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Budget effectiveness in multinational corporations: an empirical test of the use of budget controls moderated by two dimensions of budgetary participation under high and low environmental dynamism.
Abstract:
Normative discussions suggest that budget process should be different in foreign subsidiaries than those of domestic subunits of a multinational corporation, but little is known about these differences. This study examines budget effectiveness of foreign and domestic units in a European multinational company by considering the three-way interaction of headquarter reliance on budget controls, subsidiary budget communication or influence, and environmental dynamism. A major feature is studying two dimensions of budgetary participation, communication and influence. Methodological advances over previous studies test the impact of three-way interactions.

Subject:
International business enterprises (Finance)
Business budgets (Research)
Cost control (Research)
Authors:
Hassel, Lars G.
Cunningham, Gary M.
Pub Date:
07/01/1996
Publication:
Name: Management International Review Publisher: Gabler Verlag Audience: Trade Format: Magazine/Journal Subject: Business; Business, international Copyright: COPYRIGHT 1996 Gabler Verlag ISSN: 0938-8249
Issue:
Date: July, 1996 Source Volume: v36 Source Issue: n3
Accession Number:
18913623
Full Text:
Key Results

Subunit performance is enhanced by budget communication in domestic subunits of the multinational when reliance on budget control and environmental dynamism are high. The ability to influence the budget had no impact on subunit performance.

Foreign subunits differ from domestic subunits, but not in the manner hypothesised. Budget effectiveness for foreign subunits is more complex than previous research designs have addressed.

Introduction

The issue of effectiveness of budget controls in multinational companies(2) has generated recent attention. Notably, normative discussions suggest that the budget processes should be different in foreign subunits from those in domestic subunits because of differences in environment, strategic emphasis, geographic distance, language, and culture, in the foreign units (Egelhoff 1988, p. 163, Bartlett and Goshal 1989, p. 100). In the only empirical studies on the subject, Hassel (1991) and Hassel and Cunningham (1993) found that effectiveness of budget controls and budgetary participation varies between domestic and foreign business units of multinational companies in some contexts. These studies have been limited because they have only considered two variables in the budget process. This study, by contrast, considers three variables: reliance on budget controls, budget communication or budget influence, and environmental dynamism.

Effectiveness of budget controls in general has been a topic of interest for several years. Notably, the benefits of budgetary participation have been widely touted in textbooks (e.g., Dominiak and Louderback 1988, pp. 214-216, Hansen 1990, pp. 592-594, Lere 1991, pp. 367-368). In particular, it is claimed that participation moderates the supposed undesirable effects of reliance on budget controls to enhance effectiveness of the budget process because managers are motivated to perform if they participate in the budget process. Yet, extensive research has produced equivocal, even contradictory results (e. g., Hopwood 1972, Otley 1978, Brownell 1982, Hirst 1987, Dunk 1989). These studies, however, all viewed budgetary participation as a single dimension. The analysis in this study, though, indicates that budgetary participation has at least two dimensions, communication and influence, as discussed below.

The impact of environmental conditions has also been an issue of concern in studies of budget effectiveness and subunit performance (e.g., Hayes 1977, Otley 1978, 1980, Waterhouse and Tiessen 1978). Previous empirical studies have examined the two-way interaction between budgetary participation and specific environmental conditions (e.g., Brownell 1985, Govindarajan 1986, Mia 1989). Others have examined the two-way interaction between reliance on budget controls and environmental characteristics (e.g., Hirst 1983, Govindarajan 1984). Studies of three-way interactions among some notions of reliance on budget controls, budgetary participation, and some element of the environment by Brownell end Hirst (1986) and Harrison (1992) found no three-way interactive effect. Brownell and Dunk (1991), using methodological refinements, did find a significant effect under certain conditions. Gul and Chia (1994) found that perceived environmental uncertainty interacted with management accounting system design, and organization decentralisation to affect performance. This study, following an approach similar to Brownell and Dunk (1991) and Gul and Chia (1994), considers the three-way interaction of reliance on budget control, budget communication or budget influence, and the environment.

Prior studies of three-way interactions cited above have essentially been limited to assessing the significance of the regression coefficient as a means of assessing the significance of the three-way interaction. Recent methodological advances (e.g., see Champoux and Peters 1987, Govindarajan 1988, Gul and Chia 1994) demonstrate that additional explanatory information is presented with a hierarchical regression which examines the increase in [R.sup.2] with the inclusion of the three-way interaction term. This study uses such a hierarchical approach.

The previous studies, with the exception of Harrison (1992), were performed in a single country and did not consider effects of multinational business operations and environmental conditions that vary among countries. This study includes the multinational dimension by examining budget processes in domestic and foreign subunits of a Finnish multinational company. This paper, thus, has two primary purposes: First, to explore effectiveness of budget processes in multinational companies. Second, to explore budget effectiveness in general by considering three-way interactions of relevant variables using a hierarchical regression approach. A major feature of the study is that it employs two dimensions of budgetary participation, communication and influence, separately in the three-way models. The remainder of the paper presents the variables measured and hypotheses tested, the research design and methods, presentation of the results, and concluding discussion.

Variables Measured and Hypotheses

Variable Selection

Reliance on Budget Controls

The budget has been traditionally widely viewed as a major tool for organization control (e.g., Parker 1977, p. 135, and sources cited by him). Hopwood (1972) suggested that high reliance on budget controls is associated with dysfunctional behavior. Otley (1978) failed to replicate the results and instead suggested that reliance on budget controls is associated with enhanced performance. A study by Brownell (1982) suggested that participation in the budgeting process moderates the effects of reliance on budget controls so that high (low) reliance on budget controls interacting with high (low) budgetary participation is associated with higher performance. Hirst (1987), though, failed to replicate Brownell's findings. Dunk (1989) in an extension of these studies found contradictory results that high (low) reliance on budget controls interacting with high (low) budgetary participation leads to low performance. These studies are not entirely comparable, but they do indicate that the issue of the effectiveness of budget controls, and potential moderating factors, is far from settled. This study continues the exploration by considering reliance on budget controls in multinational companies with potential moderating factors.

