Multinationals

Question 1

How can multinationals grow (4)

Answer 1

• by setting up franchise agreements in other countries
• by setting up joint ventures with other organisations abroad
• by buying over an existing business abroad- this is known as acquisition and involves foreign direct investments
• by creating new purpose built facilities abroad which also involves foreign direct investments

Question 2

What is foreign direct investments by a multinational

Answer 2

Foreign direct investments (FDI) involves buying over an existing business abroad and/ or creating new purpose built facilities abroad

Question 3

What are the way multinationals companies grow

Answer 3

• franchising- the company terminate the franchisees contract should they not conform to its policies and jeopardise the success of its growth

-buying over an existing business abroad

• creating new purpose built facilities abroad

Setting up joint ventures with other organisations

Question 4

What’s the benefits of a MNC and the growth of buying over an existing business abroad (3)

Answer 4

• expand operations quickly, it increases customer base by taking on existing customers, gain access to new markets and increase its share of global markets
• it may reduce any cultural mistakes and allows to adapt to the culture and customer service
• existing managers to the old company can bring new ideas and experiences and may help to identify more opportunities for expansions

Question 5

What’s the disadvantage a MNC to the growth of buying over an existing business (3)

Answer 5

• it is very expensive to buy an existing, operational business with the facilities required
• can be a huge investments with risks
• there could be conflict and resistance from existing employees particularly if its necessary to reduce the number of employees

Question 6

What’s the benefits of the method of growth for a MNC of creating new purpose-built facilities abroad - buying a new building (2)

Answer 6

• the business can influence the location, design, and the construction of the new manufacturing facility so it meets their specific needs
• they can introduce a new corporate culture, the latest ICT and production tech niches and recruit and select staff who agree with their vision

Question 7

What’s the disadvantage for a MNC for growth for creating new purpose- built facilities abroad (3)

Answer 7

The may have to raise the finance. They will have to pay interest on the loan which may increase- this will increase expenses

• it takes time to build and may have to improve the surrounding infastructure and the time required for recruitment, selection and training for employees
• the business may have little to no knowledge of the local markets, working practice and culture

Question 8

What’s the advantage for the MNC for growth with setting up joint ventures with other organisations (3)

Answer 8

• could increase customers, sales revenue and profits for both parties
• there will be shared costs, profits, risks, knowledge, finance and expertise
• benificial to all those involved both during and after the project who should become stronger and more competitive

Question 9

What’s the disadvantages for the MNC for growth with setting up joint ventures with other organisations 3

Answer 9

• if the organisation has less than a 50% stake holding in the joint venture then they will not have control of management and decision making
• profits and dividends will be shared out amongst a larger number of shareholders

-if shareholders returns are reduced they may sell their shares causing them to loose value

Question 10

What is transfer pricing

Answer 10

transfer pricing involves the setting of goods and services which are sold by one branch of a company to another branch of the same company which is another country

Question 11

What’s the effect on transfer pricing on tax paid 4

Answer 11

• the MNC using transfer pricing will want to declare low profits in a high tax country and higher profits in a low tax country

Trying to minimise the total tax liability paid thus depriving governments of tax revenue

Thus tax liability can be reduced using transfer pricing to shift earning from a high tax country to a low tax country

Loss of tax revenue leaves a burden on the rest of the population through the rest having over taxation

impact… more profit after tax which they ca use to reinvest or pay out higher dividends thus further increasing the value of shares

Question 12

Effect of transfer pricing on tax paid on a MNC

Answer 12

• eg given the corporation tex is higher in the UK than in Ireland, the impact on the MNC is that they pay no tax in the Uk and instead pay it in Ireland

-meaning they have more profi after tax which they can reinvest, which further increases the value of shares and helps the company grow

-however cutting down on taxis likely to create negative publicity which can result in a loss of sales

• to take full advantage of transfer pricing a multinational may have to reallocate to another country which can be time consuming and costly

Question 13

Whats the effect on transfer pricing on home countries (4)

Answer 13

• a MNC may fix higher transfer pricing on goods/ services coming from branches based in high tax countries
• by doing so the cost of production in the high tax country will be increased, narrowing profits margins , and reducing the final tax payable

-this net effect is an increase in profit after tax in a MNC

• this can lead to the company increasing investments, spend more on research, pay bigger dividends to shareholders

Question 14

Whats the effect on transferring pricing on host countries 4

Answer 14

• MNC use transfer pricing to reduce their tax liability whereas local businesses must pay the full tax rate- creates bad press
• it can effect the level of which the FDI country will get- they’ll open production where production is the most profitable, where tax burden is less and effects how much the country gets
• MNC may set low pricies for goods and services coming from low tax countries- reduces the cost of production
• MNC is seen as evading taxes which creates adverse publicity in the history country. However, if it is seen as a significant Contributor to tax then it may improve relations with host government

