Question

3) There are two schools of thought regarding the worldwide trend toward increased financial disclosure by publicly traded firms. Some think that increased disclosure is beneficial overall, and some think that increased disclosure is harmful overall. Explain which school of thought you hold to and why. (type answer here): 4) List and explain three strategic motives why firms become multinationals and give an example of each. (type answer here):

Answer 1

Q: There are two schools of thought regarding the worldwide trend toward increased financial disclosure by publicly traded firms. Some think the increased disclosure is beneficial overall, and some think that increased disclosure is harmful overall. Explain which school of thought you hold and why.

Ans:

In today’s world, compliances towards data reporting have become very crucial interms of not only to maintain transparency but also to bring the reporting disclosures in comparable format. Unlike past, the world has moved very fast interms of integration, many global players operating out of many geographies, various products and services, complex transactions involving mergers of companies, promoter holdings, related party transactions etc;

Being listed companies, there is a requirement for the stakeholders to understand clearly on how the companies, in which they have invested, are performing.

- Transparency: The performance of the company should be presented in a systematic, comparable and consistent format. A discipline in the periodic disclosures is very much important to portray to true performance of the entity.

- Investor Reporting/knowledge: Any company is obliged to report about the key information on the financials / operations to its stakeholders. It is not required that all the investors are well versed with the financial aspects and might not completely understand. Hence, there is a significant importance in not only publishing the financials, but also, providing the disclosures on every required aspect of the company financials, to the extent mandated. This helps in investors / stakeholders in taking more calculative decisions and increase trust on the company.

- Detailed: While the company's financial statements contain all the relevant financial data about the company, that data might need further explanations and detailed clarifications / reconciliations. A financial statement disclosure will communicate relevant information not captured in the statement to the investors / stakeholders.

- Comparative situations: While every country shall have their local accepted accounting policies (local GAAP) or local trade practices of accounting and disclosing, a common approach is always healthy interms of analysing the company’s performance with its peers, competitors etc; Eg: A company in Germany might be having strict competition with a company in India and would like to evaluate its strength; Both these geographies have their own local GAAPs; Hence, it would not be a comparable exercise by looking at the key financial indicators. Hence, for comparison, both these financials and disclosures are required to be a common platform;

- Introduction of IFRS (International Financial Reporting Standards) is a significant step taken in the accounting world interms of introducing a common platform for the companies to report their financials in a consistent disciplined way. Even in this, the disclosure requirements are so elaborate as they help investors and stakeholders to assess the health of the company.

Q: List and explain three strategic motives why firms become multinationals and give an example of each.

Ans:

In general there can be various intentions for any firm for turning itself in to multinational organisation. While the basic underlying motive shall be growth and value addition of the business, the other factors as mentioned below act as the platform for achieving such targets;

Our world provides various opportunities at various geographies which could some times be common or could be specific to such geography. While these synergies are spread across, a common platform to leverage these synergies is always a key component for any company to turn itself in to a multinational entity;

- Availability of resources: Resources could be anything for an entity – Human resources, Raw materials, land bank etc; There might be certain geographies with abundance of raw materials, however, no active market to excavate the same; A firm expanding its wings to such a geography can easily synergise the opportunity to further use the raw material for its other final products; Cheaper labour source – while certain geographies hold the highest personnel cost, there are some countries with cheap manpower;

- Market opportunities: Success for any company shall come when it is as nearer to its market; Availability of its operations / after sales services / branches for ready –to – serve environment for the customers is always a welcome. Any company planning to capture a new market should always ensure to be more nearer to the market interms of providing its services or supply of products; The lower order-to-supply time, the higher the chances to capture the market. This not only saves huge cost on the logistics, but also, attracts customers thru its faster service.

- Efficiency / Talent / Knowhow : In the last three-four decades, Service industry has grown significantly and pooling the talent was one of the key factors. While many companies have pooled talent from various geographies, there are cases of various geographies with exceptional talent base / efficiency in certain subjects / products. The firms have started moving in their operations in those geographies and have been using those locations as Share support centres, Outsourcing centres etc.

- Other reasons: Apart from the above, certain firms plan to expand their operations to other geographies for certain political support, logistics base support/hubs, Temporary servicing points etc.