International Capital Budgeting Research Articles

Legacy Effect of Soviet Budgeting System on Public Capital Budgeting: Cases of Russia, Moldova, and Uzbekistan

ABSTRACT This comparative study uses the legacy effect of the Soviet past to explain the changes in public capital budgeting and management in the three former Soviet republics: Russian Federation, Moldova, and Uzbekistan. The main argument is that the legacy of the Soviet planning and budgeting traditions in forms of the centralized control, inadequate capital planning, and strong informal powers of political elites are embedded in the capital budgeting and management practices of the case countries. The analysis reveals that regardless of the differences in the countries’ socio-economic characteristics, political regimes, and institutional developments, the budgetary outcomes are consistently shaped by the public management principles rooted in the Soviet budgeting traditions. The study findings are significant to the field of International Public Administration, Post-Soviet Affairs, and Public Finance because they disclose the legacy effect of the Soviet practices on the implementation of public administration reforms in post-communist countries. By exploring areas in international public capital budgeting and investments, this study also attempts to address the gap identified by public finance scholars.

35 Years of Public Capital Budgeting: A Review and Future Research Agenda

This paper reviews a large number of works published over the past 35 years on public capital budgeting. the purpose of this paper is to provide a more comprehensive analysis of research on capital budgeting. Through this review, this study seeks to critically analyze the literature on the public capital budgeting, identify the research gaps, and set future research agenda based on those gaps. Our study presents a review of 106 academic studies on this topic. the main finding is that constructs, such as international capital budgeting, infrastructure maintenance, cross-state and cross-local municipalities’ analysis, need further attention. This study found that there is a lack of literature that examines how the federal, state, and local governments cope with challenges and pressures during economic decline. Future studies could examine the effects of economic decline during and after Covid-19 pandemic on changes in capital budgeting practices in different countries on national, regional and local levels. the paper is intended as a resource for researchers, practitioners, and policymakers, focusing on public capital budgeting issues.

International Capital Budgeting and Valuation: Review and Proposed Approach

For cross-border valuation to be consistent with the International CAPM (ICAPM), translating projected cash flows across currencies should account for a currency risk premium and the economic interaction between the cash flows and exchange rates. The conventional translation method, based on the traditional interest rate parity condition, ignores these items and is thus not consistent with the ICAPM. Using the constant perpetual growth model and empirical data from 12/31/1998 to 6/30/2020, this study illustrates the conventional translation method’s potentially substantial valuation error if risk and expected return are based on the ICAPM.

Reflective and cognitive perspectives on international capital budgeting

Purpose The purpose of this paper is to develop a framework for an enlightened management and governance praxis against a backdrop of cognitive and motivational biases promoting a reflected international capital budgeting decision process. Furthermore, societally relevant questions are raised whether these biases might have an effect on various stakeholders in public–private partnerships. Recurring failures of international business investments motivate reflective, cognitive and socio-constructivist perspectives on the international capital budgeting process. Design/methodology/approach Based on an interdisciplinary literature review and substantiated by empirical studies, the cognitive biases and flaws of the international capital budgeting process are discussed making use of a five-stage process scheme. The article applies the interpretative paradigm and regards the international capital budgeting process stages as a socio-political process of reality construction and critically assesses the motives of its actors. Consequently, the authors develop and discuss three principle-based behavioural rationalisation factors. Findings International capital budgeting is not a process of rational choice but of social construction of reality. Reflective prudence, critical communication and independence are three rationalisation factors which could, if applied along the five stages of the international capital budgeting process, systematically lead to de-biasing and thus enhance the performative praxis of international investment decisions. Research limitations/implications The international capital budgeting process deals with the construction of future scenarios under uncertainty and assessment of potential success and failure of future projects. The defined (or any other) rationalisation factors are subject to cultural biases and can naturally not guarantee successful investment projects. Although the success of the application of various de-biasing tactics was empirically confirmed, the aggregated rationalisation factors of the paper have not been tested. Practical implications The paper is aimed at enhancing the reflective understanding and the performative praxis of the international capital budgeting process. The practical recommendations aggregated in the rationalisation factors are explicitly elaborated for international business practitioners. Social implications Societally relevant questions are raised whether systematic biases have an effect on various stakeholders in international public–private partnerships. Especially in large investment projects, where capturing private value might be boosted by actively exploiting biases of the public decision makers, active stakeholder engagement could enhance the social and ecological value of investments. Originality/value The article provides a rare interdisciplinary literature review on cognitive biases in the international capital budgeting process. It critically reflects the social construction of it various stages and its social repercussions and develops practical rationalisation factors for an enhancement of the international capital budgeting process as a performative praxis.

