Global Expansion of Toyota - Essay Example

Toyotas Global Expansion of the Outline of the paper This research paper is based upon the analysis of global expansion from the accounting point of view. The paper incorporates studying the principles associated with US GAAP and IFRS. International expansion is a complex process. Maintaining adequate accounting records becomes a challenge for most organization due to the conflicting accounting policies and regulations. The research also incorporates analyzing the accounting policies followed by Toyota in respect of its international expansion and the different issues faced by the same. The paper also lays light upon the reasons behind the company’s concentration upon overseas expansion rather than developing itself in Japan. Table of Contents Outline of the paper 2 Introduction 4 Research hypothesis 4 Research question 5 Research methods 5 Analysis and results 5 Global expansion from accounting perspective 6 Issues relating to the IFRS and US GAAP 6 Issues relating to consolidation of foreign accounts 7 International planning and control 7 Performance evaluation of foreign operations 8 Financial risk management 9 Toyota’s global expansion and reporting issues 9 Toyota’s expansion 9 Risks in overseas manufacturing 11 Expansion in North America 11 Accounting issues for Toyota 12 US GAAP pros and cons 13 Conclusion 13 References 15 Introduction There has been a considerable growth in globalization in the last decade. Trade and investments across borders have increased greatly that has helped shaping the economies of various nations. It has become highly important for organizations to remain transparent, comparable and reliable in terms of providing financial information. Globalization impacts international accounting in terms of the flow of capital. This increases issues relating to harmonizing global standards. Moreover, globalization has helped emerging economies such as, that of India and China, to participate in the global economy. This further increases the flow of capital as economic opportunities are developed. Maintaining adequate accounting records becomes a challenge for most organizations due to the conflicting accounting policies of the different nations and of regulatory authority. The requirement of universally acceptable rules in respect of accounting becomes essential. In general multinational firms follow the IFRS principles. Considerable efforts are taken by different regulatory authorities to reduce the gap between the IFRS principles and the accounting regulations imposed by different nations and the US GAAP. Research hypothesis The primary aim of the research is to develop an understanding towards international expansion from the accounting perspective. The hypotheses statement for the research is as follows: H1: IFRS regulations are widely accepted and considered to be more convenient than US GAAP rules for multinational firms in respect of the accounting perspective. H2: In international expansion firms face numerous issues in respect of managing risks, consolidation of accounts and in performance evaluation due to the lack of existence of standard policies. H3: Toyota faces numerous issues in its international expansion strategies. H4: Toyota primarily focuses upon international expansion due to the saturation of resources in its home nation. Research question Research questions are the identification of the main motive behind a research and what a researcher expects to learn from the same. Research questions hep to give direction to the study and helps maintaining a proper structure in the report. The research questions identified for conducting this research are as follows. 1. The different accounting issues faced in international expansion. 2. Issues relating to the IRFS and the US GAAP principles. 3. Issues relating to international planning and control, performance evaluation and risk management in international business. 4. Toyota’s global expansion strategies and issues relating to the same. 5. Accounting issues for Toyota. 6. The pros and cons of US GAAP as identified by Toyota. Research methods The research has been conducted on the basis of qualitative studies. The study was conducted by secondary data collection technique. Information was collected from different journals and books for analysing the subject of study. The pattern of analysis followed in this research was largely the case study method. Case study method incorporates analysing the subject matter of the research in an analytical manner so that suitable conclusions and findings can be drawn. The case study method includes describing the main subject matter and analysing different theories associated with the study. It facilitates data collection from different sources as well. The research was based on the inductive approach which facilitates the researcher to incorporate their own ideas and perceptions in the study for developing suitable conclusions. The inductive approach also helps in establishing relationships between different concepts and analysing the level of dependency existing between them. Analysis and results The following part of the research forms the main discussion of the research based upon the research questions and the research hypothesis. The discussion part is broadly