How can multinationals grow (4)
- 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
What is foreign direct investments by a multinational
Foreign direct investments (FDI) involves buying over an existing business abroad and/ or creating new purpose built facilities abroad
What are the way multinationals companies grow
- 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
What’s the benefits of a MNC and the growth of buying over an existing business abroad (3)
- 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
What’s the disadvantage a MNC to the growth of buying over an existing business (3)
- 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
What’s the benefits of the method of growth for a MNC of creating new purpose-built facilities abroad - buying a new building (2)
- 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
What’s the disadvantage for a MNC for growth for creating new purpose- built facilities abroad (3)
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
What’s the advantage for the MNC for growth with setting up joint ventures with other organisations (3)
- 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
What’s the disadvantages for the MNC for growth with setting up joint ventures with other organisations 3
- 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
What is transfer pricing
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
What’s the effect on transfer pricing on tax paid 4
- 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
Effect of transfer pricing on tax paid on a MNC
- 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
Whats the effect on transfer pricing on home countries (4)
- 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
Whats the effect on transferring pricing on host countries 4
- 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
What is a subsidiary
A branch of the company
Describe transfer pricing 5
- 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
Whats the advantages of globalisation for multi nations 7
positive effect of MNc on the home country
- 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
Whats the negative effects of globalisation for multi nations 5
negative effect of multinationals on the home country
-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
Whats the positive impact on transfer pricing 2
-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
Whats the negative impact of transfer pricing 2
- 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
What is globalisation
Companies selling goods around the world instead of the company of their origin
Define multinationals
A company that has operations in at least 2 countries
What are transitional companies
A company operating globally that has no clear home base
Define micro- multinationals
Smaller companies who use the internet and various internet based tools to operate globally
Utilise amazon and eBay to sell their goods globally
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Henri Fayoll20
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Henry Mintzberg17
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Classical management school6
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Scientific managment13
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Max Weber12
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Neo- classical management school0
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Hawthorn studies8
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Theories of motivation8
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Mcgregors theory x and theory y15
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Multinationals31
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Contingency theory7
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diversity24
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Corporate social responsibility13
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ASEAN7
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Management of change31
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Force field analysis10
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Finance14
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Hertz berg5
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Kurt Lewin7
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Globalisation7
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government influence9
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analysis of information3
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e-commerce5
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trading bloccs2
