3.2: Impacts of Globalisation

Question 1

What is the definition of Globalisation?

(don’t need to memorise - just for context)

Answer 1

Globalisation is the growing interdependency among nations.

Question 2

What are the 5 impacts of Globalisation?

Answer 2

• employment levels in developing and developed countries
• global spread of skills and technology
• international cooperation
• domestic market
• tax minimisation (tax havens & transfer pricing)

Question 3

Explain the impact of globalisation on the employment levels in developing and developed countries

Answer 3

( cause )
- globalisation often leads to increased foreign direct investment in developing countries, creating jobs, particularly in manufacutring, servce and techology sectors, which can boost local economies and reduce poverty levels
- there is a risk of labour exploitation, where multinational companies may take advantage of lower wage expectations and weaker labour regulations in developing countries, leading to poor working conditions and limited job security
( effect )

Question 4

Explain the impact of globalisation on the global spread of skills and technology

Answer 4

( cause ) - When businesses outsource overseas, work with foreign partners and/or release new products globally, the skills and technology utilised are exchanged.
( effect ) - By moving manufacturing processes abroad, the local labour force becomes skilled through ongoing support and training provided by business. Developed countries that are particularly strong in certain industries can export their resources to not only generate profit but benefit other nations and strengthen both economic and diplomatic ties.

Question 5

Explain the impact of globalisation on international cooperation

Answer 5

( cause ) - As a result of globalisation, different countries partake in a range of activities leading to international cooperation. Governments can develop free trade agreements to positively improve international cooperation, leading to further globalisation.
( effect ) - With improved international cooperation, it makes the opportunities to trade in and with other countries
more attractive and easier for businesses.

Question 6

Explain the impact of globalisation on domestic markets

Answer 6

( cause ) - The activity of international businesses and globalisation opportunities presented to Australian businesses can be both detrimental and beneficial for domestic markets. With reduced trade barriers imposed by globalisation initiatives, it becomes easier for foreign businesses to be introduced in Australia to compete against domestic businesses.
( effect ) - Foreign businesses sometimes may compete at a loss in order to gain market share due to their other multinational locations being able to mitigate the losses. This in return can diminish domestic businesses’ market share.

Question 7

Explain the impact of globalisation on tax minimisation

Answer 7

( cause ) - Tax minimisation is the right of businesses to reduce their tax obligations through legal means. A business may globalise their operations to a certain country for the sole purpose of tax minimisation; through either a tax haven and/or transfer pricing.
( effect ) - This allows for the business to manipulate its profits by paying the consequent reduced amount of tax.

Question 8

What are two examples of Tax Minimisation?

Answer 8

• tax havens
• transfer pricing

Question 9

Explain how tax havens are used in a global market

Answer 9

• countries with very low to zero tax rates and secretive financials systems that they do not share with other countries governments
• globalisation allows multinational companies to shift profits to tax havens with low or no tax rates, reducing their overall tax burden but potentially leading to reduced tax revenues for the countries where they generate income
• tax havens have secrecy laws that block information on their deposits from foreign tax authorities

Question 10

Explain how transfer pricing is used in a global market

Answer 10

• transfer pricing is an accounting practice that represents the price that one division in a business charges another division for goods and services provided
• transfer pricing allows for the establishment of prices for the goods and services exchanged between subsidiaries, that are part of the same larger enterprise
• can lead to tax savings for businesses, though tax authorities may contest their claims
• e.g. Australian business sets up a subsidiary company in a tax haven which sells their product to the subsidiary based in tax haven at a low price/low revenue to minimise tax bill. The subsidiary in tax haven sells to subsidiary at high cost takes advantage of low to no tax therefore profit is tax free, sells to subsidiary (non tax haven country) at high cost therefore low profit, minimise tax bill