuation of the firm. This
method is the most widely used currency-translation method.
 Temporal Method
The temporal method is a method of foreign-currency translation that uses exchange rates based on
the rate in place when the assets and liabilities were originally acquired or incurred. The temporal method
avoids the paper gains or losses problem of the current-rate method. But because subsidiaries purchase
assets at different times throughout the year, the multinational firm’s balance sheet may not balance if the
temporal method is used.

FINANCIAL STRUCTURE AND SOURCES OF FINANCING

Financial structure refers to the ways in which a multinational firm’s assets are financed—from
short-term borrowing to long-term debt and equity.

Multinational firms engage in both:

1. transnational financing (i.e., seeking capital from a foreign sources) and;
2. transnational investment (i.e., investing capital in foreign markets).

FINANCING OPTIONS AVAILABLE TO SUBSIDIARIES

Subsidiaries can choose between two major ways to finance their operations through external sources:

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 1. Raising Money in Overseas Equity Markets
2. Raising Money in Overseas Debt Markets

INVESTMENT DECISIONS

Capital Budgeting
 Capital budgeting is the process by which firms assess the relative merits of different investment
choices, weighing the cost of capital and the expected returns of different investment options.
 Capital budgeting refers to the process of financing long-term outlays for major projects such as
plant expansion, entry into new markets, or research and development. The process of capital
budgeting helps a firm decide which major investment projects will be most economically
advantageous for the firm by assessing each project’s benefits, costs, and risks. When making
capital-investment decisions, firms examine the initial investment that will be required, the cost of
capital, and the amount of cash flow or other gains which the project will provide. The cost of
capital is the rate of return that a company could earn if it chose a different investment of equivalent
risk. The cost of capital comes into play because firms have choices in how to put their capital to
use; using the capital for one purpose precludes using it for a different purpose.

Financial Organizational Structure in International Business

Multinational companies can choose to manage their financial operations centrally or via a
decentralized organizational structure.

Centralized Structures. The advantages of a centralized structure are that the company can afford to hire
and retain specialized staff with deep expertise who can bring savings to the company through centralized
cash management and more efficient capital investment. Centralization can improve control and compliance
with corporate policies. This structure enables the firm to gain economies of scale for investment and
borrowing activities that can reduce transaction costs and provide the firm with the most competitive
pricing.
Decentralized Structures. Alternatively, multinational firms may choose a decentralized financial
organization structure due to variations in language, consumers, cultures, business practices, and
government rules, laws, and regulations among different countries. A decentralized structure lets
multinational firms exploit local knowledge and business conditions to deal with uncertainty. The
downsides of a decentralized approach are higher costs (due to having to hire more employees), some
unavoidable duplication of effort, and a diminishment of control.

Hybrid Financial Organization Structures. Finally, multinational companies follow a hybrid of

centralized financial operations for some tasks and regional operations for others. Before it was acquired
by Hewlett-Packard (HP) in April 2010, network switching and routing solutions company 3Com had
centralized specific operations in its North America shared service center (SSC). The North America SSC
provided a number of accounting services globally. Although the US-based SSC had a much higher cost of
labor than Singapore (where 3Com offshored transaction-based processes), 3Com decided to keep higher-
value services in the North America SSC due to 3Com’s assessment of the risk and complexity in
comparison to the anticipated benefit of moving these from one global center to another. Some of the tasks
retained by the North American SSC were worldwide consolidation, worldwide intercompany accounting,
and external reporting.

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Sources:

Global Human Resource Management. Retrieved from https://slideplayer.com/slide/4917492/

Luenendonk M. (2016) Global Marketing: Strategies, Definition, Issues, and Example. Retrieved from
https://www.cleverism.com/global-marketing-strategies/
Farooq U. (2015). Importance of Human Resource Management for Business. Retrieved
fromhttp://www.businessstudynotes.com/hrm/importance-of-human-resource-management-for-
international-business/
“Understanding the Roles of Finance and Accounting in Global Competitive Advantage”
https://2012books.lardbucket.org/books/challenges-and-opportunities-in-international-business/s19-
understanding-the-roles-of-fin.html
https://www.studocu.com

Exercises: (Reflective Thinking/Analytical Skills)

A. What are the benefits of exporting and importing of

products/services?
B. What are the problems that can be encountered in countertrade?
For your own opinion, what will be the remedies for these problems?
C. How can R&D help businesses in global market?

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