Assessment of a country as a production location 4.2.3

Question 1

What are the factors to consider?

Answer 1

• Costs of Production
• Skills & Availability of Labour Force
• Infrastructure
• Location in Trade Bloc
• Government Incentives
• Ease of Doing Business
• Political Stability
• Natural Resources
• Likely Return on Investment

Question 2

Costs of Production:

Answer 2

• Equipment, buildings and land
• Wage levels
• Raw materials

In highly competitive mass markets, low production costs will be a significant issue.
This means low-wage cost economies will see FDI in order to take advantage of the labour force. This allows businesses to drive costs down and follow a low-cost strategy if required.

Question 3

Skills & Availability of Labour Force:

Answer 3

The UK is seen to have a highly skilled labour force. However, despite this, there is often a shortage of suitably skilled workers i.e. a lack of availability.
This can be resolved by locating in other countries and utilising the skills of workers there. This often involves training workers to the required standard. However, as this leads to a rise in the individual worker’s living standards, there is often plenty of supply of labour for these jobs.

Question 4

Infrastructure:

Answer 4

The same can be seen when a business looks to locate production in another country. Clearly, transportation links are vital in moving any goods around the geographical region.
At the same time, communication is vital, particularly for services, in order to be able to communicate with customers and other businesses.

Question 5

Location in Trade Bloc:

Answer 5

Locating in a trade bloc such as the EU, NAFTA and ASEAN allow easier access to markets within those countries, with lower export taxes.
This will increase the benefits of setting up production inside the trade bloc. FDI will be invested into countries that reside in a trade bloc.

Question 6

Government Incentives:

Answer 6

National and local governments can provide incentives e.g. grants if a business were to invest in the UK.
This could be provided in order to create jobs, particularly in deprived regions.

• Less taxation
• Free trade zones
• Subsidies
• Grants set up costs,
• Training
• Construction

Question 7

Ease of doing business:

Answer 7

• The ease of doing business in terms of location is how responsive governments are to the demands of the business. Again, excessive bureaucracy will increase both time and costs for a business e.g. paperwork required for a location permit.
  Governments might not want a business to compete with domestic businesses and therefore take a difficult stance in allowing them to set up in a location, even if this appears to breach regulations of the trade bloc within which they exist e.g. the EU.
• At other times, Governments can pick and choose who they want to locate in their country as so many businesses want to be close to the market e.g. China.
• Culture, language barrier
• Taxation
• Legislation
• Bureaucracy
• Quota
• Barriers to trade

Question 8

Political Stability:

Answer 8

Corruption is a major influence on whether large foreign businesses are allowed to be set up in some countries.
Normally MNCs pays bribe to local civil servants to cut through bureaucracy and use local influence to get things done.

Even if there is planning permission for new production facilities, often difficult to get skilled management to oversee operations, particularly in war-torn countries.

Question 9

Natural Resources:

Answer 9

Some countries are blessed with an abundance of natural resources that can be used for economic gain e.g. fossil fuels such as gas and oil and minerals such as diamonds and metals.

Therefore, it is sensible to set up production in order to ensure a supply of these resources.
This has led to MNCs moving into countries globally and having a significant influence on those countries.

• Availability of raw materials
• Bulk reducing
• Bulk increasing
• Cost production

Question 10

Likely Return on Investment:

Answer 10

As is the case for most businesses, the bottom line is profit.
A business will take into account all of the previous factors discussed and decide whether the return on investment is worthwhile. This is strategic decision making. Heavy investment is required to move into new countries. When a decision to proceed is under way, it is not easy to undo.

Will cost savings out weigh investment and set up costs , pros out weigh cons.