Are Virtual Organizations Multinational Enterprises - Term Paper Example

? Are Virtual Organisations Multinational Enterprises (MNEs)? Table of Contents 0 Introduction 2.0 of MNEs 3.0 TypicalSectors Where MNEs Exists 3.1 Manufacturing Sector 3.2 Mining and Extractive Sector 3.3 Food Service and Hotel Sectors 3.4 Services 4.0 The Relevance of Intellectual Property to MNEs 5.0 The Possible Burden of International Double Taxation on MNEs 6.0 Workers Protection Rights and the OECD Guidelines that MNEs Must Follow 7.0 Summary References 1.0 Introduction Virtual organisation is a term that came into existence in the 1990’s. Virtual organisations are motivated by the information revolution which allows communication to take place in real time, regardless of location. Virtual organisations are geographically distributed organisations whose members are bound by a common set of goals and objectives and who communicate and coordinate tasks through the use of information technology (Ahuja and Carley 1998). According to Preston (n.d), there are four key characteristics of virtual organizations as a process. Virtual organisations involve developing relationships with a wide range of partners each having a core competence that complements the others. It capitalises on the ability of telecommunications technology to overcome distance and time related problems. Furthermore, it involves trust between parties. Virtual organisations are also motivated by specific opportunities. As soon as these opportunities are exploited enterprises move on to form new partnerships and alliances. 2.0 Description of MNEs A multinational enterprise (MNE) or corporation (MNC) is an entity that operates in more than one tax jurisdiction whether as a single tax payer entity or as a group of such entities (Fernandez and Pope 2002). MNEs have their headquarters in one country (the parent/home country) and operate subsidiaries in several other countries known as host countries. There are a number of enterprises worldwide that operate in this way. MNEs continue to grow and expand their operations because of WTO trade rules which facilitate globalisation as well as the growth of electronic commerce and information technology. Some MNEs have budgets that are larger than some countries and this indicates the extent of their power and influence as it relates to the setting of trade rules and regulations by international bodies. Multinational enterprises have many dimensions to them and can be viewed from several perspectives. These dimensions include and are not limited to management, ownership, strategy and structure. In terms of ownership, it may be argued that an enterprise is multinational if it is owned by nationals of more than one country. Companies that fit this particular criterion include Shell and Unilever which is owned by both British and Dutch interests. Many multinational enterprises do not meet this test as most of them originated in one country. In terms of the management criterion the managers are from different nationalities according to the countries in which they operate. However, as a starting point most multinational enterprises use persons from their home country to lead the management team in the initial stages of their operations in host countries. In terms of strategy, multinational enterprises seek to maximise their profits globally by entering new markets. The structure of these companies is such that the head office which is located in the home country controls the operations of the subsidiaries and assists in the direction and coordination of their activities. According to Moran (2007) MNE investments in the developing world occurs in four distinct forms. They are Foreign Direct Investment (FDI) in extractive industries, FDI in infrastructure, FDI in manufacturing and assembly, and FDI in services. However, multinationals operate in not just developing countries but also developed countries. In addition to FDIs they also provide licenses and management agreements in the fast food and hotel sectors. Therefore, FDI and licensing are the two ways in which MNEs enter a foreign market. Examples of FDIs include oil companies like Shell and aluminium companies like Alcoa and that of Licensing – Kentucky Fried Chicken (now known as KFC) and McDonald’s. In terms of the manufacturing and extractive sectors, their activities are normally carried out in developing countries. The governments of these countries and the local private sector does not have the means to invest in the extractive industries and in terms of the manufacturing sector the private sector does not have the competitive advantage in certain manufactured items. The government of these countries form partnerships with these MNEs by providing the land for MNEs to extract resources. Thus we have gold, oil and bauxite mining operations being carried out by MNEs in Africa, the Caribbean and other developing nations where these resources exist. 3.0 Typical Sectors where MNE exists and why According to OECD statistics (2011), the typical sectors in which MNEs exists are mining and quarrying, manufacturing, chemical products, services and food and hotel sector. 3.1 Manufacturing Sector The manufacturing sector is the most dominant sector for multinationals in their quest to find cheap labour in order to maximise the returns on their investments. Capital is most mobile in this area than any other. The products that are manufactured in these sectors include garments and shoes. The raw materials are imported into the host country, possibly from the home country or wherever they can be acquired cheaply. The products are then manufactured in the host country and exported to the home or other countries for sale. The jobs that these manufacturing companies provide are normally low skilled and therefore does not require a lot of training. The MNEs therefore spend little or nothing on training and development of employees. Investment in this sector normally takes place by foreign direct investment (FDI). However, as soon as better and more attractive opportunities are discovered in other places these companies move on to form new partnerships in other countries. The ease with which this movement takes place arises from the mobility of capital. 