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Abstract

We examine how national culture impacts organisational selection of capital budgeting systems to develop our understanding of what influence a holistic formulation of national culture has on capital budgeting systems. Such an understanding is important as it would not only provide a clearer link between national culture and capital budgeting systems and advance extant literature but would also help multinational firms that have business relationships with Indonesian firms in suitably designing strategies. We conducted semi-structured interviews of selected finance managers of listed firms in Indonesia and Australia. Consistent with the contingency theory, we found that economic, political, legal and social uncertainty impact on the use of capital budgeting systems. The levels of uncertainty were higher in Indonesia than Australia and need to be reckoned in the selection of capital budgeting systems used by firms. We also found that firms are influenced by project size and complexity, when selecting capital budgeting systems.

JEL Classification: M40

Keywords: Capital budgeting systems, National culture, Indonesia, Australia.

1.INTRODUCTION

We explore whether national culture (NC) impacts organisational selection of capital budgeting systems (CBS) in the context of listed firms in Indonesia and Australia. Our central research question is: what are the perceptions of managers on the various CBS used to make project investment decisions in these two countries?

NC is the set of beliefs, customs, values and behaviours that exist within a sovereign country. CBS are formal techniques that are used throughout the entirety of decision-making steps in evaluating project investments (Farragher et al. 2001). These may be classified as either naive (e.g. payback period) or sophisticated (e.g. real options). They are instrumental in evaluating project investments. Alkaraan & Northcott (2013) note that project investments have an extensive impact on profitability, but many benefits are difficult to quantify and comprise high levels of uncertainty. Consequently, CBS in the context of project investment decisions is important, as such decisions are strategically significant (Verbeeten 2006), consume substantial resources and are difficult to reverse (Chittenden & Derregia 2015).

There are four categories of CBS - capital budgeting techniques (CBT) used to evaluate project investments (Haka 1987); risk management techniques (RMT) which supplement CBT by assessing uncertainty associated with project investments (Verbeeten 2006); capital budgeting procedures (CBP) which provide formal processes for project investments...

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