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• 1.    Natalie McGowan  |  September 24th, 2008 at 4:59 am

  European Monetary Union

  The European Monetary Union is when several countries have agreed to share a single currency between them. EMU consists of three stages coordinating economic policy and ending with the adoption of the euro, the single currency of the EU. All member states of the EU are expected to participate in the EMU.

  The UK participating in the EMU would impact UK firms seeking to expand abroad in several ways. If the UK were to participate in the EMU, UK businesses would not be able to sell products at different prices in different countries. Consumers would expect a product sold in one country in the UK would be the same as it is in another country in the EU.

  Some argue that the UK participating in the EMU would introduce high investment costs on businesses, e.g. training staff and new software. Critics claim that the euro has performed poorly on world currency markets up to date and will lead to lower economic growth and higher inflation within Europe. There will be a reduced risk from currency fluctuations and potential loss of earnings from international trade.

  Businesses will have more challenges than previously, as competition will be greater and there will be increased pressures due to transparency of prices and costs across Europe.

  Another consequence to UK businesses seeking to expand abroad is being within the euro zone would attract inward investment in the UK, which is vital for jobs. Several countries have threatened to give higher priority to investing in businesses, in countries who have adopted the euro.

  A final impact of the EMU is reduced exchange and transaction costs. This is because they will not have to exchange currency from Euros to Pounds Sterling. This will reduce costs from exchanging any profits or payments. However, the exchange rate from Pounds Sterling to US Dollars is stronger than Euros to Dollars; therefore expanding to the US would cost more in exchanging currency.

  Transfer Pricing

  Transfer pricing is the price at which goods and services are transferred within a company. Transfer prices can be used to position funds within an international business to the benefits of the organisation.

  A possible impact of transfer pricing on UK firms seeking to expand abroad is tax liabilities can be reduced. This can be done by moving earnings from a high tax country to a low tax country.

  Another impact of transfer pricing is exposure to foreign exchange risk can be reduced, when large currency devaluation is expected in a country. This is because earnings can be transferred to a country where there is less risk.

  Transfer pricing can impact UK firms as where such prices are manipulated, a subsidiary’s performance on paper may not actually reflect its actual performance. This could affect a management incentive scheme either positively or negatively, which may be based on a subsidiary’s profitability.

  Import duties can be reduced where the tariff to be paid is calculated as a percentage of the value of the goods.

  A final impact on UK firms seeking to expand abroad is that many governments, e.g. the USA, limit companies’ abilities to manipulate transfer pricing, as it decreases the country’s legitimate income.

• 2.    Lucy Gray  |  September 24th, 2008 at 4:59 am

  European Monetary Union

  A monetary union is where several countries have agreed to share a single currency amongst them. EMU consists of three stages coordinating economic policy and ending with the adoption of the euro, the EU’s single currency. All member states of the European Union are expected to participate in the EMU.

  Participating in the EMU would impact UK firms seeking to expand abroad in many ways. Some critics argue that it would introduce high investment costs on the business; for example training staff, new software etc. They also argue it has performed poorly to-date on world currency markets and will lead to lower economic growth and higher inflation within Europe.

  Being within the EMU would help in attracting inward investment in the UK which is vital for jobs. If the UK decides to stay outside the single currency, a number of companies are threatening to give higher priority to investing in plants within countries who have adopted the Euro, for example, General Motors.

  If the UK did participate within the EMU then many businesses would find an increase in challenges than they would have done previously – increased competition and pressures due to transparency of prices and costs across Europe.

  Another impact of this is reduced exchange/transaction costs. Because the EU converts money from one EU currency to another each year, it is extremely expensive and if we expanded abroad and participated in the EMU, then around $12 billion would be saved in exchange costs. Vauxhall alone estimate that this cots their company £10 million each year alone. However, because the exchange rate from pounds sterling to US Dollars is stronger than Euros to Dollars, then expanding into the US would cost more in exchanging currency.

