Multinationals

Question 1

Multinational definition

Answer 1

Businesses who own or control production or service facilities in more than one country

Question 2

Uk firms can take advantage of lower labour costs…

Answer 2

Which makes them more competitive in the global market

Question 3

Increased brand awareness…

Answer 3

Increases demand

Question 4

Learning new production methods…

Answer 4

Increases efficiency and competitiveness

Question 5

Access to cheaper raw materials…

Answer 5

Reduces costs for the business

Question 6

Transfer pricing means…

Answer 6

Involves setting the price of goods and services which are sold by one branches of a company to another branch of the same company which is in another country
If the subsidiary company sells goods to parent company, the price the parent company pays the subsidiary is the transfer price

Question 7

Transfer pricing reduces…

Answer 7

The total tax liability paid which reduces bills

Question 8

Unfamiliar with local customs and cultures leads to…

Answer 8

Conflicts and misunderstandings which can reduce businesses success of international trade

Question 9

Increased competition when new multinationals enter countries…

Answer 9

Damages local, long serving business making them go bankrupt or out of business

Question 10

Powerful enough to influence the government…

Answer 10

Allows business to dominate the market
Charge higher prices
Decreases competition

Question 11

Increased travel for managers means…

Answer 11

More time away from office/less focused on core activities and can be expensive

Question 12

Effect of transfer pricing on tax paid…x4

Answer 12

An MNC in a high tax country will want low profits and in a low tax country the MNC will want high profits. By making less profits, the business will have to pay less tax in the high tax country. In the low tax country, profit will increase which allows for future growth.
This reduces the total tax liability, depriving the gov of tax revenue, which pressures the rest of the population with over taxation.
Tax avoidance can gain the MNC negative publicity which will reduce sales.

Question 13

Effect of transfer pricing on profits…x3

Answer 13

May face fines and legal action which increases costs
Want to increase cost of production in high tax country and reduce profit margins and decrease cost of production in low tax country to increase profit.
By making less profit the business will have to pay less tax in high tax country and in low tax country profit increases which allows for future growth.

Question 14

Effects of transfer pricing on the HOME countries is…

Answer 14

Tax avoidance can attract negative publicity which can result in lost sales
An MNC may fix high transfer prices on goods/services coming Tom branches based in high tax countries increasing production costs. This narrows profit margins and reduces the final tax payable.
This increases the MNC’s ability to expand and improve dividends and share value.

Question 15

Effects of transfer pricing on HOST countries is… 2P 2N

Answer 15

Transfer pricing gives foreign MNC’s an advantage by reducing their tax liability in comparison to local businesses in HOST countries who must pay the full tax rate
The loss of tax revenue can burden the rest of the population through over taxation.

Low tax countries will attract MNC’s as they can maximise profit, who could improve the infrastructure
Improved unemployment as more money available means more people can be employed. This improves the wealth and disposable income to spend which will improve the economy.

Question 16

Advantages of multinationals for HOST country are…x4

Answer 16

New jobs to an area reduces unemployment. Also indirectly employs local firms to supply them with materials.
Standard of living improves due to employment which increases the levels of disposable income that can be spent in local businesses, improving the HOST countries economy.
Can provide training for employees who gain new skills and expertise that can be transferred to local business improving quality and increasing competitiveness.
May improve infrastructure by providing finance to improve roads or rail networks which is beneficial to HOST and MNC.

Question 17

Disadvantages of MNCs to HOST countries are…x5

Answer 17

Foreign MNC can become so powerful they can influence government. HOST governments may need to pay grants or tax breaks to MNC so they don’t leave the country.
Strategic decisions are made in HOME country which means businesses could decide to close production which would result in increased unemployment which reduces living standards
May use transfer pricing tif HOST countries corporation tax is high which deprives the government of tax revenues which pressures the rest of the population with over taxation
May monopolise local raw materials e.g. Coca Cola requires local water thus creating a depletion of local water resourcing meaning farmers were unable to water their crops.
Local businesses in HOST country will face increased competition which could result in bankruptcy and business closures.

