Academic journal article Management International Review

Budget Effectiveness in Multinational Corporations: An Empirical Test of the Use of Budget Controls Moderated by Two Dimensions of Budgetary Participation under High and Low Environmental Dynamism

Academic journal article Management International Review

Budget Effectiveness in Multinational Corporations: An Empirical Test of the Use of Budget Controls Moderated by Two Dimensions of Budgetary Participation under High and Low Environmental Dynamism

Article excerpt

Key Results

Subunit performance is enhanced by budget communication in domestic subunits of the multinational when reliance on budget control and environmental dynamism are high. The ability to influence the budget had no impact on subunit performance.

Foreign subunits differ from domestic subunits, but not in the manner hypothesised. Budget effectiveness for foreign subunits is more complex than previous research designs have addressed.

Introduction

The issue of effectiveness of budget controls in multinational companies(2) has generated recent attention. Notably, normative discussions suggest that the budget processes should be different in foreign subunits from those in domestic subunits because of differences in environment, strategic emphasis, geographic distance, language, and culture, in the foreign units (Egelhoff 1988, p. 163, Bartlett and Goshal 1989, p. 100). In the only empirical studies on the subject, Hassel (1991) and Hassel and Cunningham (1993) found that effectiveness of budget controls and budgetary participation varies between domestic and foreign business units of multinational companies in some contexts. These studies have been limited because they have only considered two variables in the budget process. This study, by contrast, considers three variables: reliance on budget controls, budget communication or budget influence, and environmental dynamism.

Effectiveness of budget controls in general has been a topic of interest for several years. Notably, the benefits of budgetary participation have been widely touted in textbooks (e.g., Dominiak and Louderback 1988, pp. 214-216, Hansen 1990, pp. 592-594, Lere 1991, pp. 367-368). In particular, it is claimed that participation moderates the supposed undesirable effects of reliance on budget controls to enhance effectiveness of the budget process because managers are motivated to perform if they participate in the budget process. Yet, extensive research has produced equivocal, even contradictory results (e. g., Hopwood 1972, Otley 1978, Brownell 1982, Hirst 1987, Dunk 1989). These studies, however, all viewed budgetary participation as a single dimension. The analysis in this study, though, indicates that budgetary participation has at least two dimensions, communication and influence, as discussed below.

The impact of environmental conditions has also been an issue of concern in studies of budget effectiveness and subunit performance (e.g., Hayes 1977, Otley 1978, 1980, Waterhouse and Tiessen 1978). Previous empirical studies have examined the two-way interaction between budgetary participation and specific environmental conditions (e.g., Brownell 1985, Govindarajan 1986, Mia 1989). Others have examined the two-way interaction between reliance on budget controls and environmental characteristics (e.g., Hirst 1983, Govindarajan 1984). Studies of three-way interactions among some notions of reliance on budget controls, budgetary participation, and some element of the environment by Brownell end Hirst (1986) and Harrison (1992) found no three-way interactive effect. Brownell and Dunk (1991), using methodological refinements, did find a significant effect under certain conditions. Gul and Chia (1994) found that perceived environmental uncertainty interacted with management accounting system design, and organization decentralisation to affect performance. This study, following an approach similar to Brownell and Dunk (1991) and Gul and Chia (1994), considers the three-way interaction of reliance on budget control, budget communication or budget influence, and the environment.

Prior studies of three-way interactions cited above have essentially been limited to assessing the significance of the regression coefficient as a means of assessing the significance of the three-way interaction. Recent methodological advances (e.g., see Champoux and Peters 1987, Govindarajan 1988, Gul and Chia 1994) demonstrate that additional explanatory information is presented with a hierarchical regression which examines the increase in [R. …

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