Budget Communication and Influence

Almost all prior studies on budget control processes have been based on Milani's (1975) measure of budget participation and they have viewed budgetary participation as a unidimensional construct (e. g., Brownell 1982, 1985, Brownell and Hirst 1986, Hirst 1987, Dunk 1989, Mia 1989) even though Milani (1975) suggested the possibility of two dimensions and Brownell (1982) isolated two dimensions.

Our analysis indicates that budgetary participation is at least bi-dimensional: 1) the extent to which information is communicated back and forth between headquarters and subunit managers, and 2) the extent to which subunit managers influence the budgets for their units. The two dimensions are conceptually independent. For example, in domestic subunits of a multinational company, communication with headquarters may be extensive but the budget may be set by headquarters with no influence by the subordinate managers. By contrast, in highly autonomous foreign subunits of a multinational company with a multi-domestic strategy (Bartlett and Goshal 1989), subordinate managers may have substantial influence over their budgets with only limited communication with headquarters.

Budget communication is the extent to which information is exchanged between headquarters and subunit managers about factors that affect the budget and performance. Recent a priori arguments suggest that benefits from budget participation are derived primarily from the communication of information (e. g., Miller and Monge 1986, Vroom and Jago 1988). Similarly, in their concluding discussion, Brownell and Dunk (1991, p. 702) suggest that budgetary participation serves as a major information exchanging role and that the primary benefit from participation is related to the exchange of information about technology and markets.

Budget influence is the degree to which subunit managers perceive that they have command over the process that establishes the criteria under which they may be evaluated. As discussed above, traditional definitions and measurement of budgetary participation include elements of both communication and influence. Yet, almost all of the textbooks and the studies cited above base the arguments for participation on the influence aspects. For example, a leading textbook states that creativity, challenge, and increased responsibility inherent in influencing the budget motivates higher performance by managers and satisfaction with their work (e.g., Hansen 1990, p. 592). By implication high reliance on budget controls alone is dysfunctional. Despite the wide-spread conventional wisdom about the benefits of budgetary influence, the equivocal results of several empirical studies do not support beneficial effects. It must be noted, though, that the measure of budgetary participation used combined factors for the two dimensions of budget communication and budget influence.

With one significant exception (Hassel and Cunningham 1993), no empirical studies have explicitly addressed budget communication and budget influence separately. This study continues the example of Hassel and Cunningham (1993) and examines budget communication and influence separately. Because the two dimensions are conceptually independent, it is appropriate to develop hypotheses separately for each dimension. Factor analysis, presented below, tends to confirm the existence of these two dimensions.

Environmental Dynamism

Conditions in the environment have been suggested as major factors influencing budget effectiveness and management performance (e.g., Hayes 1977, Otley 1978, 1980, Waterhouse and Tiessen 1978). Environmental characteristics are multidimensional and no one variable can represent the entire set of environmental characteristics. Representations in previous studies have used three generalised characteristics of environmental conditions developed by Duncan (1972) complexity (Brownell 1985, 1987), dynamism (Brownell 1985, 1987, Hassel 1991, Hassel and Cunningham 1993), and uncertainty (Govindarajan 1984, Gul and Chia 1994). This study focuses on dynamism, or change in critical characteristics of the operating environment, as a generalised environmental characteristic of interest for multinational companies. The measure of dynamism (described below) incorporates the notion of both complexity and uncertainty. Also, Egelhoff (1988) after examining several environmental characteristics suggests that rate of change in the environment is the most important variable in multinational companies. The measure of dynamism used here, however, is not intended to be a comprehensive and definitive environmental measurement. It is important to note that the environmental construct is perceived dynamism, not necessarily actual dynamism, because it is the perception of the environment that influence management decisions (Gul and Chia 1994, p. 48).

Budget Effectiveness

Budget effectiveness is a multidimensional concept that may be perceived differently by the involved interest groups (Otley 1980, p. 424). For this study, though, we have selected one dimension, self-reported subunit performance, a construct that incorporates both budget and goal-oriented performance. Variations on this construct using a single self-reported measurement have been successfully used in several prior studies (e.g., Brownell 1982, 1985, Dunk 1989, Govindarajan 1984, 1986, Gupta and Govindarajan 1984, Hirst and Lowy 1990).

Hypotheses Tested

Reliance on Budget Controls and Budget Communication -- Domestic Subunits

Traditional budget controls were developed when manufacturing process, market conditions, and other environmental factors were relatively stable. They were also developed when essentially all business activity of a company was within the boundaries of a single country. Because of the stable environment, and because headquarters and subunits were within the same country, all managers had access to the same basic knowledge about technology, markets, and economic conditions. As a result, in stable environments, headquarters could rely on budget control effectively.

With rapid changes in manufacturing technology and markets conditions, however, it has been argued that traditional budget controls alone would not be effective (Brownell and Dunk 1991, p. 702, Hassel 1991, p. 33). As mentioned above, communication in the budget process serves a major information exchange role about critical factors in the environment. Because of the high degree of shared culture, values, and language in domestic situations, the benefit of the communication is enhanced because persons at all levels in the organization have a high level of Common knowledge of underlying economic conditions and the communication can focus on the critical dynamic factors. As a result, it can be argued that there will be a significant interaction among reliance on budget controls, budget communication, and environmental dynamism in domestic subunits of a multinational company and the following hypothesis can be tested:

H1a: In domestic subunits of multinational companies, the interaction of reliance on budget controls, budget communication, and environmental dynamism has a significant effect on subunit performance.

