Exchange rate fluctuations and management control in UK-based MNCs: an examination of the theory and practice

This paper explores how UK MNCs assess their foreign subsidiary operating managers' performance in parent company currency terms using operating budgets. It shows how managers' performance evlauation systems may become dysfunctional if the management of currency risk is centralized at the parent company headquarters and the impact of these centralized currency risk decisions on operating performance is subsequently ignored when foreign operating managers are evaluated. The results of the study indicate that the practices of UK MNCs in general have not improved since the early 1980s and there seems to remain a significant gap between theory and practice in this area. However, there is evidence to suggest that UK MNCs, as their US counterparts, are becoming more interested in identifying the impact of exchange rate changes on their foreign subsidiary operations.