Research On The Common Cost Allocation Of Multinational Firms Based On Perspectives Of Profit And Efficiency

With the development of the economic globalization, a multitude of multinational firms has been bringing a lot of transfer pricing problems. The common cost allocation problem studied in this study belongs to the scope of the transfer pricing. One type of the common cost, which can produce benefits enjoyed by all affiliated firms with an intangible benefited process, will be often occurred in the daily operations of multinational firms. The intangible benefited process leads to two different problems. That is, for each affiliated firm, how to investigate his enjoyed benefits and how to allocate the common cost to him scientifically. Besides, the common cost allocation plan is derectly related to the interests of multinational firms, subsidiaries and countries located by subsidiaries. Therefore, the common cost allocation of multinational firms has been becoming a widespread, wide-influencing, quite difficult and high-value international issue.Because the effect of the obtained benefit can be reflected in multi-operational indicators indirectly, to study and analysis the common cost allocation problem perfectly, this thesis considers selecting multidimensional indicators, and researches multinational firms’ common cost allocation problems based on the the perspective of the profit and the efficiency respectively.This thesis includes six chapters, and the main content of each chapter is summarized as follows:The first chapter firstly overviews the background of multinational firms’ common cost allocation problems, the definition of the common cost studied in this paper and some transfer pricing contents related to our research topic (including cost contribution arrangement, arm’s length principle and the advance pricing agreement of the common cost allocation problem). Then it briefly introduces the mainstream methods of the transfer pricing in practice and data envelopment analysis (DEA). Finally, this chapter reviews the research status from the transfer pricing area and DEA area with pointing out their shortcomings, and states the theoretical and practical significance of our research in detail.From the perspective of the profit, the second chapter firstly deduces the mathematical expression from the arm’s length principle defined in cost allocation problems, and proves the mathematical expression is equivalent to the DEA efficient cost allocation set. Then based on the arm’s length principle, this chapter proposes common cost allocation methods from the standpoints of the multinational firm group’s profit maximization, the subsidiaries’ profit maximization and the countries’ revenue maximization respectively. It demonstrates that the methods based on the standpoints of the subsidiaries’ profit maximization and the countries’ revenue maximization are uniform, and proposes a cost allocation algorithm for the two standpoints based on the non-cooperative game theory and further proves many useful advatanges existed in this algorithm. It is followed by describing the application scopes and relationships of the allocation methods based on different standpoints. Finally, the availability of our proposed methods is illustrated by a numerical example and a real example.Utilizing the sensitivity analysis method, the third chapter studies the profit effect of multinational firms and the relevant countries or regions resulted by the allocation methods in the second chapter when changing the investment method or tax rates. They are illustrated by a numerical example and a real example. The relevant research findings can provide some decision supports for decision makers.From the perspective of the efficiency, based on the assumption of the DEA CRS, the fourth chapter treats the common cost as an independent input and defines the satisfaction degree of each subsidiary from the the mathematical expression of the arm’s length principle, and then proposes cost allocation model and its corresponding algorithm based on the principle of the efficiency maximization and the target of the satisfaction degree’s Max-min fairness. The optimal allocation plan is unique and satisfies the arm’s length principle. Finally, the rationality of the proposed method is illustrated by a real example.Based on the assumption of the DEA VRS, the fifth chapter treats the common cost as a dependent input and proposes a common cost allocation method. An algorithm is proposed to deal with the infeasibility problem of the BCC super efficiency model when an allocated cost exists. Based on the algorithm, the monotonous non-increasing function relationship between the BCC efficiencies of subsidiaries and the allocated common costs can be obatined. Furthermore, the efficiency elasticity can be defined based on the function relationship, and the subsidiaries can be divided into the perfectly inelastic set and the elastic set. The allocation method of the two set is proposed respectively and the optimal allocation plan is unique. Finally, the feasibility of our method is illustrated by a numerical example and a real example.The last chapter summarizes the main work and innovation points of our thesis, and points out the shortcomings and provides some useful suggestions for future research.The major innovations of this thesis can be briefly summarized as follows:(1) The mathematical expression of the arm’s length principle in cost allocation is deduced from the viewpoint of multidimensional indicators. Besides, this paper proves the mathematical expression is equivalent to the DEA efficient cost allocation set;(2) From the standpoint of the multinational firm group’s profit maximization, a common cost allocation method is proposed based on the arm’s length principle. Besides, this paper proves that the methods based on the standpoints of the subsidiaries’ profit maximization and the countries’ revenue maximization are uniform;(3) Considering the competitive cooperation relationship among subsidiaries (or the countries where subsidiaries are located in), this paper utilizes non-cooperative game theory and proposes a common cost allocation algorithm from the standpoint of the subsidiaries’ profit maximization (or the countries’ revenue maximization) based on the the arm’s length principle. Many advantages of the algorithm have been proved;(4) From the standpoint of the efficiency, when the allocated common cost is an independent input, a common cost model under the DEA CRS assumption and its corresponding algorithm, based on the principle of the efficiency maximization and the target of the satisfaction degree’s Max-min fairness, is proposed;(5) Based on the DEA VRS assumption, when the dependent common cost exists, this paper proposes an algorithm to deal with the infeasibility problem of the BCC super efficiency model and investigates the function relationship between the BCC efficiencies of subsidiaries and the allocated common costs. Based on the relationship, the definition of the efficiency elasticity is provided and a common cost allocation method is proposed.