Transfer Pricing for Corporate Treasury in the Multinational Enterprise

Intercompany financing transactions are becoming increasingly important to multinational enterprises (MNEs) as they expand internationally. Corporate treasurers of MNEs have many responsibilities, including the management of international capital structure and cost of capital, the financing of cross‐border acquisitions, foreign direct investment, international capital budgeting and cash management, management of foreign exchange and transactional risk, and port‐folio and investment management.This article focuses on a corporate function, transfer pricing, that is potentially relevant to each of these activities. Whenever a payment crosses borders in a treasury context—whether to provide a loan, purchase a receivable, provide a guarantee, sweep cash, factor a receivable, provide a hedge or insurance product—a transfer pricing issue is present. Transfer pricing is often viewed as a taxation issue and thus the responsibility of the corporate tax department. This article challenges that view, and makes the case that an integrated, multi‐functional approach to MNE treasury planning in the context of transfer pricing can be an important component in improving the efficiency of cross‐border financial management. The paper uses conceptual and empirical information as well as numerical examples to illustrate relevant tax and transfer pricing concepts for policy planners and others responsible for MNE treasury and tax planning.

Foreign Exchange and Cross-Border Valuation

I review and clarify the role of foreign exchange (FX) rates in international capital budgeting, showing how the outcome of the NPV analysis, from the perspective of the home currency, is affected by a misvalued current spot FX rate, or by a forecast of misvalued future spot FX rates.

Foreign direct investment: theory, evidence, and practice

Preface Introduction and Overview Theories of Foreign Direct Investment The Effects of Foreign Direct Investment International Capital Budgeting Country Risk and Political Risk International Taxation International Cost of Capital and Capital Structure Transfer Pricing Control and Performance Evaluation Concluding Remarks References Index

Partially segmented international capital markets and international capital budgeting

Evidence suggests that international capital markets are neither fully integrated nor completely segmented. There is, however, currently no general method available for computing the required return on corporate investments in such capital markets. This paper uses a model of partially integrated international capital markets to derive optimal international capital budgeting rules. We show how capital budgeting rules depend on the level of investor costs to cross-border investment, both directly and also indirectly through the portfolio specialization they induce. We explain how required returns differ for different companies raising capital in such markets and how these costs of capital may be estimated. We also explain how these differences in required returns can be consistent with general equilibrium and the effect they have on incentives for foreign direct investment.

Partially Segmented International Capital Markets and International Capital Budgeting

Evidence suggests that international capital markets are neither fully integrated nor completely segmented. There is, however, currently no general method available for computing the required return on corporate investments with such capital markets. This paper uses a model of partially integrated international capital markets to derive optimal international capital budgeting rules. We show how capital budgeting rules depend on the level of costs to cross-border investment, both directly and also indirectly through the portfolio specialization they induce. We explain how required returns differ for different companies in such markets and how these 'costs of capital' may be estimated. We also explain how such differences in required returns can be consistent with general equilibrium and the effect they have on incentives for foreign direct investment.

International Capital Budgeting, Real Operating Options and FDI

The financial analysis of international investment decisions is complex. The basic methodology which homes in on incremental cash flows needs to be refined in order to focus upon cash flows which are remittable to the parent company, for it is only these that would logically add shareholder value. Build in the complications of two lots of tax and changing exchange rates and the equation looks anything but simple. But there is another complexity too which renders the traditional discounting methodology less than wholly appropriate. And this applies not just to international investment but to any situation where capital is committed with an option to expand or curtail embedded in it. This is not to say that the typical model cannot be adapted to meet the situation. It can and it is not too difficult.

