Transfer Pricing Determinants of U.S. Multinationals
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PervaizAlam** Kent State University
Syed H. Akhter*** Marquette University
Abstract. This paper examines the influence of environmental and firm-specific variables on the selection of international transfer pricing strategies. The primary data were obtained from 164 multinational enterprises by means of a questionnaire. Responses were analyzed by performing factor analysis and constructing a probit model. The findings suggest that legal constraints and firm size are significant determinantsin the selection of internationaltransferpricing strategiesby U.S. multinationals. In order to successfully compete in the global market, U.S. multinationals use control and evaluation systems for monitoring the performance of their divisions abroad. A multinational corporation also deals with the complexities of cultural and political differences, tax regulations, import-export restrictions, controls on the transfer of funds, and various other restrictions designed by host countries to protect their national economic interests. The *MohamedF Al-Eryaniis an AssistantProfessorof Accountingat Sana'aUniversity, Yemen.He obtainedhis Ph.D. degreein businessadministrationfrom KentState University.His Ph.D. dissertationwas on multinationaltransferpricingpractices. **PervaizAlam is an AssistantProfessorof Accountingat KentStateUniversity. His researchinterestsinclude multinationalcapital structureand international productpricingstrategies.His most recentpublicationsare in Decision Sciences and Journal of IndustrialMathematics. ***SyedH. Akhteris an AssistantProfessorof Marketingat MarquetteUniversity. His researchinterestsinclude foreignmarketentry strategies,political risks, and schematicinformationprocessing.Dr. Akhter has publishedin variousjournals including the European Journal of Marketing, Advances in International Marketing,and the Journal of Global Marketing. Comments on an earlier draft of this paper by Richard Hoffman, David Jarjoura, Kent McMath, Rosemerry Rudesal, and three anonymous referees are gratefully acknowledged. We are also indebted to the participant firms and to discussants of an earlier version of this paper presented at the Research Workshop, Graduate School of Management, Kent State University. Partial funding for this study was received from the Department of Accounting, College of Business Administration, Kent State University. Received: April 1988; Revised: February, September & November 1989; Accepted: November 1989.
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JOURNAL OF INTERNATIONALBUSINESS STUDIES, THIRD QUARTER 1990
challengefor multinationalsis to design a transferpricingstrategywhich appropriatelyrewardsthe managementof the unit(s) abroad and also addressesthe variouslegal, cultural,and economicrestrictionsof the host countries. Internationaltransferpricingstrategiescan be classifiedinto two groups: marketbasedand nonmarketbased. Market-basedtransferpricinguses the prevaili
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