Globalisation Flashcards
what is Globalisation
the process of which the world is becoming increasingly interconnected as a result of massively increasing trade and cultural exchange
main reason for globalisation
- removal of global trade barriers - tariffs and quotas
- advances in technology
- growth in global trade/travel - reduction in costs
- emerging markets
- transport development
- growth in the global media, increasing demand
Benefits of globalisation
- exploitation of local resources
- transfer pricing benefits
- increased demand for western products in newly industrialised countries
- greater control of production from start to finish
- avoids monopoly legislation
- low cost transportation: products can be shipped world wide
- large organisations may be able to influence government policy
- can serve a gap in the market/larger markets
- new management techniques
- access to cheaper raw materials
- closer to source or raw materials
costs of globalisation
- larger organisations may find it difficult to adapt to changing local markets
- current trend for locally produced goods
- cultural differences
- negative impacts on smaller, local businesses
- risk for employees working in politically unstable countries
- increased travel for senior management
- increased consumer awareness of tax avoidance tactics
- standardised products may not sell
positive globalisation impacts on MNC’s
- larger market to sell
- access to cheaper raw materials, can be closer to raw materials reducing transportation costs
- access to cheaper labour
- transfer pricing reduces tax
- new management techniques can be discovered and filtered down
- can learn new production techniques
- can serve a gap in the market e.g starbucks targeting britain
- can help aid expansion where monopoly legislation in home country prevents it. Large organisation may be able to influence government policy
negative globalisation impacts on MNC’s
- cultural differences
- centralised organisations may find it hard to react to changes in local markets
- standardised products may not be feasible
- increased travel for senior managers: time away from organisation
- increased competition from new MNC’s entering the market
- employees may be working in a politically unstable country
- consumers are becoming aware of tax avoidance tactics e.g starbucks
what is Transfer Pricing
refers to the price charger before one international subsidiary of an MNC and another for the goods supplied between them. This is an internal transfer of goods or services and therefore the price charged between them is set by the company and is not influenced by market forces
transfer pricing
- as MNC’s operate in many different countries the goods and services produced by them are regularly transferred between the parent company and its foreign operations. Once transferred, these goods may undergo further processes before they can be sold to the consumer as a final good or service
- additionally it is common for international subsidiaries of MNC’s to specialise in different stages of production to benefit from economies of scale. Therefore goods or partly finished goods from a branch in one country are transferred to a branch in another country for assembly
- transfer pricing is used to achieve company goals whilst minimising their tax liability. Most of the company’s tax will be declared in the country with low tax, shifting profits to reduce the overall taxes paid. The MNC will set high transfer price when transferring goods to subsidiaries in high tax countries and a low transfer price when transferring goods to subsidiaries in low tax countries
- this lowers the profit margins in the high tax country so less tax is paid in that country but increases the profit margin in the low tax country. Can cause conflict between subsidiaries due to one appearing more successful
basic rule of transfer pricing
theory:
- tax is paid on profit
- the lower the profit declared, the lower the tax liability
therefore:
- transfer in at a low price and sell at a high price in a low tax country
- transfer in at a high price and sell at a low price in a high tax country
what is a multinational company
an MNC is a company which has its head quarters in one country (home country) and branches manufacturing or assembly plants in others (host country)
what is a transnational company
a company that operates internationally but don’t have a clear home base
Reasons for the growth of multinationals
- to dominate world markets
- to take advantage of cheaper labour and materials in lesser developed counties
- to avoid monopoly legislation within the home country which may prevent the company from expanding its core activities at home
- to be in full control of operations (vertical integration) e.g shell from extraction to retail
- to take advantage of different growth rates in different countries
- deliberate attempt to spread risk
- world markets are being created by global communication networks (internet)
- easier to facilitate business through ease of travel and communication
what is the growth of MNC’s facilitated by
- low cost transportation/low cost jet travel
- the reduction of barriers to the free flow of goods, services and capital (GATT) (WTO)
- low cost global communication networks
- global media has made a worldwide culture for a variety of goods
positive impact on home countries
- increase job opportunities abroad for uk citizens
- expertise gained by the MNC may be passed on to other uk businesses when employees switch employment, or to their suppliers and uk commercial customers
- repatriation of profits to uk: increase tax revenue; improvements in uk balance of payments
- increases jobs in scotland HQ if company expands: tends to be more managerial position/high income jobs; encouraging uk people to peruse education
negative impact on home countries
- reduction in manufacturing or service jobs which may transfer to cheaper countries e.g call centre jobs
- job losses from transfer of jobs can have many effects: lower spending power, lower sales for domestic businesses; reduction in tax revenue; increase in benefit payments
- need for increased training/skills development to redeploy works: require government intervention e.g more college courses
- investments being made abroad instead of UK; negative impact on balance of payments