global issues

Question 1

what is transfer pricing

Answer 1

when produce is moved from one department to another to pay less tax.

Question 2

advantages of transfer pricing (5)

Answer 2

Tax liabilities can be reduced by using transfer pricing to shift earnings form a high tax country to a low tax one. reducing costs + retaining more profits

Import duties can be reduced where the tariff to be paid is calculated as a percentage of the value of the goods

Where a reduction in the exchange rate of that currency is expected in a country, transfer pricing can be used to reduce exposure to foreign exchange risk.

Can allocate resources effectively increasing efficiency and reducing costs

Competitive edge

Question 3

Disadvantages of transfer pricing (3)

Answer 3

Governments limit companies’ freedom to manipulate transfer pricing as it decreases those countries legitimate income

Tax authority scrutiny and disputes = time waste and costly potential fine

Reputation risk and damaged brand image for avoiding tax = removed trust from stakeholders

Question 4

Reasons for the growth of multinationals (8)

Answer 4

To gain global market dominance

increase market share

Utilise cheap labour and materials = reduction in production costs = lower pricing for consumers or increased profit margin

Take advantage of economies of scale e.g. bulk buy = lower costs. This can be passed to consumers in the form of lower pricing, creating a competitive edge

Improve competitiveness

Acquire expertise

Avoid monopoly legislation in home country

Question 5

things that help companies grow (8)

Answer 5

Cheap transportation and air travel

Decline in barriers to entry

Internet growth

Global media has increased demand for certain goods

Changes in demographics – increased consumer in developing and emerging economies due to improved standards

Changes in consumer tases – due to global promotions there is increase in demand

Emerging marketed in developing countries = potential market share increase and take advantage of incentives offered by host country government

Transfer pricing = setting up where taxes are lower can improve overall profitability/return for share holders

Question 6

Advantages of creating new purpose built production facilities (4)

Answer 6

Favourable location can be sought to suit the needs of the multinational

Facilities are purpose built to match the current production system of the multinational

Growth can be controlled and managed more easily = done at a pace which suits the company

Employing own staff can help maintain corporate culture e.g. workplace procedures.

Question 7

disadvantages of creating new purpose built production facilities (4)

Answer 7

Time, effort and finance is required to build premises and hire/train staff = delayed production

New infrastructure may need to be built e.g. access roads = time and costly

May need to negotiate with local authorities in host country = may not be able to operate as intended. Time needed to solve disputes

No guarantee that the multinational can replicate their business model effectively.

Question 8

Advantages of buying an existing company abroad (4)

Answer 8

Knowledge and expertise of the local market conditions are available as well as immediate access to the company’s customer base

Access to skilled staff who know the local language and culture = helps avoid cultural barriers

Can be easier to enter new markets where they have little experience in

Production can start faster than setting up a business from scratch

Question 9

disadvantages of buying an existing company abroad (3)

Answer 9

Multinational may have to pay more than it would like to obtain an organisation that has all facilities it requires

Can take time to find a company with all facilities required

Procedures may need to be changed to fit with the multinationals corporate culture = time, finance and effort

Question 10

what are the 3 methods of growth

Answer 10

Creating new purpose-built production facilities abroad

Buying an existing company abroad

Joint venture

Question 11

advantages of Joint venture (4)

Answer 11

they may not have had recourses to do it alone

Partners can benefit from each other’s expertise and recourses = greater chance of project succeeding

Less to need to source external finance e.g. loans which need to be paid back with interest. Or selling shares which dilutes ownership.

Reduced risk

Question 12

disadvantages of Joint venture (4)

Answer 12

Time and research involved in finding a suitable partner to help achieve objectives

Risk of culture clashes between organisation e.g. management style

Objectives of each partner may change overtime = confit

Imbalance of levels of expertise, investments and assets brought into the joint venture = conflict

Question 13

Positive effects of globalisation on UK business (11)

Answer 13

Access to larger market = increased sales

Take advantage of economies of scale

Access to cheaper material and labour = lower production costs

Lower transportation costs

Closer to raw materials = cut transportation costs

Can allow expansion where monopoly legislation doesn’t exist

Benefit from learning new cultures

Can learn new techniques e.g. production and management from other countries

Greater control for companies from start to finish

Increased demand for UK products from developing markets

Use of technology can reduce costs e.g. e-commerce

Question 14

negative effects of globalisation on a UK business (5)

Answer 14

language barriers impact communication

time differences Less responsive to external changes

Successful products/practices may not replicate well in other markets meaning they need to adapt

Senior management may need to travel around the world impacting work/life balance

Force local businesses out of competition

Question 15

Benefits of FDI on home country (5)

Answer 15

Increased jobs in HQ tend to be more managerial and high-income earners = encourages people to stay in education.

Upskilling occurs as low skilled jobs are no longer demanded. Results in increased income which increases income tax revenue. Greater spending power = improved economy.

