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.
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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
0.62Table 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
revisedVariable 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/aVariables 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