  A final impact of the UK expanding abroad is that there would be a reduced risk from currency fluctuations and potential loss of earnings from international trade. If we participated, then the UK would be safer and so more likely to maintain successful.

  Transfer Pricing

  This is the price at which goods and services are transferred within a company. They can be used to position funds within an international business to the benefits of the organisation.
  For example, funds can be moved out of a particular country by setting high transfer prices for goods and services supplied to a subsidiary in that country and by setting low transfer prices for the goods and services sourced from that subsidiary.

  One impact of transfer pricing on UK firms seeking to expand abroad could be that tax liabilities can be reduced. This could be done by moving earning from a high-tax country to a low-tax one.

  Another impact of transfer pricing on UK firms could be that import duties can be reduced where the tariff to be paid is calculated as a percentage of the value of the goods.

  A third impact of this may be that where a large currency fluctuation is expected, transfer pricing can be used to reduce exposure to foreign exchange risk.

  Transfer pricing can also affect firms as where prices are manipulated, a subsidiary’s performance may not reflect its actual performance. This could positively or negatively affect a management incentive scheme which may be based on a subsidiaries performance.

  A final impact of UK firms seeking to expand abroad is that many governments, particularly the USA, limit the companies’ abilities to manipulate transfer pricing as it decreases the country’s legitimate income.

• 3.    Shelley  |  September 24th, 2008 at 5:00 am

  Q: Assess the possible impact of each of the following on UK firms seeking to expand abroad.
  • European Monetary Union
  • Transfer pricing
  (14 marks)
  The European Monetary Union is a situation where several countries have agreed to share a single currency amongst themselves. The EMU consists of three stages coordinating economic policy and culminating with the adoption of the euro, the EU’s single currency. All member states of the European Union are expected to participate in the EMU. Fifteen member states of the EU have entered the third stage and have adopted the euro as their currency. However, the UK, Denmark and Sweden have not accepted the third use and still use their own currency.
  A possible impact of the European Monetary Union on UK firms seeking to expand abroad is there are reduced exchange/transaction costs. As the EU currently converts approximately $8 trillion from one EU currency to another every year, the moving to the euro represents a saving of $12 billion in exchange costs. This would result in cheaper transaction costs for UK companies.

  Another possible impact of the EMU on UK firms seeking to expand abroad is there is reduced risk from currency fluctuations and potential loss of earnings from international trade.

  Another possible impact of the EMU is if the UK does not adopt the euro, then European companies may not consider using UK companies as suppliers because of transaction costs, exchange rate risks and lack of transparent pricing. Therefore, this could reduce the potential size of the market available to UK companies.

  An impact of the EMU is with transparent prices, UK companies could improve competitiveness by seeking low cost supplies and possibly pass this on to their consumers through price reductions.

  Also, an impact on the EMU is critics argue that the euro will initially involve high investment costs such as, training staff, new software systems etc. It has performed poorly to-date on world currency markets and It will lead to lower economic growth and higher inflation within Europe.

  Another impact on the EMU on UK firms seeking to expand abroad in the UK is single product or service price in different countries will be expected by the consumer.
  Transfer pricing is the price at which goods and services are transferred within a company. Transfer prices can be used to position funds within an international business to the benefits of the organisation.

  A possible impact of the transfer pricing on UK firms seeking to expand abroad is tax liabilities can be reduced by using transfer pricing to shift earnings from a high-tax country to a low-tax one.

  Another possible impact of the transfer pricing on UK firms is import duties can be reduced where the tariff to be paid is calculated as a percentage of the value of the goods.

  Also a possible impact of transfer pricing is many governments limit companies’ abilities to manipulate transfer pricing since it effectively decreases that country’s legitimate income.

  An impact of transfer pricing on UK firms is that where prices are manipulated, a subsidiary’s performance on paper may not reflect it’s actual performance, which could positively or negatively affect a management incentive scheme which may be based on the subsidiary’s profitability.

  Finally, a possible impact of transfer pricing is where a large currency devaluation is expected in a country, transfer pricing can be used to reduce exposure to foreign exchange risk.

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