Improved balance of payments from the inward flow of foreign earnings and demand for home country exports. This can increase employment opportunities

Home companies can benefit from skills learnt aboard e.g. production processes. Increased efficiencies which lead to economic growth

Repatriation of profits to the UK as there is increased tax revenue = improved balance of payments

Question 16

Negative effects of FDI on home country (3)

Answer 16

Reduction in manufacturing jobs or services which may transfer to cheaper countries. Leads to greater unemployment = lower spending power = lower sales for domestic businesses = reduction in tax revenue and increase in benefit payments

Greater need to training and skill development to redeploy workers which requires government intervention e.g. more college courses

Investments being made abroad instead of the UK = negative effect on the balance of payments

Question 17

benefits of FDI on host country (7)

Answer 17

Increased employment opportunities = more disposable income = higher living standard = increased spending power in local business = economic growth. Higher tax revenue for government and reduction in benefits payments

Local companies can be outsourced which improves the host countries’ economies and can allow companies to enter competition

Increase range of goods available for locals = consumer choice

Improved infrastructure e.g. access roads = improved transportation for all. Can travel and spend money elsewhere

Competition can force local companies to become more efficient = cheaper prices and higher quality

Multinationals train staff = fit for future promotions

Question 18

negatives of FDI on host country (8)

Answer 18

Exploitation of workers and recourses

Jobs tend to be low skilled and low paid

Competition can force small business to close = job losses

Multinationals have little loyalty to the host and can leave once incentives end

Increased government spending for incentives to attract business = opportunity cost

Multinational may use all natural recourses and then leave

Transfer pricing

Retained management

Question 19

ways MNC exploit local resources (6)

Answer 19

• resource extraction e.g. oil leading to environmental degradation and exploitation if not managed responsibly
• labour exploitation by paying low wages and poor working conditions = perpetuate economic inequality
• market dominance squeezes out local businesses and removes competition
• tax avoidance deprives governments of revenue which is needed for public services
• land grabbing e.g. agricultural displacing local communities and distrust traditional livelihoods
• MNC with economic power can influence politics to change policies and regulations in their favour and undermine democratic processes

Question 20

what are the 8 aims of ASEAN

Answer 20

Accelerate economic growth, social progress and cultural development in the region

Promote regional stability and peace

To provide assistance to each other in the for of training and research facilities

To collaborate effectively

Promote free movement of goods to encourage trading

Promote free movement of workers to prevent labour shortages

Promote southeast Asian studies

Comparative advantage

Question 21

what is the opportunities of ASEAN to UK business (7)

Answer 21

ASEAN is a major global hub of manufacturing and trade. By setting up within this community, UK businesses could expand their markets, increasing sales and profits

ASEAN has the 4th largest labour force in the world, representing an opportunity for UK business to make use of low-cost labour = reduce production costs = competitive edge / increase profit margin

With free movement of labour and goods, should UK business set up in one country they can more easily expand, selling top consumers throughout the economic area

67 million households in ASEAN are part of the consumer class with disposable incomes giving UK business greater customers

increased use of social media so can use to promote goods and increase sales and profit margin

New production process can be learnt making UK organisations more efficient and competitive

Specialisation by ASEAN can be used to produce higher quality parts = greater competitiveness

Question 22

what are the challenges of ASEAN to UK businesses (4)

Answer 22

Increased competition from organisation in ASEAN – lowering prices to remain competitive = reduction in profitability and less appealing to potential shareholders

Distance from suppliers in ASEAN – transport costs increase = less environmentally friendly and damaged reputation. Increased lead time = less responsive to external changes

ASEAN is very diverse in terms religion and culture. UK business need to be aware of this to avoid cultural conflicts and adapt their products

There is economic diversity in ASEAN meaning UK economies must ensure they have up-to-date knowledge on the economies.

Question 23

impact of china on the UK economy (4)

Answer 23

Chinese economic growth has been characterised by low priced manufacturing. The price is constantly falling which helps maintain low level of inflation in the UK. This has increased living standards in the UK, allows more income to spend ton other goods and services.

China buys many British goods e.g. education and assets e.g. government bonds

UKs manufacturing sector has been in decline and Chinese growth has sped this up. This has led to job losses.

Chinese growth has contributed to higher pricing for raw materials e.g. oil as there is greater demand. This may encourage the development of greater fuel efficiency which will help UK economy in the long run

Question 24

reasons for changes of Chinese manufacturing industry (8)

Answer 24

Lower operating costs compered to developed economies e.g. lower wage costs

Increased demand for products worldwide has increased the disposable income of Chinese workers which stimulates domestic demand

Increased investment in western banks has provided more money domestically to expand

The large population means there is an abundance of labour

Advancement of technology/automation

Growing middle class as wealth grows so does demand for goods

Growing links with western organisations leading or more exports

China is a leading economy for R&D in production methods