Discovery of an interactive effect by itself is not sufficient to discover the conditions under which budget communication produces positive effects on subunit performance. It can be argued, though, that with rapid changes in manufacturing technology and dynamic markets, traditional budget controls alone would not be effective (Brownell and Dunk 1991, p. 702, Hassel 1991, p. 33). High degrees of budget communication about the changes in technology and markets are needed, therefore, to moderate what would otherwise be dysfunctional reliance on budget controls in dynamic environments. Therefore. the following hypothesis can be tested:

H1b: In domestic subunits of multinational companies, high levels of budget communication interact with high levels of environmental dynamism to produce high perceived subunit performance when reliance on budget controls is high.

Reliance on Budget Controls and Budgetary Communication -- Foreign Subunits

With two significant exceptions (Hassel 1991, Hassel and Cunningham 1993) there have been no significant empirical studies of budget effectiveness in foreign subunits of multinational companies. As a result, it is necessary to rely in addition on a priori reasoning and conventional wisdom to develop hypotheses. Hassel (1991) found a significant positive impact on performance of foreign subunits from reliance on budget controls when the environment is dynamic. This outcome is consistent with Waterhouse and Tiessen (1978) who argued a priori that when environments are dynamic, reliance on budget controls produces the most effective controls.(3) Hassel and Cunningham (1993) found that foreign subunits, unlike domestic subunits, did not benefit from budget communication when the environment is dynamic (Hassel and Cunningham 1993). That study did not consider, however, the impact of reliance on budgetary controls. The implication is that local managers, especially in multinational companies with multi-domestic strategies, need to be free to respond to local environmental conditions without the need to communicate with headquarters. Unlike domestic subunits which have a high degree of common shared culture, values, and intuitive sense of business conditions with the headquarters, extensive communication between foreign subunits and headquarters can be tedious and time consuming because of differences in language, culture, and limits on communication technology. Thus, attempts to foster communication between headquarters and foreign subunits when the environment is dynamic would be ineffective and may produce dysfunctional results because local managers should devote their resources to cope with the demands of the local environment rather than to engage in tedious communication with headquarters. Therefore we argue that there is no significant effect on performance of foreign subunits from the interaction of reliance on budget controls, budget communication, and environmental dynamism. As a result, the following hypothesis can be tested:

H2: In foreign subunits of multinational companies, there will be no effect on subunit performance from the interaction of reliance on budget controls, budget communication, and environmental dynamism.

Reliance on Budget Controls and Budget Influence -- Domestic Subunits

As discussed above, extensive studies of budget participation have not tended to support beneficial effects on subunit performance when reliance on budget controls is high. As mentioned, these studies measured a construct that included both communication and influence, even though the arguments were based mostly on the influence aspects. All of these studies were conducted in a single country. Thus it would seem that budget influence would have no moderating impact on the alleged dysfunctional effects of reliance on budget controls in domestic subunits of a multinational. Hassel and Cunningham (1993) found that high degrees of budget influence is associated with decreased performance of domestic subunits of multinational companies. The interaction between budget influence and environmental dynamism did not significantly affect subunit performance, however. That study did not consider the impact of reliance on budget controls. Thus it would seem likely that there would be no significant interactive effect on subunit performance from the three-way interaction of reliance on budget controls, budget influence, and environmental dynamism. Therefore, the following hypothesis can be tested:

H3: In domestic subunits of a multinational company, there will be no effect on subunit performance from the interaction of reliance on budget controls, budget influence and environmental dynamism.

Reliance on Budget Controls and Budget Influence -- Foreign Subunits

As mentioned above, only two significant empirical studies have addressed the effectiveness of budget controls in foreign subunits of multinationals. Hassel (1991) found that reliance on budget controls is associated with high performance in foreign subunits when the environment is dynamic. This finding is consistent with the a priori arguments of Waterhouse and Tiessen (1978). That study did not, however, consider budget influence. Hassel and Cunningham (1993) found that budget influence alone is negatively associated with performance in foreign subunits of multinationals and that interaction with environmental dynamism did not moderate this negative impact. That latter study, however, did not consider reliance on budget controls. The a priori discussions cited above suggest that managers of foreign subunits of multinationals should be able to influence their budgets when the reliance on budget controls is high (Egelhoff 1988, p. 163, Bartlett and Goshal 1989, p. 100). It can be argued that the foreign managers are motivated to perform better if they have influence over their budgets when the environment is dynamic because the local managers understand the local conditions. Thus it can be argued that the ability of foreign subunit managers to influence their budgets has a moderating effect on what would otherwise have a negative impact on subunit performance when reliance on budget controls and environmental dynamism are high. Thus the following hypothesis can be tested:

H4a: In foreign subunits of multinational companies, the interaction of reliance on budget controls, budget influence, and environmental dynamism has a significant effect on subunit performance.

Discovery of an interactive effect by itself is not sufficient to discover the conditions under which budget influence produces positive effects on subunit performance. The a priori normative arguments cited above indicate that autonomy of subunit managers is essential in foreign subunits of multinational companies because of distances, cultural and language barriers, etc. Such autonomy is especially important when the environment is dynamic because of barriers that inhibit effective interaction with headquarters. Following the conventional wisdom and a priori reasoning, it can be argued, that when environments of local subunits of multinational companies are dynamic, the high use of budget controls alone would not be effective because budgets imposed by the headquarters would not reflect local multi-domestic conditions and local managers would not be motivated to perform to their potential. Because the foreign subunit managers are the ones most familiar with the local environments, markets, etc., they are the ones who should have primary input on determining budget amounts. As a result, managers of local subunits must be able to influence their budgets in order to enhance their motivation leading to high subunit performance. Therefore, the following hypothesis can be tested:

H4b: In foreign subunits of multinational companies, high levels of budget influence interact with high levels of environmental dynamism to produce high perceived subunit performance when reliance on budget controls is high.

