4.2.3 Assessment of a country as a production location Flashcards
What is meant as a production location?
An area to outsource and offshore production to
What are the factors assessed when deciding upon a production location?
1) Costs of production
2) Skills and availability of labour force
3) Infrastructure
4) Location in trade bloc
5) Government incentives
6) Ease of doing business
7) Political stability
8) Natural resources
9) Likely return on investment
Why is the cost of production considered when deciding upon a production location?
- Because amongst MNCs cost minimisation is a popular strategy to increase profit margins in mass markets
- Direct costs are a large cost (CELL (Capital, Enterprise, Land, Labour)). There are large sunk costs.
- lower costs of labour especially if in a primary/secondary industries
- Due to wage-inflation caused by government policies (minimum wage) and rising middle-classes are making MNCs move out of emerging markets to Africa.
- Trends in the UK include reshoring due to the available infrastructure and skilled workers.
Why are the skills and availability of labour skills considered when deciding upon a production location?
Skills:
- more efficient due to education, training, GDP growth, skills transfer by TNCs
- Globalisation has led to the transference of skills.
- Help address skill shortages
Availability:
- Younger working-age population (human capital)
- A greater supply of labour downward pressurising wages (lower labour costs)
- High unemployment makes the home nation unattractive
Why is the location in a trade bloc considered when deciding upon a production location?
- operate within trade bloc without trade barriers enables trade liberalisation allowing cost minimisation TNCs benefitting from external economies of scale
- easier access to foreign markets
- support within a trade bloc through subsidies
- 4 freedoms (capital, labour, materials and services)
- distribution channels
- easier transportation
- Monetary unions enable firms to compare prices and not be affected by exchange rates
Why are government incentives considered when deciding upon a production location?
- expansionary fiscal policies reduce tax burdens for MNEs allowing more spending and consumer/business confidence. This allows a business to easily happen.
- Government offer incentives granting SEZs addressing skill shortages reducing unemployment
- protection of intellectual property allows greater return on investment.
Why are natural resources considered when deciding upon a production location?
- accessibility and availability of resources
- lead time would be lower with greater supply (more responsive to demand)
- limits the power supplies and buyers (greater choice) (don’t have leverage)
- extraction and usage of materials may provide a USP
- first-mover advantages near resources
- backwards integration as a form of risk spreading (dictate own prices)
Why is the return on investment considered when deciding upon a production location?
- ROCE (OP/CE)X100
- ARR (Average ann. profit/initial investment)x100
- OPM (considers fixed costs that are related to production lines
- Important as most large MNCs want profit maximisation (increase in share value)
- gain and secure finance
- reinvest in future growth
- large investment/risk to move into new countries (taxation and have sunk costs)
Assess Indonesia as a production location:
+ available workforce (4th largest)
+ natural resources available
+ government are investing in infrastructure through subsidies with (673 airports)
+ within the ASEAN trade bloc, therefore, able to purchase goods due to FTAs
- political instability and with fairly high corruption
- high corporation tax (25%)
- prone to natural disasters being a multiple hazard zone
- fairly low life expectancy around 71
