JIBS Paper #553 THE INTERNATIONAL CONTROL CONUNDRUM WITH EXCHANGE RISK: AN EVA FRAMEWORK

Principal-agent problems between corporate parent and subsidiary operations are frequently exacerbated in international settings by exchange rate fluctuations between the foreign subsidiary’s local currency and the multinational corporation’s (“MNC”) reference currency. This article develops a conceptual solution to resolve this international control conundrum using an Economic Value Added (“EVA”) contingent framework. The framework accounts for nominal exchange rate fluctuations and differential inflation rates between the countries of parent and subsidiaries, and for currency-pass-through policies of rival firms in the foreign subsidiary’s local market. The resulting control framework suggests how MNC parents may assess foreign subsidiary performance in emerging market countries where unexpected, exchange-related shocks might otherwise skew such assessment.