3.2 Mining and Quarrying In the mining and quarrying sector the primary resources are located in the host country. MNEs are usually attracted by the availability of resources such as gold, diamonds, oil and bauxite in the host countries. MNEs have the capital, expertise and technology to carry out the processes involved in extracting the resources. In this sector therefore, investment is not based on cheap labour but the existence of valuable resources which are in demand all over the world. MNEs provide benefits to the host countries by providing well needed jobs, leading to the reduction of unemployment. In some cases they form partnerships with private companies or with the government in the process. 3.3 Food Service and Hotel Sector In the fast food service companies like Kentucky and McDonalds grant licenses for the operation of franchises in host countries in return for franchise fees which represents a percentage of their sales. These MNEs have patents for their products which are in high demand. In the case of hotels it takes place in the form of management contracts or by FDI. Where management contracts are entered into, the name of the MNE is used and they manage the operations of the entity. The name goes a long way in identifying the property with a brand which is known for its reputation in providing high quality services to tourists all over the world. This attracts tourists who focus on brand names when travelling overseas. FDI in the hotel sector involves MNEs constructing the facilities and providing the management staff to coordinate operations. Both the construction and service industries benefit from the infrastructure development that takes place in the host country. Employees are readily available to staff the operations in the host country. 3.4 Services A number of multinationals are involved in the service sector. During the late 1990s to early 2000’s we have seen the growth of call centres in developing countries. The growth has been facilitated by the substantially lower cost of labour developing countries. The multinationals that exist in this sector facilitate the growth and development of MNEs in the other sectors and represents off shoots from those sectors. 4.0 The Relevance of Intellectual Property to MNEs MNEs invest a lot of resources in research and development (R&D). The introduction of the World Trade Organisation’s (WTOs) Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement indicates that intellectual property is important to the success and profit maximisation capabilities of MNEs who depend on patents and trademarks for their continuing profitability. According to Drahos (2003), TRIPS is seen as a major step in the globalisation of standards of patent, trade secret and trade protection. These were the areas of major significance to the chemical and pharmaceutical companies. Companies like Pfizer had an interest in this as companies in India were infringing on there research and development efforts to their own benefit. TRIPS require countries to recognise patents on pharmaceutical products and have implications for both the cost of patented medicines as well as the long-term fate of generic industries in countries like India, Brazil and Thailand (Drahos 2003; Action Aid International n.d.). Countries that were engaged in producing identical products based on formulas arrived at based on research carried out by MNEs are now only able to do so under license. Action Aid International (n.d.) further states that Pfizer’s CEO stated that he was in talks with WTO director-general Supachai Panitchpakdi as it relates to his role in the TRIPS negotiations. 5.0 The Possible Burden of International Double Taxation on MNE International double taxation occurs when the host and the home country imposes a tax simultaneously on a person or company. When this happens MNEs have a higher tax to pay than they would actually pay if the enterprise was only located in one country. However, MNEs by their definition operate in several countries and each of these countries has their own tax laws which have to be adhered to. International double taxation is therefore a high possibility if there is no treaty between the host country and the home country or if the host country is not in agreement with the transfer pricing method that is use by the MNE. Taxation treaties allow for the tax to be paid in the host country and any difference between the host and the home country (if the home country tax rate is higher) to be paid in the home country. Tax treaties encourage foreign direct investment and in so doing allows for the promotion of trade and global partnerships. Without such treaties growth in trade and the development and growth of some countries would be stifled. The aim of an international tax policy is to place some controls on companies which locate their operations in countries in order to achieve tax savings. The OECD recently provided new guidelines which are used by both OECD member countries and non-member countries for negotiation, application and interpretation of their bilateral tax treaties. According to OECD (2011) this model tax convention provides a means for settling on a uniform basis the most common problem that arise in the field of double taxation. The OECD (2011) further states that these guidelines help to prevent problems that would cause barriers to the free movement of goods, services, capital and persons between countries. The OECD’s transfer pricing guideline provides guidance on the application of the arm’s length principle in terms of the valuation of goods for tax purposes between associated enterprises. The principle seeks to ensure that the taxable profits that MNEs report faithfully represents their economic activities within the host country. This assists MNEs to avoid the risk of double taxation that are likely to arise from disputes between countries in relation to the determination of arm’s length remuneration and other transactions. OECD guidelines also provides new guidance on how to select the most appropriate transfer pricing and how to apply two of the OECD’s approved transfer pricing methods. These methods are referred to as transactional profit methods. They are the transactional net margin method and the transactional profit split method. According to OECD (2011) these methods will help both developed and developing countries in their endeavour to ensure that MNEs do not use transfer pricing to shift profits to low-tax jurisdictions and in the same manner do not subject them to double taxation. These guidelines will no doubt go a far way in resolving disputes between tax authorities. 