Executive Summary
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Senior executives, especially finance officers, need to be aware that standardized metrics to evaluate international performance are only applicable when firms operate globally. Now that research shows that large firms actually operate regionally, it is necessary to use new regional metrics to measure performance.
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Regional variables are important new measures that supplement the traditional measures of multinationality; indeed, the regional measure is a superior measure of the financial performance of multinational enterprises (MNEs).
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There is evidence that MNEs perform in an intraregional manner, on the basis of both sales and assets; there are strong intraregional effects across all industry sectors.
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Analysis of multinationality and financial performance needs to take into account the new metrics available on regional sales and assets, and the return on foreign assets.
Introduction
Most of the world’s 500 largest firms have extensive international operations; indeed, these firms average 35% of their sales in other countries. Finance officers and senior executives involved in strategic management usually assume that such firms are operating globally. This is a bad mistake, since recent academic research has demonstrated that the vast majority of the foreign sales of these firms are actually made within the firm’s home region of the broad triad of the European Union, North America, and Asia–Pacific. In other words, the world’s largest firms are actually operating regionally rather than globally.
The regional nature of business means that the traditional financial and accounting metrics used to evaluate international performance need to be revised. These measures assume that firms operate globally, such that financial performance can assume standardized operations across the world. (Globalization is usually defined as worldwide economic integration leading to standardization and commonality.) Instead, financial performance needs to be measured within the home region and not globally. Large firms face additional risks in expanding operations beyond their home region. Such additional risks need to be compensated by a better performance on interregional sales in contrast to the less risky intraregional sales. In this article we outline the nature of regional activity and the new regional metrics required to measure the financial performance of large firms.
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