Capital Budgeting Practices in Developed and Emerging Countries: Divergent Or Convergent?

Abstract

This research adds to the existing literature by using a mixed-methods approach to theoretically and empirically investigate how capital budgeting techniques and applications diverge between developed and emerging countries. A sample of 150 firms in each of the case-study-exemplar countries of Australia and Sri Lanka yielded effective-response rates of 31 and 49 percent, respectively. This study shows that, Australian firms tend to rely heavily on sophisticated capital budgeting practices and that while payback-period techniques continue to be used, that usage is declining. Scenario analysis and sensitivity analysis are, also, widely utilised by Australian companies. In contrast, Sri Lankan firms tend to use payback period as the primary method for evaluating capital investment and scenario analysis is often applied. The choice of whether to use more sophisticated techniques vs. simpler alternatives tends to vary with a firm’s attributes (size, available human capital, etc.) as well as the economic and financial market development around the firm. These findings suggest that a firm’s choice of capital budgeting techniques tends to be more related to the capabilities inherent in the firm than it is to the culture in which the firm is embeded.