Business - Summative A07

Topic: 1.6 MNC's, 2.5 Culture, 3.8 Investment Appraisal BMT: Steeple / SWOT / Hofested

Host Countries

Host countries are nations that receive foreign direct investment (FDI) from multinational companies. These countries are where MNCs establish business operations such as production, distribution, or sales facilities.

Multinational Companies

Multinational companies are large firms that operate in more than one country. They manage production or deliver services across national borders through branches, subsidiaries, or joint ventures.

Reasons for the growth of multinationals

• Improved communications – not only ICT, but also transport and distribution networks.

• Dismantling of trade barriers – allowing easier movement of raw materials, components and finished products.

• Deregulation of the world’s financial markets – allowing for easier transfer of funds, as well as tax avoidance.

• Increasing economic and political power of the multinational companies – this can be of enormous benefit, especially in middle- and low-income countries.

Positive impacts of multinationals on the host country (AO3)

Advantages for the host country include:

• Economic growth – multinational companies can boost the domestic economy by providing employment, developing a local network of suppliers, and paying taxes and providing capital injections.

• New ideas – multinational companies may introduce new ways of doing business and new ways of interacting socially.

• Skills transfer – multinational companies may help develop the skills of local employees. Domestic businesses can benefit from starting their own business with the skills learned.

• Greater choice of products – the domestic market will benefit as the variety of products will increase.

• Short-term infrastructure projects – multinational companies often help to build infrastructure (for example roads to the factory, schools for workers’ children).

Negative impacts of multinationals on the host country (AO3)

Profits being repatriated – the multinational companies may pay into the local tax system, but the bulk of their profits will be rerouted away from the host country.

Loss of cultural identity – the appeal of domestic products, ways of doing business, and even cultural norms may suffer. This is especially important for the younger generations who are more likely to buy global brands.

Brain drain – many highly skilled employees may look to work for the multinational company in another country.

Loss of market share – as multinational companies take over more of the domestic market, domestic producers may suffer.

Short-term plans – multinational companies may not intend to stay for a long time – if lower-cost producers can be found elsewhere, they may move out at short notice.

Organisational (corporate) culture

Organizational culture refers to the attitudes, experiences, beliefs, and values that shape how people behave within an organization. It is influenced by company policy and other things like the company's mission and vision statement.

Handy’s Gods of Management theory

Handy’s Gods of Management theory categorizes organizational culture into four types—power, role, task, and person—each symbolized by a Greek god. The theory helps businesses understand different leadership styles and how culture influences decision-making and employee behavior.

Cultural clashes

Conflict between two or more cultures within an organization. This occurs when individuals enter an organization or when two or more organize merge together

Power culture

A power culture exists when a few individuals retain the essential power. Control comes from these individuals and spreads out across the organization. Power cultures have few rules and procedures. People are usually judged by their results rather than how those results are achieved, since ends are more important than means. Swift decision-making can result, but the decisions may not be in the long-term interests of the organization.

Role culture

In a role culture, employees have clearly defined roles and operate in a highly controlled and precise organizational structure. These organizations are usually tall hierarchical bureaucracies with a long chain of command.

Task culture

The task culture describes a situation in which short-term teams address specific problems. Power within a task culture shifts from person to person, since different people with different skills can lead the team at different times.

Person culture

A person culture exists where individuals believe themselves to be superior to the organization and just want to do their own thing. Some professional partnerships, such as architecture firms and some university departments, can be predominantly person cultures. There, each specialist brings a particular expertise to the organization.

Reasons for Cultural Clashes

• Different degrees of formality – some organizations are highly formal whereas others are informal.

• Different languages – organizations typically have a language that is the norm. Individuals who do not speak the language well often experience difficulties. Misunderstanding can also occur if differences exist in modes of non-verbal communication.

• Different leadership styles – when two organizations merge, individuals can experience changes in leadership styles. For example, if an organization with an authoritarian leadership style acquires a company accustomed to democratic leadership, both leaders and employees will find the situation difficult.

• Different practices – all organizations, even those from the same country, have some differences in practices compared to other organizations. These differences can be greater when organizations are from different countries or cultures.

Consequences of Culture Clash

• Lower productivity – employees struggle with unfamiliar procedures and don’t meet expected efficiency levels.

• Higher labour turnover – unhappy and uncertain employees may leave, especially when unsure of their future in the company.

• More workplace conflict – clashing organizational cultures may create stress and conflict.

• Decreased profitability – rising conflict, turnover, and falling productivity lead to reduced profits.

Payback period

Payback period is the amount of time it takes for an investment to recover its initial cost from net cash inflows. It is a simple method used to assess the risk and liquidity of a project by measuring how quickly the investment is repaid.

Discount rate

The discount rate is the interest rate used to reduce the value of future cash flows to their present value in investment appraisal. It reflects the opportunity cost of capital and helps account for the time value of money in methods like Net Present Value (NPV).

Average Rate of Return

This method measures the annual net return on an investment as a percentage of its capital cost. It assesses the profitability per annum generated by a project over a period of time. It is also known as the accounting rate of return.

Net Present Value

This is defined as the difference in the summation of present values of future cash inflows or returns and the original cost of investment. Present value is today’s value of an amount of money available in the future

Advantages of Payback period

Advantages

• It is simple and fast to calculate.

• It is a useful method in rapidly changing industries such as technology. It helps to estimate how fast the initial investment will be recovered before another machine, for example, can be purchased.

• It helps firms with cash flow problems because they can choose the investment projects that can pay back more quickly than others.

• Since it is a short-term measure of quick returns on investment, it is less prone to the inaccuracies of long-term forecasting.

• Business managers can easily understand and use the results obtained

Disadvantages of Payback period

Disadvantages

• It does not consider the cash earned after the payback period, which could influence major investment decisions.

• It ignores the overall profitability of an investment project by focusing only on how fast it will pay back.

• The annual cash flows could be affected by unexpected external changes in demand, which could negatively affect the payback period.

Advantages of ARR

Advantages

• It shows the profitability of an investment project over a given period of time.

• Unlike the payback period, it makes use of all the cash flows in a business.
  It allows for easy comparisons with other competing projects for better allocation of investment funds.

Disadvantages of ARR

Disadvantages

• Since it considers a longer time period or useful life of the project, there are likely to be forecasting errors. Long-term forecasts reduce the accuracy of results.

• It does not consider the timing of cash inflows. Two projects might have the same ARR but one could pay back more quickly compared to the other due to faster cash inflows.

• The effects on the time value of money are not considered.

Advantages of NPV

Advantages

• The opportunity cost and time value of money is put into consideration in its calculation

• All cash flows, including their timing, are included in its computation

• The discount rate can be changed to suit any expected changes in economic variables, such as interest rate variations.

Disadvantages of NPV

Disadvantages

• It is more complicated to calculate than the payback period or ARR.

• It can only be used to compare investment projects with the same initial cost outlay.

• The discount rate greatly influences the final NPV result obtained, which may be affected by inaccurate interest rate predictions.

Calculate payback period

Payback Period (with months, for uneven recovery):
Payback period =
Number of full years +
(Additional cumulative cash flow needed ÷ Net cash flow in that year) × 12

• Use when you need to go partway into the final year to recover the investment.
  This is based on the cumulative cash flow turning positive.

Calculate ARR

average rate of return (ARR) =  ( (total returns - capital cost) ÷ years of usage ) ÷ capital cost × 100

Calculate NPV

NPV = (Net cash flow × discount factor for Year 1)

   + (Net cash flow × discount factor for Year 2)

   + (Net cash flow × discount factor for Year 3)

   + ...

   – Initial investment.