The negotiating power of the subsidiary
A subsidiary’s foreign currency profit is boosted by low transfer prices for its input and high transfer prices for its output.If this is the case, then the subsidiary will be considered to be a good risk by foreign financial institutions and thus the negotiating power of the subsidiary with these financial institutions will be greater.On the other hand, high transfer prices for input and low transfer prices for output will reduce the reported profit of the subsidiary and this may improve its ability to negotiate wages with the trade unions.
1.FDI is one of several approaches that business firms can use to enter foreign markets.The alternatives include exporting, licensing and franchising.
2.Several methods involving various criteria are used to evaluate direct investment projects, including: (i)the accounting rate of return; (ii)the payback period; (iii)the net present value and (iv)the internal rate of return.The first two do not take into account the time value of money.The NPV seems to be the most consistent of the four methods.
3.International taxation refers to the taxation of cross-border transactions.Double taxation arises if income earned abroad is taxed by both the home and host government.Many countries have bilateral tax treaties with other countries designed to avoid double taxation.These treaties are typically based on the OECD Model Tax Convention.
4.Transfer pricing policies are determined by: (i)tax considerations; (ii)global regulation; (iii)management incentives; (iv)performance evaluation; (v)fund positioning; (vi)marketing considerations; (vii)risk; (viii)government policies: (ix)the interests of joint venture partners; and (x)the negotiating power of the subsidiary.