Question 15

What is a subsidiary

Answer 15

A branch of the company

Question 16

Describe transfer pricing 5

Answer 16

• refers to the price charges by a subsidiary for supplying good to the main country

It is a technique used by multinational companies to reduce their tax liability when declaring profits

The multinational will declare low profits in a country with high tax rates

It will fix transfer pricing on products coming from branches based in high tax countries. This will increase the cost of production in the high tax countries, which reduces profit margins, and reducing the final tax payable

A MNC will declare high profits in a country with high tax rates. This will make profts higher in low tax countries so the overall tax payable by the company os minised

Question 17

Whats the advantages of globalisation for multi nations 7

positive effect of MNc on the home country

Answer 17

• larger markets that allows for increased sales and economies of scale
• closer to the source of raw materials, which gives access to cheaper raw materials and cutting down on transport costs

-new management techniques can be discovered and filtered down the organisation- find a new best way

• can benefit from learning from different cultures, less chance of cultural differences

-exploitation of local resources- less labour costs meaning less expenditure

-transfer pricing can be used to reduce tax bills-can invest the money else where

• can recieve grants from the government- large organisations may be able to influence government policies in their favour

Question 18

Whats the negative effects of globalisation for multi nations 5

negative effect of multinationals on the home country

Answer 18

-Cultural differences may lead to conflicts and misunderstandings

• increased travel for senior managers of organisations- crucial time away from office which can be expensive

-damage to long serving smaller business- increased competition when new larger companies enter the country

-consumers will be more aware of tax avoidance and can asset pressure, this may create bad publicity

-employees may be put at a risk, could be working in politically unstable countries

Question 19

Whats the positive impact on transfer pricing 2

Answer 19

-reduction in the tax paid on profits- can be invested in other areas or pay bigger dividends

• a country with low tax rates will encourage multinationals to operate in that country for transfer pricing- will help create employment and improve wealth of the country

Question 20

Whats the negative impact of transfer pricing 2

Answer 20

• bad reputation- tax avoidance and people may protest.
  -result in customers boycotting company which will reduce sales
• multinationals can be taken to court for this if its felt they’ve been using transfer pricing- could result in the company being fined for this

Question 21

What is globalisation

Answer 21

Companies selling goods around the world instead of the company of their origin

Question 22

Define multinationals

Answer 22

A company that has operations in at least 2 countries

Question 23

What are transitional companies

Answer 23

A company operating globally that has no clear home base

Question 24

Define micro- multinationals

Answer 24

Smaller companies who use the internet and various internet based tools to operate globally

Utilise amazon and eBay to sell their goods globally

Question 25

What’s a home country

Answer 25

A country that the multinational originated in

Where the head office tends to be located

Question 26

What’s the host country

Answer 26

Multinationals have chosen to operate in with its home country

Question 27

What factors have allowed the growth of multinationals and globalisation 5

Answer 27

• technological change, ict such as video conferences to make it easier for various parts of the company to communicate with each other
• improved transportation- goods can now be moved from one place to another more quickly allowing suppliers worldwide to be considered, cheaper airlines also means cheaper transport

-changed consumer taste, due to the use of i the internet now, consumers are more aware of products in other countries snd want to give it a try

-economies of scale, companies can produce on a large scale and thus lower costs if they buy in bulk

• access to different resources, companies want to increase their market share and dominance, so operating globally allows access to new customers and brand recognition

Question 28

define multinationals

Answer 28

multinationals are where companies sell in tw or more countries

Question 29

positive effects of multinationals on their host country 6

Answer 29

• create employment opportunities for residents in their host country, creating further income… help support their economy as their will be less benefit pay out and more disposable incomes

-competition provided by foreign MNCs may act as a stimulus to the hosts country rival businesses… may result in lower costs, prices and a greater choice for host country consumers

• provide training for the local employees- gain new skills and expertise in production and technology which will be transferred to host country businesses if they move to local businesses

-foreign MNC will earn profits in the host country and then be liable to pay corporation tax to the host country gov. boost the govs revenue and can increase spending on local services etc

-provide healthcare for their employees, relieve pressure for the hosts health service, gov can spend more finance elsewhere

improve the host countries infrastructure by providing finance to improve roads, rail networks. means gov dont have to take it out their own spending

Question 30

negative effects of multinationals on their host country 4

Answer 30

-MNC may make use of transfer pricing. deprive host country government of vital tax revenue.

-so powerful that the MNC influence the host country. gov have to pay out grants or give tax breaks to encourage it to not leave their country

-MNC having strategic decisions such as closures and the switching of production to other countries, result in host country having higher unemployment and lower economic growth

• host countries rival businesses will face increased competition from a more efficient foreign MNC. result in a lose of custom, staff redundancies and local closures

Question 31

positive effect of MNC on their home country

Answer 31

-