Risk Analysis and Capital Budgeting Techniques of U.S. Multinational Enterprises

The purpose of this study is to examine the capital budgeting strategies that are used by foreign subsidiaries of U.S.‐based multinational enterprises. While the results indicated a preference for sophisticated capital budgeting techniques as the primary method of analysis, the actual use of sophisticated capital budgeting techniques by foreign managers may not be as widespread as expected by financial theorists. Although it was found that certain environmental and company‐specific factors influenced the level of sophistication of capital budgeting practices used by U.S. foreign subsidiaries, the associations were small and had only minor explanatory significance. The results showed that foreign subsidiaries exposed to high levels of political and financial risk tended to use sophisticated capital budgeting strategies. Subsidiaries characterized by high levels of financial leverage and high cost of capital requirements also employed advanced capital budgeting strategies. Multinational enterprises (MNEs) have many options available to them in terms of how they manage their foreign subsidiaries. Traditionally, most major policy decisions were made at the parent firm's headquarter office while foreign subsidiaries had few opportunities to influence major corporate decisions. Today, more companies are using a flexible approach which involves setting strategic goals at the home office and allowing local managers to implement their own specific policies. An important question in this study involved determining how effective local foreign managers were in implementing their capital budgeting processes. As U.S.‐based MNEs continue to expand their operations abroad, there is an increased need to examine which financial decision models are actually used by subsidiary managers to deal with the increased complexity of investing in foreign countries. Unlike traditional capital budgeting analysis, international analysis is a considerably more complex process. These complexities occur for a number of reasons including complicated cash flows estimates, changes in foreign exchange rates, different accounting systems, potential for blocked funds, and political risk considerations. These factors are rarely experienced by traditionally domestic U.S. firms. To maintain a competitive edge, MNEs must continue to use the most efficient approaches available to them. This study provides a detailed analysis of the capital budgeting practices that are actually being used by foreign subsidiaries of U.S.‐based MNEs. The paper is organized in the following manner. Section I provides a brief overview of the theoretical and practical issues of international capital budgeting analysis. Section II focuses on the areas of data collection, questionnaire design, and environment‐specific and company‐specific factors. Section III discusses usage of capital budgeting techniques, adjustment and assessment of project risk, and factors influencing capital budgeting policies. The final section presents some findings from this study.

International Capital Budgeting Using Option Pricing Theory

Typically, international capital budgeting is carried out using the adjusted net present value (NPV) approach. In this article, we present an alternate method for valuing international investments; one that is based on the option pricing theory developed by Black and Scholes (1973). We show that when (a) the decision being valued involves an irreversible investment, (b) the investment decision can be postponed, and (c) uncertainty is resolved gradually over time, using the option pricing approach may be more appropriate than the NPV approach. Applying the traditional NPV approach to value investments such as the decision to enter a new market, expand production, suspend operations temporarily or liquidate operations, may lead one to underestimate their value. This is because the naive NPV criteria is a static valuation method that ignores a firm's flexibility to postpone projects, to abandon them, or to shut down operations temporarily.

CAPITAL BUDGETING FOR INTERNATIONAL BUSINESS: A FRAMEWORK FOR ANALYSIS

This article focuses on three related themes. Firstly, normative decision rules for the international capital budgeting decision are outlined. Secondly, the strengths and limitations of finance theory in guiding the capital budgeting plan within the MNC are discussed. Thirdly, strategic views are introduced to complement financial analysis in the area of international capital budgeting.

POLITICAL RISK IN INTERNATIONAL CAPITAL BUDGETING

One of the practical difficulties of international capital budgeting is how to incorporate political risk into the decision process. This paper examines the nature of political risk and the use of analytical techniques in the evaluation of such risk. Questionnaire and interview findings from a survey of UK multinational companies suggest that corporate practice differs from the theoretical ‘textbook’ treatment of this type of risk.