global issues Flashcards
what is transfer pricing
when produce is moved from one department to another to pay less tax.
advantages of transfer pricing (5)
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
Disadvantages of transfer pricing (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
Reasons for the growth of multinationals (8)
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
things that help companies grow (8)
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
Advantages of creating new purpose built production facilities (4)
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.
disadvantages of creating new purpose built production facilities (4)
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.
Advantages of buying an existing company abroad (4)
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
disadvantages of buying an existing company abroad (3)
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
what are the 3 methods of growth
Creating new purpose-built production facilities abroad
Buying an existing company abroad
Joint venture
advantages of Joint venture (4)
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
disadvantages of Joint venture (4)
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
Positive effects of globalisation on UK business (11)
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
negative effects of globalisation on a UK business (5)
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
Benefits of FDI on home country (5)
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
Negative effects of FDI on home country (3)
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
benefits of FDI on host country (7)
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
negatives of FDI on host country (8)
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
ways MNC exploit local resources (6)
- 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
what are the 8 aims of ASEAN
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
what is the opportunities of ASEAN to UK business (7)
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
what are the challenges of ASEAN to UK businesses (4)
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.
impact of china on the UK economy (4)
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
reasons for changes of Chinese manufacturing industry (8)
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
