Determinants of Capital Budgeting Strategies: An Econometric Analysis of U.S. Multinational Subsidiaries

By Hasan, Iftekhar; Shao, Lawrence Peter et al. | Multinational Business Review, Spring 1997 | Go to article overview

Determinants of Capital Budgeting Strategies: An Econometric Analysis of U.S. Multinational Subsidiaries


Hasan, Iftekhar, Shao, Lawrence Peter, Shao, Alan T., Multinational Business Review


Given the increased trend toward integrated global markets, the financial strategies used by foreign managers have become increasingly important areas of concern for multinational enterprises. This exploratory study evaluated the capital budgeting strategies of 159 foreign subsidiaries of U.S.-based multinational enterprises. A logit regression model was used to test the likelihood that foreign subsidiaries would adopt sophisticated capital budgeting strategies given various firm-specific and company-specific factors. The results of this study indicated that ownership arrangement, financial leverage, and asset size were key factors related to the adoption of sophisticated capital budgeting strategies.

INTRODUCTION

Determining which firm-specific and environmental factors affect a firm's capital budgeting practices is a difficult task in any domestic market - this task is even more difficult in the international arena. In particular, there are various foreign issues associated with the political, economic and financial environments that can upset even the best laid plans. Thus, a clear understanding of a company's internal and external environments is necessary if it is going to be successful abroad.

When multinational enterprises (MNEs) open offices in foreign markets, there are many options regarding how to manage their foreign subsidiaries. On one end of the continuum, they may choose to operate with a heavy hand. That is, they instruct their subsidiaries how and what to do and when to do it. At the other end of the continuum, they may allow their foreign subsidiaries to make their own decisions. In this case, it would be left up to the subsidiaries to design their own strategies and carry them out. The rationale behind this strategy is that since the subsidiaries are located in local markets, they should be equipped to handle the tasks. Today, many companies are utilizing a compromise between these two extremes by setting strategic goals at the home office and then allowing local managers to achieve the goals by implementing their own specific techniques.

To determine how well foreign subsidiaries are performing, it is necessary to examine which financial decision models are being used by subsidiary managers. Unlike domestic capital budgeting analysis, there are more factors to consider when doing international analyses. Foreign influences that can affect the capital budgeting decision include complex cash flow estimates, foreign exchange rate changes, lack of standard accounting systems, financial risks and political uncertainties. The purpose of this study is to examine several additional factors that may affect the capital budgeting practices utilized by foreign subsidiaries of U.S.-based MNEs. The findings based on responses generated from 159 foreign subsidiaries of U.S.-based MNEs operating in 43 countries.1

The findings of this study show that ownership status and financial leverage are important factors which are related to the sophistication of capital budgeting techniques utilized by foreign subsidiaries. The analysis also shows that firm age and asset size are directly related to the source used to determine discount rates. Finally, the results indicate that publicly traded subsidiaries and asset size are positively associated with sophisticated risk-assessment strategies.

This paper is composed of five parts. The first part briefly gives both a theoretical and practical overview of international capital budgeting analysis. The second part discusses the data collection techniques and the questionnaire design used in this study. The third part focuses on the logit regression model used in our analyses. The fourth section provides some important findings of our research. The last section offers some conclusions from this study.

LITERATURE REVIEW

Theoretical Issues on International Capital Budgeting Analysis

Due to the complex environmental concerns abroad, capital budgeting analysis is more difficult for foreign projects than it is for local projects. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Determinants of Capital Budgeting Strategies: An Econometric Analysis of U.S. Multinational Subsidiaries
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.