Accounting for Intangible Assets in International Manufacturing

Introduction

The international business world has worked to break down barriers that formerly existed, allowing businesses to more easily expand their operations into new markets. Much of this trend has been fueled by globalization, which has allowed for the increasing connectedness of markets and resources through technological developments in many areas—including, but not limited to, information and communications technology, advances in shipping, and a political environment largely accepting of deregulation. However, as companies have acted to expand into new opportunities in foreign markets, many have found that there is a plethora of different challenges presented by cultural and social factors, among others, that are present in those markets.

The main functions of business include operations, marketing, and accounting, and there are many aspects of these functions that must be adjusted to effectively carry out international expansions. This analysis focuses on the challenges that are present in accounting for intangible assets in international networks spanning countries such as the United States, Mexico, France, and Turkey, and considers what factors businesses must focus on to operate successfully in these markets.

Understanding Intangible Assets

In order to explore how intangible assets affect international business operations, it is first necessary to expand upon the concept of intangible assets and develop a working definition. An intangible asset is something that is not a physical asset. For example, a factory and all the equipment needed to produce finished goods are physical—you can actually touch them—which makes accounting for them relatively straightforward even in international locales. By contrast, an intangible asset is more abstract in nature and does not have any physical form that can be easily valued. Examples include items such as human capital, information capital, and organizational capital.

Although these intangible assets may be more abstract in nature, they can in some cases represent an organization's most valuable assets in relation to its strategy. For example, a company with a strong brand image may rely on that image to attract consumers and give its product or service a selection advantage in the market, which in turn can represent the company's strategic advantage. Similar analogies can also be drawn to a company's human capital—the quality of its workforce—as well as its ability to add value through some transformative process in the organization, or organizational capital. It is often the case that such factors can represent the success or failure of any organization. For example, while a number of entrepreneurs might be able to acquire the physical capital needed to launch a new product or service, they might not have the ability to promote their brand in the market or the human or process expertise to design a sufficiently valuable product relative to the competition. Therefore, considering the influence of intangible assets in any strategic decision often represents the difference between success and failure.

Globalization and Its Cultural Dimensions

One of the trends that has fueled a great deal of change throughout the world is globalization. Globalization is a complex phenomenon that is often misunderstood, but it roughly deals with the movement toward more integrated economic and political systems. Much of the globalization trend has been driven by technological innovations that allow for greater communication, information sharing, travel, and other exchanges that have allowed people to share different goods and ideas across the globe. This trend has changed the lives of billions of people—in most cases for the better, but in some for the worse. Understanding the impact of globalization on regional and national cultures requires an understanding of both the process and the meaning of globalization.

During the initial stages of development of this trend, most of the emphasis was on goods rather than services. However, given the fact that people are now more free to travel to different markets, there are also many services that people can seek to purchase from foreign markets. Examples of this are prevalent in the information technology service sector as well as in emerging sectors such as healthcare tourism. Globalization can therefore be defined roughly as the worldwide exchange of goods and services irrespective of national boundaries, in which consumers and businesses are exposed to a wide array of new products, services, and markets. Furthermore, in the modern international economy, many complex manufactured products have different parts that are assembled in different parts of the world before reaching their final assembly location (Jensen & Barfield, 2012).

Despite improving access to these new opportunities, globalization has also created new sets of challenges arising from the different cultures that exist in different regions. The notion of culture refers to a set of symbols and artifacts created by a society and handed down from generation to generation as determinants and regulators of human behavior; thus, different goods and services can be viewed entirely differently in the context of different cultures (McCrackin, 1986). Culture refers to widely shared norms and patterns of behavior of different populations, and international ventures will in some cases have to tailor their entire operational procedures to meet the challenges within these individual cultures to be most effective. Furthermore, this often has immense consequences for intangible assets, given that they are largely valued by subjective perceptions.

International Implications for Intangible Assets

Measuring the value of intangible assets is one of the most challenging aspects of accounting, and this challenge can be confounded by culture. Employees' skills, IT systems, and organizational cultures are worth far more to many companies than their tangible assets. Unlike financial and physical assets, intangible assets are hard for competitors to imitate, which makes them a powerful source of sustainable competitive advantage (Kaplan & Norton, 2004). Kaplan and Norton (2004) defined the intangible aspects of assets across three primary categories when they designed their popular balanced scorecard model:

Human Capital: the skills, talent, and knowledge that a company's employees possess.

