The International Control Conundrum with Exchange Risk: An EVA Framework
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Control
International
with An
Conundrum
Exchange EVA
Risk:
Framework LaurentL. Jacque*
THE FLETCHERSCHOOL,TUFTSUNIVERSITYAND GROUPEHEC (FRANCE)
Paul M. Vaaler**
THEFLETCHER TUFTS UNIVERSITY SCHOOL, Principal-agent problems between corporateparent and subsidiary operations are frequently exacerbated in international settings by exchange rate fluctuations between the foreign subsidiary's local currency and the parent multinational corporation's reference currency. We develop a conceptual solution INTRODUCTION
his paperdevelops a frameworkfor planning and assessing the shareholdervalue-creatingstrategiesof multinationalcorporation("MNC") subsidiary units operating under fluctuating exchange rates. Designing effective management control systems for domestic firms is fraught with problems of information asymmetry and goal incongruence between corporate parent and subsidiary units. In an international setting
to this international control conundrum using Economic Value Added as the sole performance numeraire. Our framework facilitates assessment of foreign subsidiary performance in emerging-market countries in the presence of unexpected, exchange-related shocks. the problems are further complicated by exchange rate fluctuations between the foreign subsidiary's local currency and the parent firm's reference currency. To be reliable, management control systems for MNCs must somehow incorporate a multiplicity of complicating factors tied to the local environments in which they operate such as exchange rate fluctuations, differential rates of inflation, segmented capital markets and foreign exchange controls.
*LaurentL. Jacque is Professorof InternationalFinance and Banking at the Fletcher School, Tufts University and the HECSchool of Management,France. **Paul M. Vaaleris Assistant Professorof InternationalBusiness at the Fletcher School, Tufts University. His research focuses on multinational enterprise strategy and behavior. This researchbenefited from previous presentation at the University of Michigan, the University of Washington, IMD, and the 1999 Academy of InternationalBusiness Annual Meeting in Charleston, South Carolina,USA. The authors also gratefully acknowledge helpful comments and suggestions provided by the JIBSreferees and Donald Lessard. BUSINESSSTUDIES,32, 4 (FOURTHQUARTER2001): 813-832 JOURNALOFINTERNATIONAL
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INTERNATIONALCONTROLCONUNDRUMAND EVA
The importance of MNC budgetary and control systems contrasts with an absence of recent research on this subject in the international management literature. As Miller (1998) notes, early scholarly work focused on development of accounting control mechanisms to deal with smoothing the impacts of foreign exchange movements on accounting profits, and facilitating the consolidation of financial statements (Lessard and Lorange, 1977). More recent research has seen a shift in emphasis from narrow
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