The Concept of Multinational Corporations Essay

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Consider that a multinational firm headquartered in the U.S (40%) has subsidiaries in the Bahamas (0%), United Arab Emirates (55%), and South Africa (35%). The parent firm produces a good at a cost of $100 and it is shipping this good to its subsidiaries for sale in local markets. The parent firm transfers the goods to its subsidiaries to be sold locally. The parent firm could charge its four subsidiaries anywhere from $100 to $300 for one unit of the good. Clearly describe an ideal plan for this firm to minimize overall taxation (i.e. what price to charge each subsidiary, etc.). (Note that the number in parenthesis for each country is corporate tax rates).

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Normally, subsidiaries of US corporations are not subject to laws on foreign sources of income. Tax liability only arises under considerations regarding income generated from passive investment. Thus, plans on the minimization of overall taxation should focus on income generated through strategies for favorable pricing in transactions between the US Corporation and its subsidiaries. Using multilateral netting, the Corporation should prioritize the minimization of instances of cross-border payment starting with the subsidiary in the United Arab Emirates, then South Africa, and lastly the subsidiary in the Bahamas. Single payments that satisfy the involved parties will reduce the rate of flow of funds, which translates into high tax costs.

Generally, there are four motives for MNC to engage in foreign direct investment. Each of these motives has different implications on the volume of intra-firm trade around the world. Describe each motive and explain how each affects the volume of intra-firm trade.

Multinational corporations engage in foreign direct investment to acquire resources, increase profits, expand market dominance, and reduce operating costs. The need to acquire resources increases the volume of inter-firm trade due to the expansion of capital stock in the host country. MNC’s desire to increase profits has minimal effects on the volume of inter-firm trade since subsidiary firms have to operate within the business sphere of the host country. Expansion of market dominance leads to an increase in the volume of inter-firm trade because the process requires the transfer of human, financial, and technical resources between a company and its subsidiaries. The need to reduce operating costs promotes a reduction of the volume of inter-firm trade due to aspects such as tax costs.

Theoretically, FDI/MNC has significant impacts on host country economies through three major channels. List and explain each of them.

FDI/MNC affects the host country’s economies through the transfer of knowledge and technology, which facilitates the formation and exploitation of resources in the host country, integration of local and global markets that open up numerous trade opportunities for the host country, and development of local firms and institutions, which increase employment opportunities.

Compare and contrast the impacts of Greenfield FDI and Merger & Acquisition on a host country’s market structure.

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Although Greenfield FDI and Mergers & Acquisitions spur economic growth in the host country by expanding the domestic market size and improving capital markets, the influence of these two forms of investment on a host country’s market structure varies. Greenfield FDI substantially enhances economic growth by increasing price competitiveness, which has significant impacts on the level of productivity in the host country. On the contrary, Mergers & Acquisitions cause appreciation in the rates of real exchange leading to a loss in price competitiveness.

Nike Inc. has contacts with over 800 manufacturing factories around the world that manufacture Nike’s products; whereas Intel Inc. runs over 200 company-owned facilities around the world. Explain the reasons for the difference in the strategy for global operation by the two companies.

The difference in the strategy for global operation between Nike Inc. and Intel Inc. concerns the level of control that both companies desire to have over operations of their branches. Nike seeks to grant significant levels of autonomy on the management of its factories while Intel is keen to maintain a centralized source of authority that oversees operations in its branches around the world.

One of the difficulties in dealing with the transfer pricing practice is to estimate a comparable market price of a good that a firm charges its affiliates. There are about five methods used by tax regulators to arrive at a comparable price. Explain four of the five methods. Be specific.

The five methods used by tax regulators to arrive at a comparable price are comparable uncontrolled price (CUP), resale price (RP), cost plus (C+), profit split (PS), and comparable profits method (CPM). CUP analyzes the transaction between parties under similar circumstances. RP focuses on the estimation of transfer costs from the perspective of either the manufacturer or distributor. The C+ approach seeks to establish the profit mark-up of the seller in the scope of earnings for arm’s length sellers. PS focuses on the sharing of profits in a transaction between related parties.

How would you go about determining the nationality of a multinational firm? Is the location of a headquarter office an indication of a company’s nationality?

In determining the nationality of a multinational firm, I would consider the legal systems employed in forming the firm. These legal systems define a multinational firm, and thus are the basis of its nationality. Legal systems determine the location of the central administration of multinational firms.

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IvyPanda. 2021. "The Concept of Multinational Corporations." March 21, 2021. https://ivypanda.com/essays/the-concept-of-multinational-corporations/.

1. IvyPanda. "The Concept of Multinational Corporations." March 21, 2021. https://ivypanda.com/essays/the-concept-of-multinational-corporations/.


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IvyPanda. "The Concept of Multinational Corporations." March 21, 2021. https://ivypanda.com/essays/the-concept-of-multinational-corporations/.

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