Assessment of a country as a production location Flashcards
Factors to consider
Cost of production Skills and availability of labour force Infrastructure Location in trade bloc Government incentives Ease of doing business Political stability Natural resources Likely return on investment
Cost of production
Includes: Labour wages Energy costs Cost of raw materials Cost of land
A country which pays lower wages will be more attractive as a production location
Skills and availability of labour force
A large unemployed population means a large pool of candidates for every position
Countries with low wage may have unskilled staff, which would not benefit a business carrying a differentiation strategy, so it is important to look at the qualifications of the population
Infrastructure
A set of facilities ad systems an economy needs to function effectively.
In developing countries where labour might be cheap, infrastructure is often under-developed, this might hinder sales and quality
Things to consider:
Poorly constructed/ inadequately maintained roads
Access to a broadband network
Airports/ports
Railroads
Investment in education/ effects human capital
Quality of hospitals
Commercial services (cleaners, advertising agencies, IT support etc..)
Location in trade bloc
Some businesses locate production facilities in certain countries to avoid trade barriers
Might enter markets in EU, NAFTA or ASEAN countries
Government incentives
Governments are usually keen to attract FDI due to the benefits it brings (income and employment). They can do this by providing incentives to businesses to locate their production facilities in their country
Incentives include: tax breaks lower rates of company tax interest-free loans cheap land
Ease of doing business
Measured by an index created by the World Bank Group Can include factors such as: ease with which business can be started and closed down efficiency with which contracts are enforced amount of bureaucracy availability of trade credit efficiency of tax collection ease of resolving insolvency trading across borders (RTA) ease of getting electricity dealing with construction permits protecting minority investors registering property
Political stability
Operating in politically unstable businesses might be too dangerous
Natural resources
Business activities such as mining require large quantities of natural resources. Businesses that use natural resources are likely to set up near their sources
Likely return on investment
If a business sets up production in another country, this is expensive:
moving factory
hiring staff
buying machinery
moving operations such as HR
hiring key staff with local knowledge (ie. language)
