3.2.2 Assessing the potential of different economies Flashcards
What are the factors influencing expansion into a market?
- levels of disposable income
- ease of doing business
- infrastructure
- exchange rate
- political stability
Explain ease of doing business?
The ease of doing business influences firms expansion into a market as it determines how accesible markets are. Countries with excessive bureaucracy levels act as a push factor as it rises costs to do business within that country/market. due to their rules and regulations.
Singapore are a country with very low bureaucracy, levels so are seen as attractive to do business their and expand in their markets.
Usually analyse from the prespective of MNC’s
Explain infrastructure
Infrastructure looks at the level of transport, roads airports and railways etc. Infrastructure is key for doing business and developde countries have high quality infratructur levels meaning MNC’s will be able to operate mor efficiently in these markets making the mmor ecompetitivev as it lowers their costs. However developing countries are seeing more government investment in areas such as provision of utilities also making them more attractive.
Explain political stability
MNC’s wish to set up in markets where free trade is accesible. Some less developed countries may have strict rules creating trade barriers. Also corruption may be present in less devloped coutries acting as a push factor in these markets.
Explain exhange rate
An MNC will perhaps decide to set up in a coutry which has a relative weak exchnage rate as WPIDEC. This will help the MNC exports more goods and services as the exchange rate makes them globally competitve due to the prices being cheaper. However the problem which arises from setting up in a foreign country with a weaker exchange rate is that if the profits are to be sent back tp where the MNC is based for example the UK, their profits would fall significantly as the UK will has a stronger currency. When converted back into pounds, the value will be less hence profits fall
What are the factors influencing the location of production site?
- cost of production
- availability of natural resources
- skills of the workforce
Explain costs of production
MNC’s want to ensure they can compete in saturated markets and having low costs of prodution is a major influencer as to where they set up so hey can push lower prices onto their customers. As aresult countries with low wage economies are likely to see greater FDI flows as low wages means cheaper labour.
Explain availabilty of natural resources?
Countries with greater natural resources means less requirement from imports and also resources are less likely to be depleted. For example, BP has been operating in the Middle East for over 100 years due to their rich supply in the neccesity good of oil and has led to BP capitalising through great levels of profits and growing as a MNC.
Explain skills and availability of workforce
An MNC will want to set up where the skillset of the labour force is high and the average human capital is high. This is so they can employ higher skilled workers which will help boost their productivity making them more globally copetitive and incease exports. Though higher skilled workers usually are in high wage economies due to their skillset so MNCs will have to rationally decide between costs and skillset of labour. Or they may decide to set up in low wage economies and instead train the workers.