Research Method

This study involved a questionnaire survey within a multinational company headquartered in Finland. The company has grown domestically and abroad through related diversification around the building materials industry. The company has approximately 100 manufacturing units with profit-centre responsibility in more than 15 foreign countries. Each unit reports directly to the headquarters in Finland. The company's net sales were the equivalent of US$ 1.3 billion for the year studied, of which 54% were generated by the foreign units. The company uses a standardised reporting system for domestic and foreign subsidiaries that focuses on financial measurements such as operating profit and return on capital employed. Multinationals with a decentralised multi-domestic strategy for its foreign operations are most amendable to profit-center structures and financial control based reporting and tend to implant their domestic control system into their foreign operations (Dyment 1987). The company seems to have fitted the profit-center control structure to a multi-domestic strategy. Participants of the study were subunit managers who had the ultimate budget responsibility. The foreign subsidiary countries are shown in Table 1.

(a) Countries include Sweden, Norway, Denmark, Germany, Holland, Belgium, France, U.K., Spain and Canada.

(b) Four units were excluded from the sample because they were sold during the process.

(c) As a percentage of questionnaires distributed

Research Procedure

The participants were identified by one of the researchers and the corporate controller using the organization chart. Criteria used to select the participants included: (1) each participant should have budget responsibility for the subunit; (2) each unit would be a profit-centre and have manufacturing operations; (3) each person must have held the position for at least two years to have command over the target-setting process for the period of the study; (4) an equal number of domestic and foreign-unit managers would be selected; and (5) because of the nature of the study it was necessary to include subunits facing different degrees of environmental dynamism.

Phases leading to the mailing the questionnaire are:

Phase 1: Unstructured interviews were conducted with the corporate controller and business-unit controllers at the headquarters. The purpose of the interviews was to gain insight into the budgeting and evaluation process in the organization and to identify whether the measurement instruments intended for the study could be used.

Phase 2: The survey instrument was left for comments by a group of controllers, after which it was pilot-tested with a group of domestic managers. After the survey instrument was finalised in the parent company's language (Finnish), it was translated into Swedish for the Scandinavian units, and into English for the other foreign units. The reporting language of the international operations of the corporation is English, but Swedish was considered to be more appropriate for the Scandinavian managers. The language of the questionnaire was cross-checked by translators. The aim of the tri-lingual instrument was to give managers the opportunity to respond in a language with which they were comfortable in order to enhance the response rate and the validity of the responses.

Phase 3: Eighty questionnaires, of which half went to foreign units, were mailed with a cover letter from the Vice-President that indicated corporate approval of the study. Responses were returned directly to one of the researchers using corporate envelopes. The response rate is shown in Table 1. Domestic unit managers returned 95% usable responses, and foreign unit managers 84%. The usable response rate (88%) precludes the need for any nonresponse analysis.

Measurement and Validation of Variables

This study uses subunit performance as the dependent variable. The three independent variables measured are 1) reliance on budget controls, 2) budget communication or budget influence, and 3) environmental dynamism. Measurement and validation procedures are discussed below. Descriptive statistics are shown in Table 2.

Table 2. Descriptive Statistics for Variables Measured (Foreign units in bold face)



Subunit performance

The specific measurement approach is adapted from Govindarajan (1984) and Gupta and Govindarajan (1984). Managers were first asked to evaluate the importance they attach to ten potential performance evaluation criteria on a five-point Likert scale. These criteria include measurable items such as return on capital employed and operating profit; they also include subjective criteria such as personnel development and product development. The respondents were then asked to indicate the extent to which they are satisfied with their units' performance on a five-point Likert scale for each of the ten criteria. The measurement used in the study is the average of the scores for managers' satisfaction with each criterion weighted by the perceived importance. The weighted measure does not readily lend itself to an internal reliability test. A reasonably convergent validity was established, however, between business unit controllers' perceptions of overall subunit performance and the subunit general managers' responses (r=0.39, p [is less than] 0.01).

Budget Communication and Influence

This study, like the previous studies involving budgetary participation (e.g., Brownell 1982, 1985, Brownell and Hirst 1986, Hirst 1987, Dunk 1989, Mia 1989) uses the six items (see Table 3) developed by Milani (1975) with modifications to permit responses on a five-point Likert scale. These previous studies, though, used a composite measure of the six items based on the premise that they represented a single factor. In this study, factor analysis of the responses shows that they load on two factors with eigenvalues greater than 1.0. These factors have been titled budget influence and budget communication and represent 60% of the total variance. Rotated factor loadings are presented in Table 3. The measurement used in this study is the aggregate of the three items in each factor.

(*) Items adapted from Milani (1975)

Reliance on Budget Controls

The extent of reliance on budget controls was assessed in a manner similar to that of Brownell (1985, 1987) which was adapted from Otley's (1978) eight-item superior evaluation-style measure. Subsidiary managers were asked how important they perceive that the budget is for the headquarters. Like Brownell, two items were assessed: 1) The importance of meeting the budget, and 2) the importance of making a profit. A five-point scale was used ranging from 1) "not at all important", to 5) "very important". The two items were summed to give an overall measure. The two items are associated (r=0.43; p [is less than] 0.01).

Environmental dynamism

The measure of the environment used in this study represents the average rate of change in the critical elements of a subunit's operating environment. This measure includes both complexity (critical elements) and dynamism (rate of change), two major dimensions of environmental uncertainty (Duncan 1972). The measurement approach is that of Brownell (1985, 1987) and Hassel (1991) who adapted Duncan's (1972) measurement approach. Twelve potentially critical elements in the subunit's operating environment were developed from Brownell (1985, 1987) and Sathe (1982). The elements include aspects of customer, distributor, and government relations; technical developments; supplies of capital, raw material, and labour; competitors' actions; and impacts of inderdependence and corporate policy. Respondents were asked to rate each element as critical or non-critical for their decision-making and then to indicate the perceived rate of change each element. Only the perceived rate of change in the critical elements of the operating environment was included in the measure of dynamism. The critical items were averaged to give an overall measure of dynamism.

