THE NEXT CEO’S KEY ASSET: A WORN PASSPORT Accounting Help

In 1979, long before China was Gillette Co.’s Michael Halley flew Into Shanghai. Harley, then the Sydney-based head of Asia-Pacific Operational, was on a to make Gillette one of the first Waters companies milch But his search for a joint venture to make razor blades was Increasingly looking We were flying blind,” recalls . China didn’t even have a law for Joint venture as yet. Worse, imbue Shanghai, home to China’s largest razor-blade manufacturer was the natural sit., the city was still under the sway of the Gang =our

It took over two dozen trips and nearly four years before the Shenyang Dally Use Metals Products Co., as Gillette’s joint venture was called, began production.  Source: William C. Almonds, “The Next CEO’s Key Asset: A Worn Passport,” Business Week, January 19, 1998. p. 76. Reprinted by special permission, copyright © 1998 by The Companies.

The opening story of how Gillette created a business opportunity in China shows that doing business in another country creates business problems not encountered domestically. Creating new facilities and joint operations in the United States can be done in short periods of time, often only months. Creating new facilities and joint operations in other however, can take years. because. business managers are not familiar with the customs, laws, infrastructure, and economic and poetical systems of many countries, they gotten find it challenging to create business opportunities in those countries

The purpose of this chapter is to introduce you to the additional complexity of doing busmess globally and to explore some of the accounting issues associated with global business. We can provide only a briei  here. As you experience business activity, either as a consumer, producer, or both, we believ~ you will find the ideas introduced here useful.

GLOBALIZATION 

GlobaJization-is the process of managers ecorning aware of the impact of international activities on the future of their company. lobalization is a continuous process; at the most basic level, a purely domestic company’s managers become aware that changes in foreign exchange rates. international technological advances, cultural diversity. and international political and economic issues will have an impact on their ability to compete in the future.

An example of a higher level of globalization is a multinational enterprise whose production and sales locations may span multiple foreign locations from raw materials extraction to final product a. sembly ‘and ales.

The Gillette Company, a global Fortune 500 company, is a good example of a multinational with an explicit global mission. The exhibit below shows the lob 1 e ch of Gillette, which produces products in 26 different countries that are old in about 200 countries around the world.

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Globalization typically progresses through a series of stages that include exporting, licensing, joint ventures, wholly owned , and, tonally, global sourcing. Exporting is, at the simplest level, selling a good or service to a foreign customer. hole exporting maintains control over product creation, licensing gives up some control for a
monetary return. International licencing is a contractual agreement between a company and a foreign party allowing the use of trademarks, patents, technology, designs, processes, intellectual property, .brother proprietary advantage. Most major multinational
food manufacturing companies are involved in some form of international product licensing. An international joint venture Is a-company owned by two or more companies from different countries, A wholly owed international subsidiary is created when a company uses its own funds to construct or purchase 100% equity control of a foreign ‘ subsidiary. Finally, global sourcing is the close  of R&D, manufacturing, and marketing across national boundaries and typically includes all of the four mechanisms that are part of globalization.

As shown in the exhibit on the next page, companies typically engage in globalization through an outward growth path. Those companies wishing to globalize typically

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progress through the following stages: (I) exporting domestically produced products, (2) establishing licensing and joint venture arrangements, (3) creating wholly owned subsidiaries, and (4) full-scale global’ sourcing. In practice, there are many subcategories that are not shown in the exhibit, and companies may pursue multiple globalization processes simultaneously

The strategic direction of planned globalization will have implications for the type of accounting information gathered, created, and reported. For example, the type of accounting information gathered and reported for a joint venture operation will be more detailed and control oriented than information gathered and reported to monitor a licensing agreement. In a wholly owned subsidiary, information .is needed to help maintain control over resources; that same information would be unnecessary for a licensing arrangement. If the ‘wholly owned subsidiary is part of the outward growth path and located in a foreign location, the company will also monitor information about that foreign location. As companies become more global, many additional environmental variables must be tracked as part of normal business processes.

Posted on November 23, 2015 in Global Business and Accounting

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