TRANSFER PRICING AND PERFORMANCE EVALUATIONS IN MULTINATIONAL CORPORATIONS: A SURVEY STUDY

There has been much discussion in the literature concerning the potential conflict between using transfer pricing as a tool for increasing the overall welfare of the multinational corporation (for example, by concentrating reported profits in subsidiaries operating in relatively low tax countries), and maintaining conditions favorable to an equitable and efficient performance evaluation system for subsidiary units and managers.;According to the theory of corporate policy formulation underlying this empirical research, the corporation's policy in each of the three policy areas (subsidiary autonomy, performance evaluation, and transfer pricing) is determined by the objective characteristics of the firm and the perceived environmental variability. These causal relationships were assessed by means of partial correlation. Inter-relationships among the three areas of policy are viewed as associational rather than causational and thus were assessed by means of simple correlation.;Statistical analysis of the data base uncovered numerous statistically significant relationships. For example, the results in the area of transfer pricing and performance evaluation suggest that companies which tend to depart from market-imitative transfer pricing will at the same time place somewhat less emphasis on profit-oriented measures in the performance evaluation of subsidiary managers.;The purpose of this study has been to determine empirical relationships between transfer pricing policy and performance evaluation policy in multinational corporations. In addition, several other issues in the determination of and inter-relationships among various dimensions of corporate policy have been addressed by the research. The data base was obtained by means of a questionnaire survey of United States multinational corporations carried out during the winter of 1980-81.