Hypotheses Testing

Hypothese 1a, 2, 3, and 4a are tested using a hierarchical regression (Champoux and Peters 1987, Govindarajan 1988, Gul and Chia 1994). This approach uses a multiplier interaction model with cross-product terms of the independent variables (Southwood 1978, Arnold 1982). The model uses to equations:

(1) Y = [a.sub.0] + [a.sub.1] [x.sub.1] + [a.sub.2] [x.sub.2] + [a.sub.3] [x.sub.3] + [b.sub.1] [x.sub.1] [x.sub.2] + [b.sub.2] [x.sub.1] [x.sub.3] + [b.sub.3] [x.sub.2] [x.sub.3] + e

and

(2) Y = [a.sub.0] + [a.sub.1] [x.sub.1] + [a.sub.2] [x.sub.2] + [a.sub.3] [x.sub.3] + [b.sub.1] [x.sub.1] [x.sub.2] + [b.sub.2] [x.sub.1] [x.sub.3] + [b.sub.3] [x.sub.2] [x.sub.3] + [c.sub.1] [x.sub.1] [x.sub.2] [x.sub.3] + e

Where:

Y = Subunit performance.

[x.sub.1] = Reliance on budget controls

[x.sub.2] = Budget communication or budget influence

[x.sub.3] = Environmental dynamism

a, b, and c = Regression coefficients.

Difference scores from the mean are used for the independent variables in order to provide a clearer basis to interpret signs of the interaction coefficients (Brownell and Hirst 1986) and to minimise multicolinearity between main and cross-product effects (Cronbach 1987). A two-model approach is used in which the model is fit separately for domestic and foreign managers for both budget communication and budget influence.

The difference between equation 1 and equation 2 is the inclusion of the three-way interaction term in equation 2. Support for hypotheses 1a and 4a results from a significant unstandardised coefficient [c.sub.1]. If [c.sub.1] is significant, the effect of any of the variables depends on the level of the other two variables. An additional appropriate test for hypotheses 1a and 4a is to determine whether the inclusion of the three-way interaction term adds significantly to the variance explained by the regression (Southwood 1978). Thus the difference in [R.sup.2] between the two equations indicates the magnitude of the impact of including the three-way interaction term in the regression. If [c.sub.1] is significant, the corresponding incremental [R.sup.2] will also be statistically significant at the same probability level (Southwood 1978, Gul and Chia 1994).

As mentioned above, significant three-way interactions are not sufficient to provide information about the moderating effect of budget communication or budget influence. Therefore, in order to test hypotheses 1b and 4b if hypotheses 1a and 4a are supported, two-way interactions of two of the independent variables will be tested for subgroups dichotomised at the mean of the third independent variable (Brownell and Dunk 1991, Harrison 1992) following similar approaches to those above. In this study, subunits are dichotomised into two subgroups based on high and low reliance on budget control and then dichotomised into two subgroups based on high and low environmental dynamism. The following equations are used:

(3) Y = [a.sub.0] + [a.sub.i] [x.sub.i] + [b.sub.j] [x.sub.j] + e

(4) Y = [a.sub.0] + [a.sub.i] [x.sub.i] + [b.sub.j] [x.sub.j] + [b.sub.1] [x.sub.i] [x.sub.j] + e

where:

Y = Subunit performance.

[x.sub.ij] = the independent variables remaining after dichotomising on the third

a and b = Regression coefficients.

The difference between equations 3 and 4 is the inclusion of the two-way interaction term in equation 4. Support for hypotheses 1b and 4b results from a significant unstandardised coefficient [b.sub.1]. As above, the test is to determine whether the inclusion of the two-way interaction term adds significantly to the variance explained by the regression by examining the difference in [R.sup.2] between the two equations.

Results

Simple correlations among the variables are computed using raw scores and are presented in Table 4. The significant negative correlation between reliance on budget controls and environmental dynamism in domestic subunits (r=-0.43; p [is less than] 0.001) indicates that budgets are de-emphasized as the environment becomes more dynamic for domestic subunits as argued for the hypotheses. The opposite correlation between these two variables for foreign subunits is likewise consistent with the arguments for the hypotheses (see note 2).

Table 4. Correlation Matrix for the Variables Tested (Foreign subunits in bold face)

(*) p < 0.10; (**) p < 0.05; (***) p < 0.01 (one tail tests)

Hypotheses Tests

The results of hypotheses tests 1a, 2, 3 and 4 are shown in Table 5 which shows regression equations for equations 1 and 2 for both budget communication and budget influence. These results support hypotheses 2 and 3 because the coefficient of the three-way interaction term is not significant. Thus there is no significant impact from budget communication in foreign subunits and from budget influence on performance in domestic subunits as reflected in three way interactions ([c.sub.1]) and two way interactions ([b.sub.1] and [b.sub.3]).

Table 5. Results of Multiple Regression Analysis with Budget Communication Variable (Standard Errors in Parentheses)

(*) p < 0.10; (**) p < 0.01; (***) p < 0.01 (two-tail test)

Support for hypotheses 1a and b is shown by results in Table 5 and 6. As shown in Table 5, the coefficient for three-way interaction term for reliance on budget controls, budget communication, and environmental dynamism ([c.sub.1]) is significant (p [is less than] 0.05). Including the three-way interaction term in the regression equation significantly increases the [R.sup.2] from 0.11 to 0.24 (p [is less than] 0.05). Thus the three-way interaction is positively associated with subunit performance in the domestic units of the multinational company and hypothesis 1a is supported.