classified into two main parts. The first part includes analysing accounting issues in general associated with international expansion. The second part includes analysing the issues faced by Toyota in its international expansion. Global expansion from accounting perspective Globalization has increased accounting issues for multinationals as separate financial standards are followed in different nations. It becomes difficult for such organizations to maintain same accounting policies in different nations where it operates. In order to minimize such issues, it is necessary that organizations across the globe follow similar accounting standards and policies. This facilitates easy comparison of financial statements and maintenance of integrity in the reports. Multinational organizations have investors from different parts of the world. Hence, it is necessary that accounting records are maintained in a manner that it is easily understood by all stakeholders of the business, spread across the world. Following similar regulations in preparing financial statements, therefore, removes majority of barriers associated with international accounting (Luo & Tung, 2007). Issues relating to the IFRS and US GAAP According to Van, Adhikari and Tondkar (2005) the developments of international business have paved way for the formulation of international financial reporting standards (IFRS). These standards have helped to combine accounting policies and implement similar standard for all international firms. The number of enterprises following the IFRS has increased considerably over the last decade. In general, firms are seen to practice three types of standards while preparing reports, which are mainly IFRS, US GAAP (United States Generally accepted Accounting Principles) and national standards. The IFRS was developed keeping in mind special requirements of international business accounting. The IFRS was first developed in the European Union for stabilizing accounting policies and the economy in general. The concept of IFRS soon was found to be attractive by other nations and they began adopting the same extensively. The IFRS concepts and standards are based upon development of fair presentation of accounts, recognizing entities as going concerns, accrual basis of accounting, Materiality, offsetting, frequency of reporting and comparative information. The IFRS standards, however, have been criticized by many nations as they have not helped in improving inflationary situations. This system of accounting representation has also been neglected by US organizations. The FASB (Financial Accounting Standards Board) believes in converging accounting policies, making them as similar as possible across different nations. The FASB in collaboration with the International Accounting Standards Board (IASB) has been consistently trying to reduce the difference in accounting and reporting systems between the US GAAP and the IFRS. The FASB is also entrusted with the task of improving regulations associated with the IFRS and GAAP so that there is adequate level of compatibility between accounting policies and economic conditions (Van, Adhikari & Tondkar, 2005). Issues relating to consolidation of foreign accounts The consolidation practices of the regulatory authorities include resolving the diversity in accounting related practices. There are different standards existing in terms of estimating the fair value of assets and liabilities. It is essential that firms follow a similar pattern of recording assets and liabilities so that it is easier to compare while acquiring a subsidiary company and consolidating the financial statements. It is essential to identify the correct value of a firm while consolidating the financial statements so that the ultimate expected value that can be realized from the merger or acquisition can be realized. Consolidation issues are primarily associated with lack of accounting integrity between different firms. Firms are seen to follow different accounting policies, which pose as significant issues while preparing consolidated statements. The primary difference arises in the taxation policies followed as well as depreciation rates. Differences are also seen to arise in respect of interest and exchange rates (Zeff, 2003). International planning and control Accounting principles and techniques are highly essential in managing a business organization’s future investment. Organizations are required to invest in different projects on the basis of capital budgeting techniques. While taking capital budgeting decisions, firms might follow different discounting rates. This might diversify the ultimate results obtained. Hence, a project that might be forecasted as non-profitable by one firm might be considered as a profitable venture by another or the stakeholders because of dissimilar accounting or forecasting techniques. Such differences in accounting systems lead to confusions on behalf of stakeholders. It becomes difficult for them to judge the best suited accounting practices. Firms are largely seen to adopt those budgetary systems and techniques through which higher revenue can be achieved. This leads to difference of opinions between stakeholders and the firm’s management. As firms expand on a global scale, it interacts with different