Multinationals And Globalisation Flashcards
What is transfer pricing?
Transfer pricing refers to the figure used when goods or services are transferred from one branch of a multinational company in one country to another branch of the same MNC located in another country
Two types of transfer pricing
- MNC may fix high transfer prices on good and services coming from branches based in high tax countries
- on the other hand MNC may set low prices for goods and services coming from low tax countries m
Benefits of transfer pricing
• It may lead to a reduction in the tax paid profits
• the reduction in tax paid can in turn enable the company to increase investment, spend more on research, expand more widely, pay bigger dividends to shareholders etc…
• a country that has low tax rates will encourage multinationals to operate in that country to use transfer pricing to pay lower tax which will create employment and improve wealth of the country.
Costs of transfer pricing
• The multinational’s reputation may be negatively affected if home/host
consumers protest against it
• Multinationals can be taken to court by a host country if it is felt that they have used transfer pricing
• customers may boycott the company which will decrease sales
• Company may be fined for doing this, eg Google was fined f130 million for doing this in Ireland
Positive Impacts of multinational on home country
• Multinational may have the resources available to take advantage of previously un-tapped resources which can be shared with the host country such as ideas or expertise
or techniques which can improve the home country’s business practice
• Creation of high quality technical and managerial jobs at the MNC HQ which will enhance the spending power to the benefit of the home country
• People will seek further and higher
education in order to get the top quality managerial with the MNC at its HQ so will eventually contribute more in income tax
• Company profits are returned home
whichboosts tax paid in the home country and drives up standards of living due to more funding to public services because of more tax coming
• Other firms in the home country may gain opportunities from any expertise gained which will in turn create wealth for the country in the form of increased taxation collected
Negative impacts of multinationals on the home country
• Employment opportunities may be reduced as MCs wind down operations leading to less tax revenue for government and increased spending on unemployment benefits
• Competition from foreign-based subsidiaries may lead to greater need for home based companies to become more efficient or result
in losing customers and profit which funds home country taxation
• Increased burden on government to
provide college and university places
• Balance of payments (less money being sent home) may suffer in the short term from the outflow of money to the foreign country as profits are reinvested in the host Country to provide additional capital investment on buildings, machinery, etc
Positive impacts of a multinational on the host country
• Infrastructure improvements will benefit the local area for example Shell built roads in Chad
• Corporation tax paid to the government can be used to improve services in the country
• Multinational could use local services which creates more jobs, eg catering or cleaning (creation of indirect jobs)
• Competition can force local businesses to become more efficient eg offering cheaper prices to the consumer, better quality
products
Negative impacts of multinationals on the host county
• Exploitation of workers and resources (eg clothing manufacturers in Bangladesh child labour, working conditions)
• Host country businesses may suffer from new competition which forces them to close down as they cannot compete
• MNC may pull out of the host country which creates mass unemployment
• May only provide low paid jobs as higher-paid managerial jobs taken up by home country staff
Adv of buying over an existing company in host country
• Able to reduce competition as you buy them over
• Allows a large market presence to be built up quickly as company already exist
• Gain access to management and their experience of local conditions reducing risk of failure
• Start earning revenue and profits straight away as no time wasted building a factory etc
Adv of creating your own specialist facilities
• Custom built to suit the organisations requirements
• Ensures uniform global facilities
• Enables the company to establish its own business philosophy and corporate culture
• Only option as no suitable facilities are available
Disadvantages of buying over a business in host country
• host country It may be difficult to find a firm with the facilities it needs
• The staff in the company being bought over may be reluctant to work with you as they are loyal to the original company
• Managers in the host country may be made redundant due to the parent company bringing in their own top managers from the home country. This may cause a bad reputation with consumers in the host countrv
Disadvantages of creating own specialist production facility
• Time to find a suitable location and
construct the building
• Time taken to hire and train employees to an appropriate standard
• Cost of new building and up to date
technology may be high
• Possible need to develop new infrastructure in the country may make transporting goods difficult
Positive effects of globalisation
• Larger market that allows for increased sales and economies of scale
• Access to cheaper raw materials
• Exploitation of local resources eg lower labour costs
• Transfer pricing can reduce tax bills
• Can learn new techniques (production and management) from other countries
• Can benefit by learning from different cultures
Negative effects of globalisation
• Cultural difficulties may lead to conflicts and misunderstandings
• Increased travel for senior managers of organisations - time away from
office/expensive
• Increased competition when new multinationals enter countries can damage the long serving, smaller businesses
• May have employees working in politically unstable countries, which may put them at risk
• Consumers more aware of tax avoidance methods and can assert pressure eg Starbucks