To test for hypothesis 1b, as mentioned, it is necessary to dichotomise the domestic sample on one of the variables while testing the two-way interaction between the other two variables. Table 6 shows the dichotomisation of the domestic subunits first by high and low reliance on budget control and then by high and low environmental dynamism. For the subset with a high reliance on budget control, the two-way interaction of budget communication and environmental dynamism is significant (p [is less than] 0.10) and significantly increases [R.sup.2] from 0.02 to 0.16 (p [is less than] 0.10). Thus hypothesis 1b is supported. The interpretation is that when the headquarters emphasizes the budget then domestic managers need to communicate in dynamic environments. Dichotomising the sample on environmental dynamism neither supports nor fails to support the hypothesis. It is interesting to note, though, that for the subset with low environmental dynamism, the coefficient of two-way interaction of budget communication and reliance on budget control is significant and negative and increases the [R.sup.2] from 0.09 to 0.30 (p [is less than] 0.10). Thus, when environmental dynamism is low, high communication and reliance on budget controls is associated with lower subunit performance. Consequently, there is no need to match high budget control with high communication to enhance performance when the environment is stable.

Table 6. Results of Multiple Regression Analysis for Domestic Subunits With Budget Communication Variable Dichotomized on Reliance on Budget Control (Standard Errors in Parentheses)

(*) p < 0.10; (**) p < 0.05; (***) p < 0.01 (one-tail tests)

Hypothesis 4a is not supported because the coefficient of the three-way interaction term for reliance on budget controls, budget influence, and environmental dynamism is not significant and does not significantly increase the [R.sup.2] for foreign subunits of the multinational. Thus, hypothesis 4b becomes most. Therefore, the impact of budget influence on subunit performance of foreign subunits is limited.

Concluding Discussion

The results of this study provide the first empirical evidence that communication in the budget process is the major factor of budgetary participation that has a positive effect on subunit performance when the environment is dynamic. Thus the results support the suggestion of Brownell and Dunk (1991) that the exchange of information about changes in markets and technology is the primary benefit of budget participation. In this study, these results are limited to domestic subunits of a multinational company.

The results of the study did not find any moderating impact of submit managers' ability to influence their budget in either foreign or domestic subunits for any conditions of reliance on budget controls and environmental dynamism. This outcome, combined with that of Hassel and Cunningham (1993) that budget influence alone has a negative impact on foreign subunit performance, provides additional evidence that managers' ability to influence their budgets is not inherently motivating and may be dysfunctional. This finding, likewise, is consistent with the suggestion of Brownell and Dunk (1991) that communication, rather than motivational factors, represent the primary benefit of budgetary participation.

This study demonstrates that differences do exist between domestic and foreign subunits with respect to the efficacy of the budget process. Yet, they do not support the a priori conventional wisdom that foreign managers must have control over their budgets in order to enhance their performance. The effectiveness of the budget process in foreign subunits of multinationals is seemingly more complex than has been addressed by research designs to date.

This study is among the first to examine the two dimensions of budgetary participation, communication and influence, separately and demonstrates the efficacy doing so. Results suggest that budget communication and budget influence are indeed separate dimensions and that future studies should be approached in this manner.

This study is limited because it considered only three possible independent variables that affect the budget process. It is also limited because it was conducted within a single company. However, the absolute majority of the cited studies on budget control were conducted within one single company. All of the subunits are manufacturing subunits that operate mostly in developed industrialised countnes of Western Europe and North America. Therefore, results cannot be generalised to other companies. A natural extension would be to study a multinational with a more centralised global strategy that would call the profit-center structure into question. Nonetheless, the results provide a valuable initial insights into several issues relating to budget effectiveness, especially for multinational companies.

Notes

(1) The authors appreciate the helpful comments of Dennis Bline, Alan Dunk, Judy Harris, Graeme Harrison, Lokman Mia, Jill McKinnon, David Otley, Robert Reeve, Saeed Roohani on an earlier version of the paper and the two MIR reviews for their comments.

(2) There is an extensive body of literature on performance evaluation in multinationals. These studies have mainly focused on performance evaluation measures and methods and not behavioral budget control as in this study.

(3) Waterhouse and Tiessen (1978) did not limit their arguments to specific situations such as foreign subunits of multinationals. As discussed above, these arguments do not apply to domestic units of multinationals. We do argue, though, that they apply to foreign subunits.

References

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Lars G. Hassel, Associate Professor of Accounting, Department of Accounting, Turku School of Economics and Business Administration, and Abo Akademi University, Turku, Finland. Gary M. Cunningham, Professor of Accounting, U.S.A.

Manuscript received March 1995, revised October 1995.
Table 1. Survey Response Rate

                                 Domestic Units   Foreign Units(a)

Total number of questionnaires        40                40
Total number distributed(b)           39                37
Number of responses                   37                33
Response rates(c)                     95%               89%
Number useable                        36                31
Useable response rate(c)              95%               84%

                                 All Units

Total number of questionnaires      80
Total number distributed(b)         76
Number of responses                 70
Response rates(c)                   92%
Number useable                      67
Useable response rate(c)            88%


Theoretical   Actual   Mean
                              Range         Range

Reliance on budget controls     2-10        5-10      9.05
                                            5-10      8.81
Budget communication            3-15        7-14     11.30
                                            3-15     10.58
Budget influence                3-15        6-15     12.57
                                            7-15     13.26
Environmental dynamism          1-5         2-4       3.45
                                            2-4       3.37
Subunit performance             1-5         2-4       2.82
                                            1-4       2.7

                              Standard
                              Deviation

Reliance on budget controls     1.03
                                1.22
Budget communication            1.63
                                2.55
Budget influence                2.51
                                2.02
Environmental dynamism          0.55
                                0.39
Subunit performance             0.57
                                0.62


