Tag: multinational corporations

With globalisation, more and more businesses have found it beneficial to ‘go global’. There are many reasons why a firm might choose to expand its production or market to other countries and one particular advantage is cutting costs in the manufacturing of products.

Countries such as China and India have become leaders in production. Look at many of the items you own – I’m sure you’ll see a ‘Made in China’ or ‘Made in India’ amongst them. These fast emerging countries were highly sought after as places to produce due to much cheaper production costs. This advantage led to Western companies outsourcing much of their manufacturing base to China, as a means of retaining a competitive advantage.

However, the cost advantages that China boasted are now less significant and we may be about to see the emergence of a new manufacturing hub. Other countries that are further behind the BRICS in the development process now have cost advantages over places like China and so we may see another transfer of manufacturing to other parts of the world.

When splitting up a supply chain to gain cost advantages a key consideration is the extent to which you lose control. Communication and co-ordination issues can emerge when design takes place in one country; production in another and then the products are sold around the world. When cost differences are huge, these problems can be overlooked, as what they might cost you in terms of lost time etc. is easily made up by savings through cheaper labour.

However, when the cost advantages of production in China shrink, companies are still left with the problems of communication and co-ordination. These now represent more significant costs that could be reduced were production to revert to the country of design or if production were to be moved to an even cheaper country.

The following article from BBC News considers the issues surrounding the supply chain and how businesses may benefit from more collaboration.

Better collaboration lets businesses take back the supply chain BBC News, Alastair Sorbie (15/6/12)

Questions

  1. What are the arguments for becoming a multinational?
  2. Why do host countries, such as the BRICS accept inward investment? What do they gain from it?
  3. Explain how the product life cycle can affect the profitability of a MNC and how the company might respond.
  4. What are the disadvantages to a MNC from ‘going global’?
  5. What are the problems faced by developing countries acting as host nations?
  6. How has technology affected both big and small businesses?

Transfer pricing is a technique used by multinational companies to avoid tax liabilities in countries they regard as having high levels of taxation. The articles below from the Guardian give the results of an investigation by Guardian journalists into the elaborate structures that have been created by multinational companies in the banana industry to funnel their profits through tax havens like the Cayman Islands, Bermuda and the British Virgin Islands. In some cases they have paid an effective tax rate as low as 8% when the tax rate in their home country is 35%.

Revealed: how multinational companies avoid the taxman Guardian (6/11/07)
Bananas to UK via the Channel islands? It pays for tax reasons Guardian (6/11/07)
‘I get up at 4am, work to 6-7pm – it doesn’t feel like a life’ Guardian (6/11/07)

Questions

1. Define the term ‘transfer pricing’.
2. Explain how multinational banana companies use transfer pricing to reduce their tax liabilities.
3. “The trend in the last 30 years has been to shift the burden of tax away from companies on to the consumer and labour. Capital is increasingly going untaxed.” Discuss the advantages and disadvantages of this shift in the method of taxation.