A major problem in the evaluation of the performance of foreign affiliates is the tendency by headquarters managers to judge subsidiary managers as if all of the evaluation data were comparable across countries. Unfortunately, many variables can make the evaluation information from one country look very different from that of another country due to circumstances beyond the control of a subsidiary manager. For example, one country may experience considerable inflation, significant fluctuations in the price of raw materials, political uprisings, or governmental actions. These factors are beyond the manager's control and are likely to have a downward effect on profitability. And yet, that manager may in fact have maximized the opportunity for long-term stability and profitability compared with a manager of another subsidiary who was not faced with such adverse conditions. Other variables influencing profitability patterns include transfer pricing, Currency devaluation, exchange-rate fluctuations, taxes, and expectations of contributions to local economies.
Clearly, one way to ensure more meaningful performance measures is to adjust the financial statements to reflect the uncontrollable variables peculiar to each country where a subsidiary is located. This provides a basis for the true evaluation of the comparative return on investment (ROl), which is an overall control measure. Another way to provide meaningful, long-term performance standards is to take into account other nonfinancial measures These measures include market share, productivity sales, relations with the host-country government, public image, employee morale, union relations, and community involvement.
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