As strictly domestic companies evolve into MNCs, many internal and external pressures strain a firm's existing organizational structure. Some responsibilities are changed, new ones are created, and some existing ones are eliminated. Furthermore, control and finance functions change over time as changes occur in countries' socioeconomic environments. Companies must constantly adjust their organizational structure to deal with new opportunities and challenges as they grow, diversify, and internationalize.
How should the financial staff of a company with foreign operations organize itself to carry out tasks that require the specialized expertise of multinational finance? There are three basic forms of organizational structure: centralization, decentralization, and hybrid structure.
A centralized financial function has a strong staff at the parent company level, which controls virtually all treasury decisions. The subsidiary financial staff only implements the decisions of its parent company. In a decentralized financial function, parent-company executives issue a few guidelines, but most financial decisions are made at the subsidiary level. Many companies split responsibilities for international financial management between the corporate level and the regional level. The corporate level typically determines policy and grants ultimate approval on major financial decisions. However, day-to-day decisions to implement policy are made at regional headquarters.
Both centralization and decentralization carry advantages. The advantages of a centralized financial function include close control of financial issues at headquarters, attention of top management to key issues, and an emphasis on parent-company goals. A decentralized company may argue that these advantages could be disadvantages. Data collection costs may be enormous, centralized decision-making may stifle flexibility, and many opportunities may be lost because of slow actions.
Decision variables The ultimate choice of a particular organizational structure depends largely upon the types of decisions one must make: (1) transfer pricing and performance evaluation, (2) tax planning, (3) exchange exposure management, (4) acquisition of funds, and (5) positioning of funds.
First, transfer pricing decisions made to minimize taxes may ruin the performance evaluation system for foreign subsidiaries. This problem sometimes forces a company to keep a second set of books for evaluation purposes. Many MNCs may, in fact, keep three or more sets of books: one for taxes, one for financial reporting, and one for evaluation purposes. There may be a need for two transfer prices: one for tax purposes made at headquarters and one for evaluation purposes decided by direct negotiations between affiliates.
Second, the centralized organization usually works well to minimize worldwide taxes. When tax planning is centralized, it is easier to use tax-haven countries, tax-saving holding companies, and transfer pricing. Thus, it is more efficient for MNCs to centralize their tax planning function rather than allow each region to create its own layer of tax havens and holding companies.
Third, most companies centralize their foreign-exchange exposure management, because it is difficult for regional or country managers to know how their foreign-exchange exposure relates to other affiliates.
Fourth, many MNCs borrow money from local sources for their working capital. On the other hand, cheap sources of funds depend upon alternatives in all capital markets and the cost of exchange gains or losses. Regional managers can hardly know all alternative sources of funds outside a local market.
Fifth, positioning funds involves paying dividends and making intracompany loans, thereby reducing consideration of total corporate tax liabilities, foreign-exchange exposure, and the availability of capital. Consequently, most companies tend to control positioning of funds from a centralized vantage point rather than from a regional viewpoint.
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