6.0 Workers Protection Rights and the OECD Guidelines that MNEs Must Follow The protection of workers rights is a very important element in globalisation and the development and spread of MNEs. The organisation for economic cooperation and development (OECD) guidelines indicates that enterprises should operate within the framework of applicable laws and regulations in relation to labour relations and employment practices, respect the rights of their employees to organise themselves and seek representation from a trade union of their choice or any other genuine employee association (OECD 2008). The guidelines cover such elements as the effective abolition of labour as well as the elimination of forced or compulsory labour. OECD guidelines promotes equality of employment opportunity and non-discrimination of employees as it relates to their employment and their occupation on the grounds of race, colour, sex, religion, political opinion, national extraction or social origin. OECD guidelines also allows for the provision of facilities and information for employee representatives such as trade unions in order to assist in the development of collective agreements and to facilitate meaningful negotiations on conditions of employment. The guidelines provided for MNEs also promote consultation and cooperation between employees and employers in relation to matters of mutual concern. MNEs are required to observe standards of employment that are no less favourable than those observed by employers of a comparable standard in the host country. MNEs are required to take the necessary steps to ensure the occupational health and safety standards are followed in their operations (OECD 2008). 7.0 Summary Virtual organisations are MNEs as they operate in more than one culture and their activities are directed and coordinated from a central location which is at head office in the home country. They are attracted by favourable opportunities in the host countries and as soon as these opportunities are exploited they look for other opportunities in other countries. They are made possible by the information revolution which enables some corporations to be profitable for others as well as themselves. In a similar way other industries in the host country benefits from the existence of an MNE in their locale. According to Preston (n.d.) because of the role that technology plays in the evolution of social structures virtual organisations are seen as the emerging standard in business. They result not only from technological advances but from ‘changes in expectations on the part of consumers and collaborators (Preston n.d.). To that extent virtual organisations are just one form of MNE. The only difference is that they do not possess all of the structural characteristics of traditional MNEs. As consumers continue to change the way they do business and as the world continue undergo changes brought on by globalisation the social structures of organisations will continue to undergo fundamental changes as they seek to lower their cost of operations in foreign countries. References Action Aid International (n.d.) Under The Influence: Exposing undue corporate influence over policy-making at the World Trade Organization. Retrieved from: http://www.actionaid.org.uk/doc_lib/174_6_under_the_influence_final.pdf. Last accessed 14th Jun 2011 Ahuja, M.K. and Carley, K.M (1998). Network Structure in Virtual Organisations. Journal of Computer Mediated Communication: 3(4) Retrieved from: http://jcmc.indiana.edu/vol3/issue4/ahuja.html. Last accessed 14th Jun 2011 Drahos, P. (2003). Expanding Intellectual Property's Empire: the Role of FTAs. Retrieved from: http://ictsd.net/downloads/2008/08/drahos-fta-2003-en.pdf. Last accessed 14th June 2011 Fernandez, P. and Pope, J. (2002). International Taxation of Multinational Enterprises (MNEs) Revenue Law Journal: 12 (1). Retrieved form: http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1132&context=rlj&sei-redir=1#search="Journal+Articles:+Multinational+Enterprises". Last accessed 14th Jun 2011 Moran, T. H. (2007). A Perspective from the MNE Declaration to the Present: Mistakes, Surprises, and Newly Important Policy Implications. ILO Publication. Retrieved from: http://www.ilo.org/wcmsp5/groups/public/---ed_emp/---emp_ent/documents/publication/wcms_101037.pdf. Last accessed 14th Jun 2011 OECD. (2011).Inward activity of multinationals by industrial sector. Retrieved from: http://stats.oecd.org/Index.aspx?DataSetCode=AFA_IN3. Last accessed 14th Jun 2011 OECD (2008). OECD Guidelines for Multinational Enterprises. Retrieved from: http://www.oecd.org/dataoecd/56/36/1922428.pdf. Last accessed 14th Jun 2011 OECD (2011) 2010 OECD Model Tax Convention Transfer Pricing and Updated PE Definition. Retrieved from: http://www.konsilia.es/esp/2011/01/03/2010-oecd-model-tax-convention-transfer-pricing-and-updated-pe-definition/. Last accessed 15th Ju 2011 Preston, S.M. (n.d).Virtual Organisation as a process: Integrating Cognitive and Social Structure Across Time and Space. Retrieved from: https://www.msu.edu/~prestons/virtual.html. Last accessed 15th Jun 2011 Read More