Question 18

Advantages of MNCs on HOME countries are…x7

Answer 18

Closer to suppliers which reduces transportation costs and carbon footprint. This allows them to ship all across the world
Transfer pricing improves profits after tax which improves dividends and value of shares
Lower labours costs due to no or low minimum wage can increase profits which can be reinvested into future growth plans
MNCs can learn new and more efficient production techniques which can improve productivity and competitiveness
Economies of scale makes bulk buying cheaper which reduces operating costs
Operating in new markets increases brand awareness and therefore demand
Can influence the gov of HOST country which allows them to dominate market and control prices

Question 19

Disadvantages of MNCs to HOME countries are…x3

Answer 19

Balance of payments may suffer as in foreign country profits are reinvested in the HOST country to provide machinery or buildings
Reduces demand for unskilled workers in HOME country which increases unemployment. This increases benefits and lowers tax revenues.
Unfamiliar with local customs can cause conflicts and misunderstandings, gaining the business a bad reputation and losing customers.

Question 20

Ways multinational grow x4

Answer 20

By setting up franchise agreements in other countries
By setting up joint ventures with other organisations abroad
By buying over existing business abroad which is known as FDI
By creating new purpose-built facilities abroad which is all so known as FDI

Question 21

Foreign direct investment involves…

Answer 21

Buying over an existing business abroad or creating new purpose-built facilities abroad

Question 22

The effectiveness of franchises in helping the growth of MNCs… 4P 1N

Answer 22

Regular royalty payments from franchises provide steady flow of income which is a valuable source of finance that can be used elsewhere in the business.
The franchisee may provide equipment and seating which reduces capital expenditure for franchiser thus releasing funds to improve their own branches
Franchise agreements protect brand which means franchises have to conform to the company policies so that the business can provide a uniformed experience
Refined market strategies and product innovations can be rolled out across the brand resulting in more customers and competitive edge
More local franchisees- franchisees don’t have the power to alter products without franchiser consent which makes them slow to react to change, losing customers.

Question 23

Benefits of buying over existing businesses abroad are…x6 (acquisitions)

Answer 23

Allows the business do expand its operations quickly increasing customer base by taking existing customers
Purchasing businesses who offer similar services reduces competition from the global market which increase market share
Business gains access to new markets and increases it shares of the global market
Benefit from the experience and local knowledge of the existing business which helps the business adjust to cultures and customer service in that country
Gains the existing employees at business which reduces and cultural mistakes the business makes. It also means that production can start straight away
The existing managers can bring new ideas and identify opportunities to expand

Question 24

Costs of buying over an existing business abroad are…x4 (acquisitions)

Answer 24

Very expensive to buy existing and operating business which the facilities required which reduces profit
Huge investments and huge risks
Existing businesses come their own culture which makes it difficult to implement cultural and motivation techniques
Business could face resistance and conflict from existing employees especially if employee reduction needs to be made. The employees could resurrect their output which misses deadlines

Question 25

Benefits of creating new purpose-built facilities abroad are…x3

Answer 25

Your business can influence design and construction so it meets specific requirements
Can choose a densely populated location which increases the number one potential customers
In newly built branches, corporate culture can easily be implemented. This means that business can employ staff who agree with their vision

Question 26

Costs of creating new purpose-built facilities abroad are…x3

Answer 26

Very expensive to start from scratch so may need to borrow. Increasing interest rates reduces cash flow and profits
Takes time to build and Amy have to improve the surrounding infrastructure to make the business easily accessible which lengthens the process further
Lack of knowledge of local markets could lead to cultural misunderstandings and conflict which reduces chance of success at international trade

Question 27

Setting up a joint venture means…

Answer 27

When two or more businesses undertaking a project agree to combine

Question 28

Benefits of joint ventures are…x4

Answer 28

Joining together increases customers, sales revenue and profits for both parties
Shared costs, knowledge and risks is beneficial for all involved as parties will become stronger and more competitive
Reduces competition which increases customer base and market share
Benefit from economies of scale which is reduces price when buying in bulk which increases profit that can be used elsewhere in the business

Question 29

Costs of joint ventures are…x5

Answer 29

Of the organisation has less that 50% stakeholding, it will not have control of management or decision making in joint venture
Profits and dividends will be shared between a large number of shareholders which reduces the return to shareholders
If return to shareholders has reduced, they may sell their shares, causing value of shares to fall
Absense of agree procedures and objectives can cause conflict and communication problems. This will also cause confusion between employees.
May have to wait for the CMAs approval which causes shareholders to lose confidence as future expansion may be limited