Under this set of conditions, the subsidiaries country gains somewhat more than the parent

company: more funds, more taxable income, greater economic growth of the subsidiary, and
more export revenues. The government pays greater subsidies or gives more tax credit because of
the subsidiarys artificially high value of exports and, like the government of the other country,
its national control is lessened.
Allocation of Overhead
O the cross national side, firms must determine what to do with corporate overhead. This become
a real issue for performance evaluation because the allocation of corporate overhead directly
reduces operating profit, which reduce return on invested capital, potentially pushing that return
below the companys cost of capital. On the purely national side, companies struggle with the
general concept of allocating overhead and the ways that affect product costs.
Cross Border Allocation of Expense
If it were not for differences in tax rates worldwide, companies could allocate corporate overhead
based on sales revenues in each subsidiary or on some other basis. However, different tax rates
complicate the situation. For companies headquartered in high tax countries, there is an incentive
to charge as many expense as possible against parent company income. However, this practice
tends to overstate expenses, understate income, and understate taxes in the parent company.
The problem with using tax law to allocate overhead is that it likely eliminates any possibility for
the firm to select an allocation basis that is consistent with its manufacturing strategy. When tax
implications are ignored, overhead is allocate differently. The Japanese, for example, have
established a direct link between allocating overhead and corporate goals.
Another important aspect of overhead we have aspect of overhead we have learned from the
Japanese is that overhead cannot be reduced over the long run by simply cutting cost. The entire
manufacturing process needs to be redesigned. However, MNEs find out that they have to
struggle to pick up or maintain market share against global competitors. In addition, the high
tech companies have to devote more and more of their scarce resources to R&D, so there is
pressure on management to react. The reaction usually comes in one of two ways: price are
dropped and costs are cut, or the firms gets out of certain product lines and develops a niche.

Performance evaluation issues

A variety of events that affect performance evaluation are out of the control of managers or
subsidiaries. There are many possible criteria against which to judge performance. Furthermore,
no single basis is equally appropriate for all units of an MNE. For a sales subsidiary, however,
these masures are less appropriate than such measures as market share, number of new
customers, or other measures of effectiveness. Similarly, profitability may be appropriate for a
subsidiary that is a true profit center but inappropriate for a subsidiary in a high tax rate country
that, for global tax minimization purposes, is instructed to minimize profits or even maximize
looses.
The situation suggest the desirability and advisability of using multiple bases for performance
measurement-that is, different ones for different kinds of operations in different countries. First it
is more difficult to compare the performance of different units measured under different criteria.
Second, it is more expensive to set up and operate a multiple criteria system. This idea of using
different measures for different country environments is consistent with the multidomestic
approach to strategy discussed in chapter 12. Proper performance evaluation would have to
eliminate these uncontrollable impacts for the interdependent subsidiaries as well as for the
German subsidiary. Furthermore, if other than arms length transfer prices were used on any of
the intercorporate sales, the reported result would not be within the control of either the selling or
buying subsidiary, and in any case, would not reflect real performance.
Properly Relating Evaluation to Performance
Perhaps most important, ROI is not appropriate for some foreign operations, such as subsidiaries
producing only for other subsidiaries, sales subsidiaries buting all their product from other
subsidiaries, or subsidiaries starving to break into highly competitive, low-margin markets. The
problems related to using ROI as a standard measure of performance apply to other measures as
well.
The need for standardization bring us back to the one method of performance evaluation that can
meet most criteria without undue limitations: the comparison performance with plan. This
method permits each affiliate to be judged on its own , according to the plan it was given and can
be used to compare subsidiary performance. However, it is a reasonable basis of performance

measurement only if the original plan were logical and reasonable. Therein lies one danger of
comparison to plan technique. The other danger is that subsidiary expectations, for example they
might deliberately project a bleak picture. However, if he planning and budget process is
sufficiently deliberative, participative, iterative, and honest, both of these dangers can be
minimized.
Economic Value Added
One tool that company are using to measure performance is economic value added (EVA),
something economist call economic profit. It is measure of the value added or depleted from
share holder value in one period. EVA is an actual monetary amount of value added, and it
measures changes in value for a period. EVA is also primarily for performance evaluation and
compensation rather that for capital budgeting purpose. EVA is calculated as follows:
EVA=[ ROICWACC ] x AIC
With description as follows:
ROIC

return on invested capital: operating profit minus cash taxes paid divided by
average invested capital.

WACC

weighted average cost of capital: (net cost of debt x % debt used) + (net cost of
equity x % equity used)

AIC

average invested capital: average stockholders equity + average debt

Differences in accounting standard as well as changing currency values can influence the EVA
computations. Beside these differences in accounting practice, globalization also affect the inputs
required to compute EVA. Managers must consider the risk inherent to international investing to
obtain the appropriate costs of debt and equity.
The Balance Scorecard
The concept of balance scorecard (BSC) is another approach to performance measurement
increasingly being used by companies, especially in United States and Europe. This approach
endeavors to more closely link the strategy and financial perspectives of a business. The balance

score card provides a framework to look at the strategies giving rise to value creation from the
following perspectives:
1. Financial. Growth, profitability and risk from the perspective of shareholders.
2. Customer. Value and differentiation from the customer perspective.
3. Internal business process. The priorities for various business processes that create
customer and shareholder satisfaction.
4. Learning and growth. The priorities to create a climate supporting organizational change,
innovation, and growth.
From a management control system
Designed around a short term, control oriented financial framework
Strategy
and
vision

personal
incentiv
es

Budg
et

planning
and
capital
allocatio
n

To a strategic management control system

Designed around a longer term strategic view

review
and
reorient

Figure 14.1 from a management control system to a strategic management system

Although the focus is still ultimately on financial performance, the balance scorecard
approach reveals the drivers of long term competitive performance. In simple terms, learning
and growth help create more efficient business processes, which create value for customers,
who reward the firm financially. Although the BSC offers the advantages of logically
connecting financial performance with its nonfinancial drivers, establishing a coherent score
card for an MNE has its challenges. For example, as IKEA grows, it faces different
customers based in different countries. IKEA must also ensure that its streamlined product
line has appeal in its several market of operation. The cultural, geographical, and financial
complexity of an MNE makes it challenging to establish a set of interrelated, cause and effect
performance measures.
Perhaps the balance scorecard help solve many of the control and evaluation dilemmas
presented throughout this chapter. Adequate use of the BSC helps managers avoid using only
one measure of performance. In addition, subsidiaries are evaluated based on a coherent set
of performance base instead of just one base that may or may not be directly controlled by
that subsidiary.