Table 3. Rotated Factor Loadings of Budgetary Participation Items

Factor Title and Items(*) Loading > 0.40                Loading

Budget Influence
Amount of manager's influence on final budget of the     0.87
   unit
The portion of the budget that the manager was           0.84
   involved in setting
The importance of the manager's contribution to the      0.73
   budget

Budget Communication
Frequency of supervisior-initiated budget related        0.81
   discussions
Frequency of manager-initiated budget-related            0.73
   discussions
Kind of reasoning provided to managers when budget is    0.55
   revised

Factor Title and Items(*) Loading > 0.40                Percentage
                                                        of Variance
Budget Influence                                          37.3
Amount of manager's influence on final budget of the
   unit
The portion of the budget that the manager was
   involved in setting
The importance of the manager's contribution to the
   budget

Budget Communication                                      22.7
Frequency of supervisior-initiated budget related
   discussions
Frequency of manager-initiated budget-related
   discussions
Kind of reasoning provided to managers when budget is
   revised


Variable                          1          2            3

1. Subunit performance           -
                                 -
2. Budget communication          0.12        -
                                 0.09        -
3. Budget influence             -0.22       0.17         -
                                -0.23       0.31(**)     -
4. Reliance on Budget Control    0.20       0.24(*)     0.06
                                 0.28(*)   -0.02       -0.27
5. Environmental dynamnism      -0.02      -0.10       -0.08
                                -0.17      -0.05       -0.07

Variable                          3          5

1. Subunit performance

2. Budget communication

3. Budget influence

4. Reliance on Budget Control     -
                                  -
5. Environmental dynamnism      -0.43(***)   -
                                 0.14        -


Variables                                       Budget Communication

                                                Domestic

                                                With
                                                3-way term

Constant ([a.sub.0])                              2.88(***)
                                                 (0.11)
Reliance on Budget Controls (RBC) ([a.sub.1])     0.21(*)
                                                 (0.11)
Budget Communication (BC) ([a.sub.2])            -0.00
                                                 (0.07)
Environmental Dynamism (ED) ([a.sub.3])          -0.18
                                                 (0.22)
RBC x BC ([b.sub.1])                             -0.03
                                                 (0.08)
RBC x ED ([b.sub.2])                              0.02
                                                 (0.13)
BC x ED ([b.sub.3])                               0.20
                                                 (0.15)
RBC x BC x ED ([c.sub.1])                         0.25(**)
                                                 (0.11)
[R.sup.2]                                         0.24
F                                                 1.33
Change in [R.sup.2]                               0.13
F for change in [R.sup.2]                         5.03(**)

Variables                                       Budget Communication

                                                Domestic

                                                Without
                                                3-way term

Constant ([a.sub.0])                             2.86(***)
                                                (0.11)
Reliance on Budget Controls (RBC) ([a.sub.1])    0.06
                                                (0.09)
Budget Communication (BC) ([a.sub.2])           -0.00
                                                (0.07)
Environmental Dynamism (ED) ([a.sub.3])         -0.12
                                                (0.24)
RBC x BC ([b.sub.1])                             0.02
                                                (0.08)
RBC x ED ([b.sub.2])                             0.01
                                                (0.13)
BC x ED ([b.sub.3])                              0.23
                                                (0.16)
RBC x BC x ED ([c.sub.1])                         n/a
                                                  n/a
[R.sup.2]                                        0.11
F                                                0.63
Change in [R.sup.2]                               n/a
F for change in [R.sup.2]                         n/a

Variables                                       Budget Communication

                                                Foreign

                                                With
                                                3-way term

Constant ([a.sub.0])                             2.72(***)
                                                (0.11)
Reliance on Budget Controls (RBC) ([a.sub.1])   -0.10
                                                (0.14)
Budget Communication (BC) ([a.sub.2])            0.07
                                                (0.06)
Environmental Dynamism (ED) ([a.sub.3])         -0.20
                                                (0.33)
RBC x BC ([b.sub.1])                             0.01
                                                (0.06)
RBC x ED ([b.sub.2])                             0.53
                                                (0.35)
BC x ED ([b.sub.3])                             -0.03
                                                (0.17)
RBC x BC x ED ([c.sub.1])                       -0.12
                                                (0.17)
[R.sup.2]                                        0.15
F                                                0.58
Change in [R.sup.2]                              0.02
F for change in [R.sup.2]                        0.54

Variables                                       Budget Communication

                                                Foreign

                                                Without
                                                3-way term

Constant ([a.sub.0])                             2.76(***)
                                                (0.11)
Reliance on Budget Controls (RBC) ([a.sub.1])   -0.10
                                                (0.14)
Budget Communication (BC) ([a.sub.2])            0.06
                                                (0.06)
Environmental Dynamism (ED) ([a.sub.3])         -0.19
                                                (0.33)
RBC x BC ([b.sub.1])                            -0.01
                                                (0.06)
RBC x ED ([b.sub.2])                             0.44
                                                (0.33)
BC x ED ([b.sub.3])                             -0.09
                                                (0.16)
RBC x BC x ED ([c.sub.1])                        n/a
                                                 n/a
[R.sup.2]                                        0.12
F                                                0.54
Change in [R.sup.2]                              n/a
F for change in [R.sup.2]                        n/a

Variables                                       Budget Communication
                                                Domestic
                                                With
                                                3-way term

Constant ([a.sub.0])                              2.84(***)
                                                 (0.11)
Reliance on Budget Controls (RBC) ([a.sub.1])     0.07(*)
                                                 (0.09)
Budget Communication (BC) ([a.sub.2])            -0.05
                                                 (1.10)
Environmental Dynamism (ED) ([a.sub.3])          -0.02
                                                 (0.27)
RBC x BC ([b.sub.1])                              0.00
                                                 (0.04)
RBC x ED ([b.sub.2])                              0.22
                                                 (0.27)
BC x ED ([b.sub.3])                               0.04
                                                 (0.17)
RBC x BC x ED ([c.sub.1])                        -0.12
                                                 (0.17)
[R.sup.2]                                         0.10
F                                                 0.47
Change in [R.sup.2]                               0.02
F for change in [R.sup.2]                         0.54

