Unit 3 Answers Section A
1. Briefly analyse two reasons why a company such as Dell may wish to relocate its manufacturing operations to another country.
A multinational such as Dell may wish to relocate in Poland due to a variety of reasons of which the main reasons in this case is the subsidy of €52.7, given by the polish government to Dell. With the subsidy the Dells cost of production falls so it is profitable for them to go to Poland. With the subsidy “S” will shift to “S1” as shown below. Price of computers D S S1
Quantity of computers
Another possible reason for such relocation could be lower wage costs and tax advantages in Poland. Lower taxes and lower wages will reduce Dell’s cost of production. However the impact of wage costs in Poland compared to Ireland depends on how far Dell depends on labour – E.g. Automation may be involved.
2. Analyse two reasons why the Polish government were willing to pay a €52.7 million aid package to attract Dell.
The Polish Government has given the subsidy of € 52.7m to attract the world’s second largest producer of personal computers with the aim of having a profitable BOP and tax revenue. When Dell comes to Poland, Poland’s FDI will rise making the capital account of the BOP favourable. Dell will also export to other parts of the world from Poland so Poland’s visible exports will rise, creating a positive trade balance. Dell was Ireland’s biggest exporter so this might be a possible reason for Polish government to attract Dell. However in the long run Dell will repatriate profits. This will affect Poland’s BOP. They might also do transfer pricing (make less profit in Poland and avoid paying tax) which will be a barrier to Polish government’s objective of increasing tax revenue. Dell might also create large number of jobs in Poland so it is one possible reason for the government to give an aid package and attract them. This will help to reduce unemployment rates in Poland. However like most multinationals if Dell becomes footloose, the jobs created can be destroyed anytime.
3. Assess the likely impact on two stakeholder groups of Dell’s decision to relocate its manufacturing to Poland.
Stakeholders are groups interested in the activities of a business. Dells possible stakeholders are employees, consumers, Ireland government, Polish government, owners (shareholders). Employees – Dell’s decision to relocate largely will affect employees in Ireland and Poland. According to the case Dell has announced to cut 1900 of 3000 jobs, in Ireland. This would mean the employees becoming unemployed and their living standards falling. This will raise unemployment rates and these Irish employees may not have the labour mobility to work in another industry. On the other hand, the Polish employees will benefit as new jobs are created. So some employees will gain at the expense of others. If the jobs created in Poland are low paid then employees will not have high standard of living. But a low pay for Polish unemployed may be better than a no pay. Government – here again the polish government will benefit but not the Irish government. When Dell relocates, jobs in Ireland are lost as exports reduce. There will be negative impacts on the BOP as FDI flows out. Dell accounted for 5% of Irish GDP so GDP will fall. The tax revenue for the Irish government will fall. On the other hand Polish government will benefit as the jobs are created, FDI flows, exports rise, and GDP rises. But transfer pricing and footloose capitalism may not really bring about benefits to Poland.
4. Evaluate the likely impact that increasing membership of the WTO might have on a multinational such as Dell.
World trade organisation aims to reduce trade barriers and avoid trade disputes. Increasing membership of WTO would mean that many countries will remove protectionist measures, and encourage free trade. Multinationals like Dell will therefore be able to easily relocate in these countries that join...
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