4.2.3 Assessment Of A Country As Production Location Flashcards
Assessment of a country as a production location (9)
Costa of production, skills and availability of workforce, infrastructure, location in a trading bloc, government incentives, ease of doing business, political stability, natural resources, likely return on investment
Cost of production
Low costs of production is crucial in highly competitive markets.
Companies will often choose to locate in low cost countries so they can follow a low cost strategy and gain a competitive advantage - this leads to low cost economies experiencing a lot of FDI from companies.
Skills and availability of workforce
The
skills required to operate machinery may not be available in many less
economically developed locations. In addition, to function in a modern
manufacturing plant, literacy will be an important skill. Skill level affects productivity which will then affect unit costs - businesses will locate to countries where there are sufficient skilled workers.
HOWEVER - Many UK businesses are reshoring due to quality and cost issues.
Infrastructure
Transport and utilities must be up
to scratch for a modern manufacturing facility to be able to reliably service the markets it is designed to serve. Transportation links are vital when moving raw materials, components and finished products. Communications and a reliable energy supply is also needed to ensure that products arrive on time.
Location in a trading bloc
Often a vital pull factor for a location will be its presence within a trading
bloc. When Britain was still a member of the EU, it became an extremely
attractive manufacturing base for non-European firms. The reason was that
for a company such as Toyota, seeking to serve the European market, building their cars in the UK meant that they avoided tariffs that would have been
charged on cars imported from Japan, or indeed anywhere outside the EU.
Location in a trading point analysis
Trading in a bloc (e.g. EU, ASEAN, NAFTA) allows easier access to markets within those countries and therefore high costs are risks associated with FDI are reduced.
There are fewer trade barriers, making products cheaper for consumers, meaning sales increase.
Government incentives, reasons why govts may be keen to attract foreign companies to set up production facilities in their country
job creation
• extra tax revenues
• a boost for local suppliers
• increasing skill levels among local labour force
• potential for a positive impact on the balance of payments.
Government incentives- order to attract businesses to their country, governments will use a
variety of possible incentives, such as:
- grants to help purchase land and machinery
- tax breaks
- investment in local infrastructure
- investment in local training.
Ease of doing business
a business planning to operate in a new country will need to assess how much regulation, government interference and bureaucratic inefficiency it may suffer from. Typical issues to consider include: • days to start a business • days to wait for a construction permit • days to get electricity • total tax rate as a % of profit • days to import an item • days to enforce a contract.
Political stability
Businesses expect to be able to plan for the future, something which is made almost impossible if governments change frequently and make drastic policy changes as a result. Businesses may avoid countries that are politically unstable because it will affect their production and staff.
Some businesses will operate in politcally unstable countries because there is an abundance of natural resources available - they are willing to take a high risk.
Some may avoid countries with poor human rights records for ethical reasons.
Natural resources
It is likely that the availability of natural resources will play a key role
in attractiveness for businesses further back along the supply chain.
Generally, companies that initially process raw materials at the start of
a supply chain will need large quantities of relatively bulky resources.
These will be expensive to transport over large distances. This makes it
logical for these firms to select locations near a plentiful supply of natural
resources.
Likely return on investment
Cheaper locations will seem more attractive,
since the initial investment will be lower. However, where a cheap
location provides limitations to the likely future revenues the location
can earn, this may be a false economy. A country where the investment
will be 50% higher that can generate revenues that are 100% higher will
ultimately offer a better return on investment for firms that are willing to
take a long-term view.
COST OF PRODUCTION
Costs of production is the expenditure incurred by a business when producing goods or services - lower costs of production abroad may encourage a business to relocate.
Define INFRASTRUCTURE
Infrastructure describes the physical systems that a country (or business) require to operate effectively. These include transport, communication, and utilities.
Define TRADING BLOCS
Trading blocs are economic units formed when the governments of a group of countries agree to trade together freely i.e. usually with no trade barriers.