Information Capital: the company's databases, information systems, networks, and technology infrastructure.

Organization Capital: the company's culture, its leadership, how aligned its people are with its strategic goals, and employees' ability to share knowledge.

One study illustrates the importance of human capital in strategic planning and the complexity present in such planning decisions in foreign subsidiaries. The analysis was based on 5,604 subsidiary observations of 423 multinational enterprises (MNEs) from 1990 to 2012. It confirms the positive synergistic effect of aligning subsidiary strategy and human capital, and shows the moderating effects of foreign exchange rate change and MNE international experience. It also highlights the importance of global staffing alignment and the roles of external economic environments and internal organizational capabilities as boundary conditions (Chung, Park, Lee, & Kim, 2015).

Although such studies clearly illustrate the complexities in foreign strategic decisions, they also indicate that research has been able to identify many of the salient factors inherent in managing such relationships. Furthermore, given that organizational capital also has a human factor influenced by culture, it too can be complex in nature. Many have claimed that organizational capital is essential to competitive advantage, and enterprises with more and higher-quality organizational capital are likely to be more profitable and to command higher market shares, yet businesses find it an intangible that is difficult to measure—and even more so on an international scale (Lev, Radhakrishnan, & Evans, 2016).

Of the three forms of intangible assets included in the balanced scorecard approach, information capital is arguably the most straightforward, since it does not rely on human factors to the same extent that human and organizational capital do. There are many vendors that offer enterprise resource planning (ERP) systems that can provide real-time solutions to managing information globally within organizations. However, there are also many issues present in training employees to use these systems and in making effective use of the information they contain. One factor affecting a firm's competitiveness has been identified as how knowledge transfers across locations and international borders within an organization (Liew, 2007). Another study has identified that the absorptive capacity of knowledge transfer is correlated with employees' abilities and willingness to learn (Minbaeva et al., 2003). International enterprises therefore have many resources available to help them hire and train local employees in foreign locations.

Conclusion

The analysis presented here highlights the substantial complexity that transnational manufacturers face when accounting for and managing intangible assets across diverse national and cultural contexts. From the human capital considerations that vary between hierarchical and individualistic cultures, to the organizational and informational challenges inherent in cross-border knowledge transfer, successful international operations depend on a nuanced understanding of both the strategic value of intangible assets and the cultural environments in which they must be developed and sustained.

Works Cited

Cagliano, A., Marco, A., & Rafele, C. (2013). The impact of near sourcing on global dynamic supply chains: A case study. Dynamics in Logistics, 489–498.

Chung, C., Park, H., Lee, J., & Kim, K. (2015). Human capital in multinational enterprises: Does strategic alignment matter? Journal of International Business Studies, 806–829.

Hofstede Center. (n.d.). France. Retrieved from https://geert-hofstede.com/france.html

Jensen, M., & Barfield, C. (2012). Global value chains and the continuing case for free trade. American Enterprise Institute, 1(1), 1–15.

Kaplan, R., & Norton, D. (2004, February 1). Measuring the strategic readiness of intangible assets. Harvard Business Review.

Lev, B., Radhakrishnan, S., & Evans, P. (2016, February 24). Organizational capital: A CEO's guide to measuring and managing enterprise intangibles. The Center for Global Enterprise.

Liew, A. (2007, June 2). Understanding data, information, knowledge and their inter-relationships. Journal of Knowledge Management Practice.

McCrackin, G. (1986). Culture and consumption: A theoretical account of the structure and movement of the cultural meaning of consumer goods. Journal of Consumer Research, 13(1), 71–86.

Minbaeva, D., Pedersen, T., Bjorkman, I., Fey, C., & Park, H. (2003). MNC knowledge transfer, subsidiary absorptive capacity, and HRM. Journal of International Business Studies, 34(6), 581–599.

The Economist. (2012, December 22). Boom on the Bosphorus. The Economist.

Weinreb, E. (2012, March 29). France vs. U.S.: Which work culture is more sustainable? Green Biz.