types of economies. When an organization enters a new economy, it remains unaware about prevailing economic forces. They are unable to accurately budget future revenues. As a result, it becomes necessary for a business to closely and accurately study the nation’s economic conditions and other aspects, before deciding to invest in projects. Even from the view point of control, it is important for organizations to prepare different types of budgets that help in analyzing total revenues and expenses. Firms might not be include all types of incomes or expenses due to lack of adequate predictive capacity. As a consequence, net revenue is either overstated or understated. Accurate prediction of future revenue becomes difficult when firms expand into a new market. This affects the overall budgeting process and there are difficulties faced in context of control (Riahi-Belkaoui, 2004). Performance evaluation of foreign operations The organizational performance is generally measured through the preparation of financial statements such as, balance sheet and income statements. A multinational organization may have its strategic business units located at different parts of the world. It becomes necessary that all units of an organization follow the same accounting policies and standards. This it makes it easier to consolidate accounts and maintain integrity in overall system of accounting. Another significant issue relating to the measurement of foreign operations arises out of currency valuation. The value of currency is constantly fluctuating and it becomes challenging for foreign multinationals to keep track of the value of businesses across different nations. The net returns are calculated by converting values of net revenue from one currency to another. A rise in the value of dollar in respect to that of pound results in increased net business worth, if analyzed from the US economy perspective. Even so, from the British point of view, the value of business has considerably diminished. This, therefore, leads to the confusion of which currency must be set as a standard for evaluating the performance of business for multinationals. These matters foreground adequate issues for stakeholders and suppliers of capital. Due to currency differential values, the sub-business unit may seem to be doing well in one nation’s economic perspective, but when the net value is converted into a different currency, it may be revealed that actual performance is negative (Luo, Shenkar & Nyaw, 2001). Financial risk management Management of financial risk involves credit and market risks. The risk mainly arises out of difference in interest rates, exchange risks, inflationary risks and liquidity related risks. Financial risk management can be both qualitative and quantitative. In order to mange risks better, it becomes necessary for organizations to accurately study the market conditions. One of the prime reasons behind the economic crisis of 2007 was inadequate prediction of market conditions, which led to development of risks. Liquidity crisis had gripped the European Union, which also contributed towards a debt crisis scenario. Risk may arise if regulatory authorities fail to accurately predict market forces. Hence, it becomes important to regulate aspects such as, interest rates and supply of currency, so that that economic condition can be effectively controlled. According to Meek, Roberts and Gray (1995) in a globalised economic platform, different economies closely interact with each other. As a result, it is seen that economic risk of one nation gets filtered into other economies by way of derivative market operations and capital flow. In order to minimize the risks associated with such transactions, many organizations are seen to adopt hedging tools. Multinationals also have to consider the foreign exchange and transactional exposure while analyzing risk from a global perspective. Global organizations are, therefore, required to suitably distribute their financial resources so that risks can be managed effectively. Multinational organizations are required to manage risks in a manner so that value of shareholders can be enhanced (Meek, Roberts & Gray, 1995). Toyota’s global expansion and reporting issues Toyota’s expansion Toyota’s has largely set up operations in foreign nations instead of producing in Japan and exporting it to other countries. One of the primary reasons behind Toyota’s movement, in terms of manufacturing, from the market of Japan is because of high saturation of Japanese economy. The market of Japan is highly saturated as there are a number of smaller automobile firms having their facilities located in and around the same area. Moreover, there is an immense shortage of skilled labour as the population in Japan is largely aged. Over years, the company has also been facing shortage of raw materials and locations for setting up and expanding their production locations. Considering such factors, the company has strategically decided to expand operations into other nations. Toyota has been seen to establish its production facilities mainly in the Asian countries. Additionally, the firm also has plants located in the US. Setting up of production locations in India, Thailand and China will prove to be economical for the company as the cost of