The External Business Environment Flashcards
1
Q
What are the benefits of globalisation to businesses?
A
- chance to gain economies of scale which saves costs
- increased market share and dominance
- working practices will increasingly demand co-operation with people in other countries
- companies likely to specialise in particular parts of their organisation to cut costs
- instant worldwide communication
- business sourcing materials worldwide
- container shipping makes transport much cheaper
- choice of cheaper locations
- access to cheaper raw materials
- transfer pricing
- new management techniques can be discovered
- new production techniques can be discovered
- allows organisation to control production from start to finish
- large organisations may be able to influence government policy in their favour
- legislation may have limited growth in the home country
2
Q
Costs of globalisation to businesses
A
- language barriers
- competitive advantage will be harder to sustain as information spreads quickly around the world
- higher consumer expectations
- challenge of multi-cultural societies
- increased lobbying from anti-globalisation groups
- organisations may find it difficult to react to changes in the local market if they have no local knowledge
- different parts of the world have different tastes and preferences
- increased travel for senior managers can be expensive
- may have employees working in politically unstable countries
- customers are more aware of the tax avoidance schemes and can build pressure
3
Q
Reasons for growth of MNCs
A
- increased market share and dominance
- closeness to local markets - tailor products to customer preferences
- can avoid important tariffs or taxes
- lower labour costs
- government incentives e.g. grants
- falling cost of transportation of people and goods
- reduction in barriers to trade
- low cost communications enabled by ICT
- to gain economies of scale
- to avoid monopoly legislation in its home country
- markets are saturated in home country and new markets need to be found elsewhere
- being close to raw materials
4
Q
What is foreign direct investment?
A
Occurs when overseas companies set-up or purchase operations in another country. Includes new projects, expansions of existing projects, or mergers and acquisitions.
5
Q
What are the benefits of creating new purpose-built production facilities abroad?
A
- can gain competitive advantage in emerging markets
- custom built to suit the organisations requirements
- enables the company to establish its own business philosophy and corporate culture
- ensures uniform global facilities
- only option as no suitable facilities are available
- problems of integration into the existing business structure are minimised
6
Q
What are the benefits of buying over an existing business abroad?
A
- able to reduce competition
- allows a large market presence to be built up quickly
- enables moves into markets where you can attract a different segment
- gain access to management and their experience of local conditions reducing risk of failure
- may be able to acquire a loss making business cheaply
- start earning revenue and profits straight away
7
Q
What are the disadvantages to foreign direct investment?
A
- business may be disadvantaged if the firms bought were previously struggling to maintain custom and reputation
- costly to rebrand and update signage and equipment
- investing directly in a country to set up a new operation will take a lot of time. New staff need to be hired and trained, new sites need to be sourced, and premises built/modified
- less tough safety laws mean the business could be damaged by negative press
8
Q
What is a joint venture?
A
A joint venture is formed when two or more businesses undertake a project together. They each contribute capital for the project and then share in revenues, expenses, and control of the enterprise. Can be either for a specific project or a continuing business relationship.
9
Q
What are advantages of joint ventures?
A
- businesses able to learn from each other
- the cost of the joint venture can be shared = a greater return on the investment for the businesses
- once venture is completed the businesses can take what they have learned and continue to apply this knowledge to their existing business
- economies of scale
- stronger, more competitive operations
- access to more customers and increased profits
- risks are shared
10
Q
What are disadvantages of joint ventures?
A
- specialist knowledge is lost to future competition
- compromise is needed
- profits are shared so each business won’t receive the maximum return
11
Q
What is transfer pricing?
A
Transfer pricing refers to the price charged between one international subsidiary of a multinational company and another for the goods supplied between them.
A multinational company transfers goods from the low tax country in Asia where its subsidiary company is based to the high tax country where the company has its head office.
12
Q
What are the reasons that multinational corporations use transfer pricing?
A
- minimise the companies overall tax liability which increases overall profits
13
Q
What are the effects of transfer pricing on the host country?
A
- increases profit margins in the host country because more tax is being paid there. This improves the host country’s economy because its government is getting more money.
14
Q
What are the effects of transfer pricing on the home country?
A
- lowers profit margins in the home country because less tax is being paid there.
15
Q
What are the advantages of multinational corporations to the host country?
A
- gross national product (GNP) will increase. Measure of countries economic performance - the amount of goods that were produced and sold within a country. A higher GNP shows strong economic activity which results in further investment in the country.
- more direct employment opportunities are created by the multinational and many indirect jobs are created as a consequence. Often employees learn new skills which can be transferred to other employment opportunities.
- standard of living improves due to wealth creation from better employment as in general foreign owned firms pay higher wages than domestically owned firms.
- balance of payments shows how much is being spent by consumers and businesses in the UK on imported goods and services against how successful UK businesses have been in exporting to other countries. The UK’s balance of payments benefits from: initial injection of capital to the country, increase in exports if goods/services are sold to other countries, reduction of imports if the investment eliminates the need to buy from abroad
- tax raised from multinationals profits is a source of revenue for the government.
- local companies can benefit from technology transfer improving their skills and making them more efficient as MNCs will bring the technology knowledge from the home country to the host country.
- competition within the host country can be stimulated leading to improved efficiency and increased productivity - both directly improving GNP further.
- greater choice of goods and services are now available within the host country, leading to higher sales and increased taxation collected by the government.
16
Q
What are the disadvantages of multinational corporations to host countries?
A
- profits can be returned to the home country and not reinvested in the host country.
- multinationals usually employee staff from the home country in managerial positions and use the local labour for the lower skilled jobs.
- multinationals may be socially irresponsible by exploiting local resources for a number of years and then relocating back to the home country.
- multinationals have no loyalty to the host country and can easily switch production to another location to suit their needs resulting in job losses and lowering economic growth.
- multinationals can manipulate transfer pricing between subsidiaries to reduce tax liability.
- local companies may be forced to close because they can’t compete with larger companies.
17
Q
What are the advantages of multinational corporations to the home country?
A
- creation of additional high quality technical and managerial jobs at the MNCs HQ - enhance spending p;owner in the UK as the nationals employed to these new positions are financially rewarded according to the amount of responsibility they are given.
- people seeking further and higher education due to less demand for unskilled labour - more tax’s received by government.
- company profits are returned to home country which boosts balance of payments - a UK business may own a business overseas and send back some of the operating profits to the UK. This would count as a credit item for the UK current account as it is a stream of profits flowing back to the UK.
- demand for home country exports can increase is foreign country subsidiary creates a demand for them.
- other firms in the home country may gain opportunities from any experience gained which will in turn create wealth for the country in the form of increased taxation collected.
