ABR-8575.pdf

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Archives of Business Review – Vol. 8, No.7

Publication Date: July 25, 2020

DOI: 10.14738/abr.87.8575.

Flynn, T. (2020). Cost-Benefit Analysis Of Investment Projects. Archives of Business Research, 8(7). 22-24.

Cost-Benefit Analysis Of Investment Projects

Theresa Flynn

Walden University Doctorate, Business Administration Student,

MS, Organizational Leadership, Colorado State University

BS, Organizational Leadership, Pennsylvania State University

ABSTRACT

The paper contents included considerations of the relationships

existing between business units of Multinational Organizations

(MNOs). Relevant economic theory provided a framework for the

review of accounting practices. An example of consequences derived

as the result of transfer pricing strategies compared with the

transaction costs of pharmaceutical MNO GlaxoSmithKline (GSK) was

provided.

Keywords: Economic analysis, Coase’s Economic theory, transaction costs

economics (TCE), transfer pricing.

INTRODUCTION

Economic analysis used by business strategists included comparisons of benefits and costs for the

purpose of measuring the opportunity presented by business ventures (Ocneanu, & Bucsa, 2014).

Significant indicators included (a) market influences, (b) external factors, and (c) social and

environmental costs (2014). The methodology for cost-benefit analysis of investment projects

involved multiple steps (2014). Economic reports required the inclusion of the following elements

(2014):

• The transformation of accounting costs into market prices:

• The monetization of uneconomic impacts:

• The inclusion of additional indirect effects, if relevant:

• Updates posted to the costs and benefits estimates:

• The calculation of economic performance indicators including economic net present value,

economic rate of return and benefit/cost ratio.

COASE’S ECONOMIC THEORY

Coase’s theory established the preference for views of adaptable hierarchies that superseded the

market when the costs of exchanges within the firm were less than the transaction costs of the

same exchange provided from the market position (Verbeke & Kano, 2013). Ricketts (2014)

concluded Coase’s view of economics mainly altered the perspective of trade. Pigou’s attention

involved the relatively impersonal ‘price system’ and the ideal prices at which goods were sold

(2014, p 49). Additionally, the recognition of significant elements should reflect the marginal social

costs (2014).

Coase (1991) asserted that zero transaction costs estimates would nullify the need for taxation as

defined by the Pigovian solution to resultant social problems associated with business activities.

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Archives of Business Research (ABR) Vol.8, Issue 7, July-2020

Coase’s attention focused on the exchange (Ricketts, 2014). Basic ideas included ways to reduce

“the impediments to agreement” for the purpose of permitting further gains from trade (2014, p

50).

TRANSACTION COSTS ECONOMICS (TCE)

According to Verbeke and Kano (2013, p 410), TCE created a lens for developing views of

transactions based on Coase’s theory. TCE’s economizing orientation enabled analysis of trading

favors’ economizing properties, when applicable (2013). The focus of TCE theory was on the ways

that comparative institutional analysis facilitated an evaluation of the expenses and gains of

trading favors against the costs and benefits of other real world alternatives for governing

transactions (2013).

TCE theorists recognized that business outcomes at the micro-level could be fundamentally

affected by macro-level shift parameters (Verbeke & Kano, 2013). Macro-level shift parameters do

not directly refer to institutional changes over time in one jurisdiction or well-defined geographic

area (2013). Macro-level shift parameters refer to all the variables that could reasonably affect the

adoption, the specific governance features, and the outcomes of practice, and that may differ from

one jurisdiction or geographic space to the other (2013).

GLAXOSMITHKLINE’S (GSKS) TRANSFER PRICING LEGAL ACTIONS

The example of Glaxo Canada’s involvement with transfer pricing strategies paid to business units

included elements of the pricing structure for products, taxation, and income tax (Canada v.

GlaxoSmithKline Inc., 2012). The legal claim against GSK occurred as the result of subsidiary Glaxo

Canada’s purchase of Ranitidine, an ingredient of the anti-ulcer medication Zantac (Canada v.

GlaxoSmithKline Inc., 2012). Prices agreed to by contract and paid to the supply-chain company,

Adechsa, were claimed by the Canadian government to be excessive when compared with the cost

of generic drug equivalents (Canada v. GlaxoSmithKline Inc., 2012; GSK, 2015).

Market-based transfer pricing rules recommended that products should be sold at established

market prices if a competitive market existed (Brickley, Smith, Zimmerman, & Willett, 2014).

However, in the exchange between GSK business units, the rule of marginal-cost transfer prices

was successfully argued as a justification for the excessive price paid for the patented product

(Brickley et al., 2014). The outcome of the legal action favored Glaxo Canada policies yet the call

for an income tax review based on the actual transaction price paid to Adechsa resulted (Canada v.

GlaxoSmithKline Inc., 2012). The considerations included the potential that business practices led

to violations of existing taxation laws (Canada v. GlaxoSmithKline Inc., 2012).

CONCLUSION

Coase’s (1991) economic theorem provided perspectives on the relationships established when

businesses worked together to achieve mutually beneficial outcomes. GSK’s transfer pricing

strategies resulted in ground-breaking legal determinations involving global investment and

marketing policies (Canada v. GlaxoSmithKline Inc., 2012). Future review of TCE-based

interpretations of business policies should provide significant perspectives of the acceptable global

marketplace accounting practices (Verbeke & Kano, 2013).

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URL: http://dx.doi.org/10.14738/abr.86.8575 24

Flynn, T. (2020). Cost-Benefit Analysis Of Investment Projects. Archives of Business Research, 8(7). 22-24.

References

Brickley, J. A., Smith, C. W., Zimmerman, J. L., & Willett, J. (2014). Designing organizations to create value: From

strategy to structure. Custom ed. New York, NY: McGraw-Hill Companies.

Canada v. GlaxoSmithKline Inc., SCC 52, [2012] 3 S.C.R. 3. Available from http://scc-csc.lexum.com/scc-csc/scc- csc/en/item/12613/index.do?r=AAAAAQAMR2xheG8gQ2FuYWRhAAAAAAE.

Coase, R. (1991). Ronald H. Coase - Prize lecture: The institutional structure of production. Nobelprize.org. Nobel

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GlaxoSmithKline (GSK). (2015). Company names and addresses: GlaxoSmithKline. Available from

https://www.gsk.com/media/3611/gsk-group-company-names-and-addresses.pdf

Ocneanu, L., & Bucsa, R. (2014). The Importance of Economic Analysis in Investment Projects. Economy

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Ricketts, M. (2014). The Contribution and Intellectual Legacy of Ronald Coase (1910-2013). Economic Affairs, 34(1),

46-58. doi:10.1111/ecaf.12052

Verbeke, A., & Kano, L. (2013). The transaction cost economics (TCE) theory of trading favors. Asia Pacific Journal of

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