Internal Control And Corporate Internationalization Level

With the rapid development of global economic integration and the continuous acceleration of China’s opening-up process,more and more enterprises begin to actively participate in international business activities in order to better play their competitive advantages and allocate resources more rationally.The forms of their participation are increasing and the scales are expanding day by day.However,some typical cases in recent years show that Chinese enterprises lack international experience and awareness of international business risks.For example,Didi shut down operations in South Africa,Tianqi Lithium has been struggling to repay loans after acquiring stake in Chile’s SQM for $4.1 billion.In addition,the international environment has become increasingly complex,and the international operations of enterprises is facing greater uncertainty and more risks.Chinese firms urgently need to improve the internal control system to effectively prevent,identify,and deal with the various risks in the international operation.Therefore,the Communist party and the government attach great importance to the internationalization development of Chinese enterprises.On December 26,2018,seven Chinese ministries and commissions,including National Development and Reform Commission,Ministry of Foreign Affairs,Minister of Commerce,People’s Bank of China,State-owned Assets Supervision and Administration Commission,Administration of Foreign Exchange,and All-China Federation of Industry and Commerce,jointly issued the Guidelines on Compliance Management of Enterprises’ Overseas Operations.On July 21,2020,Chinese President Xi Jinping pointed out at the entrepreneurs’ Forum that entrepreneurs should "grasp the ability of international rules,improve the ability to explore the international market,improve the ability to prevent international market risks,drive enterprises to achieve better development in a higher level of opening up to the outside world,and promote the dual-cycle development pattern relying on both domestic and international economic cycles".On March 5,2022,Premier Li Keqiang also stressed the need to "carry out outbound investment cooperation in an orderly manner and effectively prevent overseas risks" at the fifth Session of the 13th National People’s Congress.As a comprehensive management and control system of enterprises,internal control has been proved by a large amount of empirical evidence to be able to improve the quality of accounting information(Cook et al.,2015;Wu&Guo,2020),improve corporate governance(Chen et al.,2020c;Chi et al.,2021),reduce financing costs(Gallimberti,2021;Gu&Xie,2018),and improve operational efficiency(Chen et al.,2020a;Wang,2020),and mainly focus on domestic enterprises and the domestic market,paying little attention to the impact of internal control on enterprise internationalization.Based on this,this paper takes China’s listed firms as a basic sample to explore the impact of internal control on enterprise internationalization.According to theoretical analysis,we propose that internal control is conducive to international operation and international investment,and can effectively prevent and control international risk,which further increases international capital.Particularly,based on the quality of export products,cross-border M&A performance,exchange rate risk management and QFII ownership,we explored the impact of internal control on the internationalization level of enterprises from the aspects of international operation,international investment,international risk and international capital.The empirical results show that:first,internal control is positively correlated with the quality of a firm’s export products,indicating that internal control contributes to the improvement of the international operations;further analysis of the five elements of internal control shows that:risk assessment and internal monitoring play a significant role in improving export quality;heterogeneity test shows that internal control has a more significant effect on firms with poorer external institutional environment and non-state-owned enterprises,and has a more significant effect on firms exporting to non-neighboring countries;the mechanism test shows that high quality internal control can improve the quality of export products by improving the quality of accounting information.Second,internal control is positively correlated with cross-border M&A performance,suggesting that the quality of internal control plays an important role in international investment.After decomposing the five elements of internal control,we find that risk assessment and internal monitoring play an important role in cross-border M&As.In addition,internal control mainly improves cross-border M&A performance through selecting targets located in neighboring areas with similar cultures.From the perspective of country-level characteristics,geographical distance,cultural distance,and institutional distance weaken the impact of internal control on cross-border M&A performance.From the perspective of firmlevel characteristics,the influence of internal control on cross-border M&A is more significant in state-owned firms and firms lacking cross-border M&A experience.From the perspective of deal-level characteristics,the larger the deal scale,the greater the impact of internal control on cross-border M&A.Third,internal control is negatively correlated with foreign exchange risk,showing that the quality of internal control plays a positive role in managing international risks.Further analysis of internal control components shows that control environment,risk assessment,control activities and internal monitoring play a significant role in suppressing exchange rate risk.In addition,internal control reduces the exchange rate risk of enterprises through increasing financial hedging activities and operational hedging activities,including the use of derivative financial instruments,increasing the diversity of foreign currency,increasing the diversity of foreign currency debt,increasing the distribution of overseas subsidiaries,and reducing the concentration of overseas subsidiaries.Besides,the effect of internal control on exchange rate risk management is more significant in the period of high exchange rate volatility.Finally,internal control is positively correlated with QFII shareholding ratio,showing that internal control plays an important role in stock investment behavior of foreign institutional investors.After further decomposition of the five elements of internal control,it is found that control activities and information and communication have the most significant impact on stock investment preferences of QFII.In addition,internal control mainly obtains more QFII shares through improving information quality,reducing enterprise risk and improving business performance.Meanwhile,the influence of internal control on QFII shareholding is more significant in enterprises with lower ownership concentration and marketization degree.Besides,QFII plays a synergistic role with internal control in promoting corporate governance.Finally,the influence of internal control on QFII shareholding preference is different from that of other institutional investors.In conclusion,the results show that internal control plays an important role in QFII shareholding selection,cross-border M&As,and exchange rate risk management.Therefore,internal control is conducive to firms’ internationalization.There are several innovation and contribution of this paper:first,under the trend in today’s global economic integration,enterprise survival and development are directly or indirectly influenced by the international environment and international risk,and existing research on the economic consequences of internal control mainly focus on the domestic market,including the quality of accounting information,audit behavior,corporate governance,cost of capital,operational and management activities,Little attention has been paid to the role of internal control in an enterprise’s international operations.This paper analyzes the important role of internal control in the international operation of enterprises through empirical study.Second,this study expands the research of enterprise internationalization in the field of financial accounting.Second,this paper expands the research of enterprise internationalization in the field of financial accounting.The existing research on the internationalization of enterprises is very limited with the combination of accounting,and there is a lack of discussion on how to reduce the risk of the internationalization of enterprises through the design of the underlying system to better achieve the strategic goals of internationalization.In this paper,following the COSO Enterprise Risk Management-Integrated Framework and the Chinese Enterprise internal control Standards,and based on the perspective of investment preferences of foreign institutional investors,cross-border M&As,and exchange rate risk management,this paper analyzes the role of internal control in enterprise internationalization strategy from enterprise internationalization management,international investment,and international risks.This paper provides a new way to explore how to achieve the strategic goal of enterprise internationalization.Third,it has certain enlightenment significance to the construction of internal control system of listed companies,the international operation and management of enterprises,and the policy-making of the government.Regulatory authorities should issue internal control guidelines on overseas operation and development of enterprises to help enterprises improve their international risk control ability in international operations,improve the level of internationalization,and thereby promoting high-quality overseas development of Chinese enterprises.Meanwhile,listed companies should strengthen their own internal control construction to effectively prevent and deal with international risks,which differs from domestic business risks,improve the quality of decision-making,so as to achieve long-term development of enterprises.