production is low in these nations as compared to Japan. In the Asian production facilities, the company will largely be engaged in the manufacturing of low cost automobiles. This suitably meets market needs of such nations. Toyota’s management team has been steadily trying to reduce costs of operations. So, expanding into the Asian markets will prove to be an effective venture. The Asian market has been looked upon as an important market for growth by many organizations of the west due to availability of abundant resources. Toyota also expects to establish a strong market base in these nations as Asian economic conditions are expected to grow highly in coming years (Amasaka, 2007). According to Martin, Mitchell and Swaminathan (1995) Overall, it can be considered that Toyota’s expansion outside of Japan helps in meeting the objectives of lowering cost, obtaining greater market share and manufacturing of low cost vehicles. Asia has also been a target destination for foreign investors. Thus, Toyota can enhance its productive capacities by acquiring capital from prospective investors. Another significant aspect associated with the development of manufacturing facilities outside of Japan is linked to supply chain management. It becomes easier for organizations to effectively distribute products across nations. However, by way of such internationalization, the company remains exposed to volatility existing in these markets. Automobile sector globally is becoming highly competitive. Hence, it becomes important for organizations operating in this sector to diversify its operations. When a firm successfully operates in the economies of different nations, it is possible to hedge market risks arising from one nation with that of another. This will help to maintain revenue at a stable level (Martin, Mitchell & Swaminathan, 1995). Risks in overseas manufacturing Toyota is primarily considering developing its production bases at Thailand, China, India and the US. In American nations, the company is exposed to the risk of inadequate liquidity. Also, as the value of Japanese Yen is much lower than US dollar, the company will require investing hugely. Due to the recent economic crisis, the capital markets of the western nations are characterized by high level of interests on debts. This could affect operations of the company as obtaining investments could be a challenge. Also, operating in the western nations can increase production costs of the company. So, manufacturing low cost vehicles in the US would not be considered as a successful venture. Toyota is considering manufacturing its expensive range of vehicles in such regions. Such vehicles require high technological facilities and infrastructure that can be developed in the western nations (Gray, 1978). Some of the primary risks and issues that Toyota is likely to face due to globalization of operations are loss of control over the manufacturing process, establishment of strong relations with suppliers, theft or misuse of intellectual property and interest rate fluctuations. When entering into a global market, an organization requires adequate funding. As a result, new stakeholders get generated. The firm is likely to lose ownership and control to the new stakeholders. Toyota is likely to obtain investors from the region where the firm plans to set up its operations. These new investors will, thus, acquire larger control in operations of the company. It shall also be quite a challenge for the organization to establish ties with local suppliers. Toyota has high considerations about quality of the products that it manufactures. As a result, it becomes essential for the company to associate itself with good suppliers. A significant issue for the company in respect of its global operations is losing intellectual property rights. When an organization enters a new economy, it entails its unique technologies and other aspects. Therefore, Toyota is exposed to the risk of its unique technologies being imitated or copied by others. The company is also likely to face the issues relating to fluctuation of exchange rates (Chang & Rhee, 2011). Expansion in North America Toyota can consider expanding its operations into Canada in North America. The flow of FDI into the economy of Canada has been quite high in the recent years. Canada has emerged as a strong economy of North America and also provides suitable opportunities for expansion and growth. The North American economy is marked by high level of manufacturing and investment banking activities. Hence, operating in this economy is suitable for Toyota as it is largely involved in manufacturing. Canada and Mexico are strong manufacturing nations of this region. Canada is a part of trade blocs such as, North American Free Trade Agreement and the Asia pacific Economic Corporation (APEC). Operating in the economy of Canada will provide Toyota with various advantages such as, free flow of investment and goods between the nations of Asia-Pacific and also with the US and Mexico. Toyota can export finished products and import required raw materials from these nations with reduced or no tariff rates. Politically, Canada has a favourable environment, which is suitable for growth and expansion. However, one of the risks associated with operating in the economy