factors that may influence a firm's choice to expand worldwide (3)

Question 1

what are the microeconomic factors influencing a firm’s choice to expand in a particular country

Answer 1

• cost of production + ability to exploit economies of scale -> lower labour costs (e.g. level of minimum wage, e.g. UK incr from 8.60->10 for 18-20 y/os) -> firms expand w/ cheaper labour e.g. Apple outsourcing in China -> improves profit margins -> more funds available for capital investment -> improved dynamic efficiency -> better quality of goods + services -> MAY have access to key inputs + infrastructure e.g. strong transport links + skilled workers -> external economies of scale -> lower long-run average costs -> improved profitability
• level of contestability in a market + market size -> ease of entry + exit in a market -> e.g. low sunk costs, brand loyalty ->

Question 2

evaluate the microeconomic factors influencing a firm’s choice to expand in a particular country

Answer 2

• high levels of competition may be a disincentive -> forced to keep costs low and prices low -> only make normal profit in the LR (if monopolistically competitive)
• high levels of contestability may be a disincentive

Question 3

what are the macroeconomic factors influencing a firm’s choice to expand in a particular country

Answer 3

• corporation tax levels -> low corporation tax (e.g. 19% in UK 2017) -> more retained profits for firms -> encourages FDI -> more capital investment -> incr AD -> eco. growth -> +ve multiplier effect
• favourable exchange rates -> weaker currency makes exports cheaper -> more competitive in foreign markets -> incr profitability for firm

Question 4

evaluate the macroeconomic factors influencing a firm’s choice to expand in a particular country

Answer 4

• taxation levels may change according to gov. policy if something happens in the economy. also less tax = less gov. revenue -> worsened budget deficit -> gov. may borrow -> interest rates increase -> limits private sector investment -> disincentive to expand
• if firm is reliant on imported inputs -> weak currency = incr production costs -> domestic firms lose out
• depends on the PED of imports -> if price inelastic, harder to compete