Variables                                       Budget Communication
                                                Domestic
                                                Without
                                                3-way term

Constant ([a.sub.0])                             2.85(***)
                                                (0.11)
Reliance on Budget Controls (RBC) ([a.sub.1])    0.09
                                                (0.09)
Budget Communication (BC) ([a.sub.2])           -0.05
                                                (0.04)
Environmental Dynamism (ED) ([a.sub.3])          0.01
                                                (0.27)
RBC x BC ([b.sub.1])                            -0.01
                                                (0.04)
RBC x ED ([b.sub.2])                             0.04
                                                (0.10)
BC x ED ([b.sub.3])                              0.01
                                                (0.16)
RBC x BC x ED ([c.sub.1])                         n/a
                                                  n/a
[R.sup.2]                                        0.08
F                                                0.46
Change in [R.sup.2]                               n/a
F for Change in [R.sup.2]                         n/a

Variables                                       Budget Communication
                                                Foreign
                                                With
                                                3-way term

Constant ([a.sub.0])                             2.78(***)
                                                (0.11)
Reliance on Budget Controls (RBC) ([a.sub.1])   -0.10
                                                (0.12)
Budget Communication (BC) ([a.sub.2])            0.06
                                                (0.07)
Environmental Dynamism (ED) ([a.sub.3])         -0.30
                                                (0.31)
RBC x BC ([b.sub.1])                             0.11
                                                (0.07)
RBC x ED ([b.sub.2])                             0.18
                                                (0.32)
BC x ED ([b.sub.3])                             -0.16
                                                (0.17)
RBC x BC x ED ([c.sub.1])                       -0.17
                                                (0.17)
[R.sup.2]                                        0.23
F                                                1.01
Change in [R.sup.2]                              0.03
F for change in [R.sup.2]                        0.94

Variables                                       Budget Communication
                                                Foreign
                                                Without
                                                3-way term

Constant ([a.sub.0])                             2.79(***)
                                                (0.11)
Reliance on Budget Controls (RBC) ([a.sub.1])   -0.10
                                                (0.12)
Budget Communication (BC) ([a.sub.2])           -0.09
                                                (0.06)
Environmental Dynamism (ED) ([a.sub.3])         -0.20
                                                (0.29)
RBC x BC ([b.sub.1])                             0.10
                                                (0.07)
RBC x ED ([b.sub.2])                             0.21
                                                (0.32)
BC x ED ([b.sub.3])                             -0.20
                                                (0.17)
RBC x BC x ED ([c.sub.1])                        n/a
                                                 n/a
[R.sup.2]                                        0.20
F                                                1.03
Change in [R.sup.2]                              n/a
F for change in [R.sup.2]                        n/a


Variables                                  Low Reliance
                                          With           Without
                                          2-way term     2-way term

Constant ([a.sub.0])                       2.74(***)      2.77(***)
                                          (0.21)         (0.12)
Environmental Dynamism (ED) ([a.sub.1)   -0.25          -0.15
                                          (0.33)         (0.25)
Budget Communication (BC) ([a.sub.2])      0.04           0.05
                                          (0.10)         (0.07)
BC x ED ([b.sub.1])                       -0.08            n/a
                                          (0.27)           n/a
[R.sup.2]                                  0.09           0.08
F                                          0.22           0.43
Change in [R.sup.2]                        0.01            n/a
F for change in R                          0.88            n/a

Variables                                  High Reliance
                                          With            Without
                                          2-way term      2-way term

Constant ([a.sub.0])                       2.91(***)      3.10(***)
                                          (0.12)         (0.20)
Environmental Dynamism (ED) ([a.sub.1])   -0.22           0.39
                                          (0.28)         (0.33)
Budget Communication (BC) ([a.sub.2])     -0.02           0.04
                                          (0.08)         (0.08)
BC x ED ([b.sub.1])                        0.36(*)         n/a
                                          (0.18)           n/a
[R.sup.2]                                  0.16           0.02
F                                          1.39           0.70
Change in [R.sup.2]                        0.14            n/a
F for change in R                          3.72(*)         n/a

Variable                                  Environmental Dynamism
                                          Low Dynamism
                                          With           Without
                                          2-way term     2-way term

Constant ([a.sub.0])                       2.74(***)      2.77(***)
                                          (0.21)         (0.12)
Environmental Dynamism (ED) ([a.sub.1])    0.19           0.10
                                          (0.11)         (0.12)
Budget Communication (BC) ([a.sub.2])     -0.15          -0.12
                                          (0.11)         (0.12)
BC x ED ([b.sub.1])                        0.22(*)         n/a
                                          (0.11)           n/a
[R.sup.2]                                  0.30           0.09
F                                          2.05           0.76
Change in [R.sup.2]                        0.21            n/a
F for change in R                          4.30(*)         n/a

Variables                                 Environmental Dynamism
                                          High Dynamism
                                          With            Without
                                          2-way term      2-way term

Constant ([a.sub.0])                       2.91(***)      3.10(***)
                                          (0.12)         (0.20)
Environmental Dynamism (ED) ([a.sub.1])    0.14           0.03
                                          (0.13)         (0.11)
Budget Communication (BC) ([a.sub.2])      0.10           0.10(*)
                                          (0.06)         (0.06)
BC x ED ([b.sub.1])                        0.11            n/a
                                          (0.08)           n/a
[R.sup.2]                                  0.24           0.14
F                                          1.57           0.26
Change in [R.sup.2]                        0.10            n/a
F for change in R                          2.02            n/a
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