of Canada is related to the issue volatility in interest rates. Due to the recent economic crisis, which initiated from the US economy, there was a considerable impact upon the industries of Canada and Mexico. Toyota must, thus, plan and develop hedging mechanisms for removing such risks. If the risks associated with interest rates are not suitably handled, it might lead to inadequate liquidity within the organization. This can impact overall production and industrial activities of the company. Therefore, before entering into the Canadian economy, Toyota must develop adequate risk-mitigation strategies (Chang & Rhee, 2011). Accounting issues for Toyota According to Gray (1979) Toyota emphasizes upon lean system of accounting across all its global units of operation. Lean system of accounting facilitates providing correct and timely information to all stakeholders of business, concentrates upon cost reduction strategies, simpler to understand and implement and motivates the organization to remain cost efficient in the long run. However, as its operation is spread across different nations of the world, it becomes difficult for the company to remain integrated towards one particular accounting system or standards. Toyota prepares its financial reports based upon the principles implemented by the US GAAP (United States Generally Accepted Accounting Principles). One of the prime issues faced by most multinational organizations, such as, Toyota, is related to reporting of its financial performance. In this international context, it is difficult for organizations to account for uncertainties. During the expansion stage, international organizations face the issue of increased liabilities. This is considered as unfavourable by most stakeholders. The primary issues faced by Toyota in respect of expansion globally are related to hedging off of risks associated with exchange and interest rate fluctuations (Gray, 1978). US GAAP pros and cons US GAAP is regarded as highly complicated with too many complex rules and regulations. For such reasons, many organizations consider adopting IFRS system of accounting owing to its simplicity. So, Toyota is required to maintain detailed and complex accounting system that increases the cost of operations. Majority of the companies across the globe are adopting IFRS accounting principles. This makes it hard for Toyota to compare its activities with other manufacturing companies. Using the GAAP principles in the accounting process is considered to be more expensive as more time and larger records are required to be maintained. On the other hand, US GAAP helps in reporting correct organizational revenues. IFRS principles tend to inflate revenues, which are considered to be misleading by most investors. Since US GAAP principles involve detailed preparation of accounts, it facilitates audit procedures. According to Gray (1979), the GAAP rules and regulations have been prevailing for a longer duration as compared to IFRS. The details provided by GAAP based financial statements leave little for room for developing individual judgments. This makes it easier to adopt and develop a greater sense of accountability. Even though GAAP provides significant positive attributes, its standards are not consistent with the changing economy. Many organizations are, therefore, switching on to the IFRS principles. For reporting purposes, it is considered that IFRS principles make organizations look better, facilitating foreign investment and developing a common ground for financial comparison (Gray, 1978). Conclusion Alongside of globalization, economic conditions across the globe change. As the characteristics of business change, the method of financial record keeping and reporting also require to be altered significantly. Policy makers should consider these aspects so that there is transparency and integrity in financial information. It is essential for the regulatory authorities to frequently make changes in the accounting policies so that the match the modern business needs of record keeping and information transfer to the interest groups associated with the business. A proper accounting policy is necessary for managing risks associated with international expansion as well. International expansion paves way for the flow of funds globally. As a result the economies of different nations are seen to interact. It is therefore essential to have sound accounting policies so that assessment of risk and performance evaluation of different businesses and securities are done with high accuracy. References Amasaka, K. (2007). Applying< i> New JIT—Toyotas global production strategy: Epoch-making innovation of the work environment. Robotics and computer-integrated manufacturing, 23(3), 285-293. Chang, S. J. & Rhee, J. H. (2011). Rapid FDI expansion and firm performance. Journal of International Business Studies. 42(1), 979–994. Gray, S. J. (1978). Managerial Forecasts and European Multinational Company Reporting. Journal of International Business Studies. 9(2), 21-32. Luo, Y., & Tung, R. L. (2007). International expansion of emerging market enterprises: A springboard perspective. Journal of international business studies, 38(4), 481-498. Luo, Y., Shenkar, O. & Nyaw, M. K. (2001). 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