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Accounting 4570/5570
Chapter 1 -
International Accounting and International Business
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International Development of the Accounting Discipline
• Pre-Italian Influence
• Italian influence
• Luca Pacioli (1494 book)
• Subsequent developments– 1673 France: Balance sheet every two years– Industrial revolution beginning in late 1800s
• Fixed assets• Corporate form of business• Taxation
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Additional Developments
• Mergers and acquisitions
• International commerce
• Technological changes
• Internal and external reporting and control systems
• Increased foreign trade and investment brought about regional economic groups
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National Differences in Accounting Systems
• Accounting systems influenced by environments factors– Economic factors– Educational systems– Legal systems– Political systems– Socio-cultural systems
• Implications - Language and currency differences
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International Business
• All business transactions that involve two or more countries
• Reasons– Expand sales due to excess capacity or small
domestic markets– Gain access to production factors including
• Raw materials• Cheaper labor• Knowledge
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Forms of International Involvement
• Exports
• Imports
• Strategic Alliances – Licensing agreements– Franchising– Management contracts– Joint Ventures
• Foreign Direct Investment (FDI)
• Portfolio Investment
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Foreign Direct Investment (FDI) and International Trade
• Either purchase shares of stock or buy assets of companies in foreign countries
• Major host nations are the industrial nations
• Emerging markets- China
• U.S., Germany, Japan, France, U.K., China - largest importers and exporters
• Tennessee Trade
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Global Enterprises
• Multinational Enterprises (MNEs)
• Have a worldwide view of production and markets
• 10% of total sales, net income or assets
• Executives often have international experience
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Characteristics of National Economies
• Gross National Product (GNP) - value of new goods and services produced by domestic factors of production. (can be produced outside the country by its citizens)
• Gross Domestic Product (GDP) - value of new goods and services produced within a country (produced by its citizens and non-residents)
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Characteristics of National Economies
• GNP (GDP) per capita - crude measure of the standard of living in a country; ratio of that country’s GNP (GDP) to its population.
• Index of openness - a measure of the importance of international trade to an economy, calculated as the ratio of exports over total domestic production; higher values indicate more “open” markets
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Gross Domestic Product per Capita (est. 2006)
• Luxembourg $68,800• United States $43,500• Canada $35,200• Switzerland $33,600• Japan $33,100• United Kingdom $31,400 • Germany $31,400• Russia $12,100 • Mexico $10 600• China $ 7,600• India $ 3,700• Iraq $ 2,900• Afghanistan $ 800
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Gross Domestic Product (GDP)(est. 2006)
• U.S. – $12.98 trillion (301 million population)• China - $10 trillion (1.3 billion population)• Japan - $4.22 trillion (127 million population)• India – $4.042 trillion (1.1 billion population)• Germany - $2.585 trillion (82 million population)• U.K. - $1.903 trillion (61 million population)• France - $1.871 trillion (64 million population)
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Foreign Currency
• Foreign currency markets– Spot rates– Forward rates– Direct/indirect rates
• How currency affects investment
• How currency affects exports/imports
• Devaluation
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Global Players
• By market value (Exhibit 1.1)
• By total sales (Exhibit 1.1)
• By profits
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Decision to Become Global
• Environmental Constraints– Local
• Educational - literacy, specialized and higher education, attitudes toward education
• Socio-cultural - attitudes toward management, work and wealth, class structures
• Political and legal - relevant legal rules, political stability
• Economic - fiscal and monetary policy, capital markets, economic stability, size and type of industries
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Decision to Become Global
• Environmental Constraints– International
• Sociocultural - attitudes toward foreigners and nationalism
• Legal-political - trade restrictions, tariffs, non-tariff barriers (quotas), exchange control restrictions
• Economic - openness of markets, balance-of-payments positions, infant industries, unemployment, industrialization objectives
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Organizations to Reduce Trade Barriers
• World Trade Organization (WTO)– Formerly GATT
• Regional Cooperations– European Union (EU)
• 1993 Maastrict Agreement
– North American Free Trade Agreement (NAFTA) January 1, 1994
– MERCOSUR (Argentina, Brazil, Paraguay, Uruguay are full members while Bolivia and Chile have associate status)
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Global Corporate Strategy
• Country-specific/location specific Advantages– Raw materials, cheap labor, location, trade ties
• Firm-specific Advantages - intangibles that a firm possesses– Also called acquired advantage
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Global Corporate Strategy
• Comparative Advantage– law that states a country will specialize in the
goods and services that they are good at and trade for those goods and services for which they do not have an advantage in.
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Global Corporate Strategy
• Polycentric attitude– All operating policies and procedures must be
adjusted to the local environment
• Ethnocentric attitude– Everything the MNE does in the home country
can be transferred to the foreign country, in spite of the environmental differences
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Strategies
• Multidomestic - independent subsidiaries
• Global - worldwide view
• Accounting issues?– Financial statements for foreign countries– Consolidation issues– Foreign currency transactions– Management systems– Taxation– Audits and internal control systems
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Environmental Influences on Business and Management
• Accounting reflects characteristics of its national environment
• Environmental variables influence and help explain why business is conducted differently in different countries
• Cultural relativism: the rationality of any behavior should be judged in terms of its own cultural context
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Environmental Influences on Accounting
• Enterprise Ownership– Broad versus family-owned
• Enterprise Activities– Manufacturing
– Agricultural
– Services
– Technology
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Environmental Influences
• Sources of Finance– Banks and family members versus public debt and equity – Degree of capital market development– Institutional versus individual investors
• Taxation– Requirements that financial income must equal taxable
income
• Accounting Profession– How influential the profession is in the business world– Formalization of accounting standards– Standard setting in public or private sector
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Environmental Influences
• Accounting education and research– Highly educated > More accounting
• Political systems– Central planning versus private enterprise
• Social climate– Attitudes toward work, management, employee
involvement, wealth
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Environmental Influences
• Economic growth and development– More growth, generally more accounting needed
• Inflation – Must be accounted for if it is a problem
• Legal system– Civil versus common law– How it affects accounting regulation
• Accounting regulation– Enforcement of standards
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Environmental Influences
• Influence of culture – – Value systems and attitudes
• International factors– Trade Influences
– Colonial influences
– Regional trade blocs
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Major Developmental Factors
• Corporations as legal entities - more disclosure• Professional Management - more disclosure• Securities Markets
– Development of markets– Type of investees– Emerging markets - help develop free market
systems– Degree of state ownership
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Additional Financial Report Users
• Employees
• Trade unions
• Consumers
• Government agencies
• General public in foreign countries
• Greater public accountability
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Accountability and MNEs
• Should MNEs disclose information to foreign countries in which they operate?
• Should MNEs leave profits in foreign countries in which they operate?
• Case: Toyota’s Global Expansion• Case: Ahold and the Challenges of Going
Global