PPQ - EXTERNAL - effects on home and host countries

Question 1

2021 - Discuss the impact on BMW Group of its decisions to:

• manufacture in China
• use a joint venture agreement with GWM
• build a new production facility in China. (8 marks)

Answer 1

Manufacture in China
- industry leading technology – BMW has access to the latest machinery in China which it can use to better improve the quality of its products
- China has the greatest world market for electric cars – BMW cars would have to be imported into China so manufacturing there saves on transport costs
- densely populated – available labour in BMW’s recruitment of manufacturing jobs

Use a joint venture agreement with GWM
- 50:50 agreement – BMW will have to split its profit with GWM. Will not have full control over decision-making process
- Chinese manufacturer Great Wall Motor – BMW will have a reduced risk of failure as it can use GWM’s local knowledge of the market

Build a new production facility in China
- can be tailored to BMW’s requirements
- investment of ¥5.1 billion – may reduce cashflow

Question 2

2019 - Explore the possible effects of McDonald’s relocating its European holding company from Luxembourg to the UK on

• UK economy

Answer 2

UK economy
- $1 billion of income = improved balance of payments from inflow of foreign currency
- therefore increased gov spending on infrastructure
- relocation of its holding office creates highly paid UK jobs – higher income tax payed to the Gov

Question 3

2017 - Explore the effects of transfer pricing on a multinational and its host countries. (4 marks)

Answer 3

Multinational
- The multinational may often have a legal agreement with the host country to pay less tax as a condition of setting up in the host country which reduces the possibility of having to pay a large tax bill
- The ability to reduce the amount of tax paid
- The multinational’s reputation may be negatively affected if home/host consumers protest against it

Host
- A country that has low tax rates will encourage multinationals to operate in that country to use transfer pricing to pay lower tax

Question 4

2017 - Other than transfer pricing, discuss the costs and benefits to a host country of a multinational organisation. (6 marks)

Answer 4

Benefits
- Corporation tax paid to the government can be used improving services in the country
- Local businesses will learn management techniques from the multinational
- Balance of Payments will improve as their exports are increased

Costs
- Influence of government due to threatening to leave
- May only provide low paid jobs
- Host country businesses may suffer from new competition

Question 5

2021 - Explore the effect of BMW Group’s foreign direct investment (FDI) on China, its host country. (6 marks)

Answer 5

• China’s balance of payments (BoP) will improve from the inward flow of capital from the exporting of BMW cars
• China’s GDP will improve from the new production facility
• China’s government will have to pay less into infrastructure if BMW build roads etc to support its new production facility
• China will benefit from direct job creation from the new production facility
• Chinese firms will benefit from ‘Smart Factory’ technology transfer from BMW
• donations by BMW alleviate financial pressures on the Chinese government to help charitable causes/help Chinese citizens

Question 6

2019 - Explore the possible effects of McDonald’s relocating its European holding company from Luxembourg to the UK on

• US economy
• McDonald’s (6 marks)

Answer 6

US economy
- if it is beneficial to declare profits in the UK, the US will still not receive the corporation tax owed

McDonald’s
- avoid further investigations by EUCC due to Brexit which reduces the risk of additional controversial media surrounding the brand
- HMRC may carry out its own investigation into McDonald’s taxation structure