Although the differences between domestic and multinational capital budgeting are minimal, the latter make more complex investment and financial decisions than the former. According to Kengatharan (2016), capital budgeting involves allocating finances to projects with the expectation that they will generate maximum investment returns. Michelon et al. (2020) state that capital budgeting is a critical business decision that allows companies to compete with rivals in the market, sustain themselves, and succeed. For instance, when organizations want to make operational decisions, such as constructing new plants or opening additional branches, they use capital budgeting to make sound and beneficial decisions. For example, Murtagh (2010) explains Water’s Edge Apartments process of capital budgeting in its real estate project. The approach highlights the cash flow estimations of the project to determine its effectiveness. Capital budgeting applies to both local and multinational companies. Based on the varying dynamics of both entities, they employ different systems and techniques of capital budgeting. Multinational companies have complicated operational and organizational structures in comparison with domestic ones, which means that capital budgeting will vary. For example, multinational companies face the challenges of foreign currency differences since they operate in different locations as opposed to domestic firms. Therefore, multinational and local companies have different capital budgeting systems due to differences in foreign currencies, capital flow restrictions, and tariffs.
Capital budgeting allows both domestic and multinational companies to determine if their budgets should be pursued. Adopting appropriate capital budgeting techniques enables managers to make sound decisions targeted at enhancing the resource base of companies and evaluating the efficacy of the projects under scrutiny. Capital investment decisions are based on the assumption that managers seek to maximize the wealth of shareholders relative to their self-interests. Whether capital budgeting techniques are discounting or non-discounting, which means that they either consider the time value of money or not, they should direct the investment choices of companies towards profitability and success. In this regard, domestic and multinational companies have different capital budgeting methods due to their business structures.
Currency issues are a significant difference between multinational and local companies during capital budgeting. For multinational companies, they operate in different countries, which means that they face foreign currency issues, unlike domestic firms that conduct businesses in one locality. The cash outflows and inflows are handled in domestic currencies, which implies that multinational companies have complex processes of designing different capital budgets for all their locations. In contrast, local firms focus on one currency only. As such, multinational organizations are forced to cover their currency risks by utilizing currency hedges, which is not the case for domestic ones. For instance, multinational firms can purchase selling points, futures, or consider derivative investments. Therefore, the currency is a significant difference between local and multinational companies when capital budgeting.
Another difference between multinational companies and local ones is the tax and legal regulations during capital budgeting. While multinational firms have to address the different tax laws in their various operating nations, local ones do not go through this process. Moreover, both company structures face varying financial reporting, borrowing, and tariff rules. Multinational companies have to comply with different legal requirements in their operating jurisdictions. For example, the tariff borrowing conditions and financial reporting styles are different in the United States and the United Kingdom. Therefore, multinational companies have to adhere to all requirements in the various locations as opposed to local ones that handle the same conditions.
References
Cappelli, P., & Conyon, M. J. (2018). What do performance appraisals do? ILR Review, 71(1), 88–116. Web.
Kengatharan, L. (2016). Capital budgeting theory and practice: A review and agenda for future research. Applied Economics and Finance, 3(2), 15-38.
Martin, G. C. (2014). The effects of cultural diversity in the workplace. Journal of Diversity Management, 9(2), 89-92.
Michelon, P. S., Lunkes, R. J., & Bornia, A. C. (2020). Capital budgeting: A systematic review of the literature. Production, 30. Web.
Murtagh, J. P. (2010). The Water’s Edge Apartments: Capital budgeting in real estate development. Journal of Business Case Studies, 6(6), 1-6.
Purwohedi, U. (2017). National and organizational culture, performance evaluation and trust: Evidence from multinational company subsidiary in Indonesia. Signifikan: Jurnal Ilmu Ekonomi, 6(2), 319-344.