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4.2.3 Assessment of a country as a production location - Coggle Diagram
4.2.3 Assessment of a country as a production location
Costs of production
Many businesses locate in countries that have low production costs, by keeping these low a business may gain a competitive edge in the market. Some of the main production costs such as labour, energy, raw materials and land are a lot lower in Asia than in many other parts of the world.
Low wage costs are often an important factor in attracting businesses, particularly for businesses that employ a large work force.
The rising cost of of energy and land is having an increasing impact on the location plans for some businesses
Skills and availability of labour force
Not only is the cost of labour important but the quality of human capital is important
A business isn't likely to locate a factory in another country just because labour is cheap
They have to consider if the work force has the skills needed to maintain quality standards as they can't afford the consequences of poor quality work
Some countries that have cheap labour the workers may be unskilled and poorly edcated
Therefore if a business chooses to locate in that country they may have to invest a lot of money into training staff unless all the work on offer is unskilled
Any business will have to ensure there are enough workers near the chosen site, and they would need to consider if there will be enough workers for the future
Infrastructure
In some developing countries, where labour is cheap, the quality of infrastructure might not be able to support a large production facility
Any of the following factors might be encountered
Roads might be poorly constructed and inadequately maintained, slowing down transportation to customers and of raw materials from suppliers.
Access to good broadband networks is vital for a businesses communication links, some countries may still be developing their broadband networks whilst others may be slow and unreliable
Some countries may not need have modern airports and ports, this might make it difficult for business personnel to travel to and from production facilities and to ship goods out of the country
Railway networks may be undeveloped or non-existent, this might be a problem if bulky or heavy goods need to be transported in large quantities
There may be a lack of investment in education, which can effect the quality of human capital and may discourage managers from locating near the site and if they had families they would require good schools. The same thing applies with poor hospital investment
A lack of commercial services and suppliers may discourage a business from locating in certain countries, as they need access to printers, IT support, bankers, cleaners, advertisement agencies etc
Normally a business will need to identify it's infrastructure needs and determine whether a particular country is able to meet them
Location in trade bloc
Some business locate facilities in certain countries to avoid trade barriers such as tariffs and quotas
This can be achieved by siting a plant inside a trade bloc
A business located inside a trade bloc will be free from trade barriers when sold to any member of that bloc
Government incentives
Governments are often keen to attract foreign direct investment (FDI) as it brings income and employment, they do this by providing incentives
They usually do this by offering financial incentives such as, tax breaks, lower rates of company tax, interest-free loans, cheap land etc
The UK has the highest level of FDI in Europe and offers foreign businesses a wide range of guidance and support services
UK Trade and Investment (UKTI), a government department responsible for helping UK business to establish links abroad, is also tasked with attracting FDI
Tax regimes are important when business are deciding on location, the UK government recognised this and in April 2015 lowered corporation tax to 20%
Financial incentives may also be offered to businesses locating in developing countries, for example governments in Kenya, Tanzania, Uganda and Rwanda in East Africa have offered a wide range of tax incentives
Ease of doing business
It's important for businesses to choose to a location where it is easy to do business because trading restrictions and additional costs can be both expensive and frustrating for businesses
Businesses can be ranked based on the ease to do business in each, this is a useful guide for businesses looking for a suitable overseas location, they will also provide some incentive for governments to introduce measures that might improve their ranking
The 'ease of doing business' may depend on factors like the following:
The ease at which businesses can be started and shut down
The efficiency with which contracts are enforced
The amount of bureaucracy, e.g. how easy it is to obtain permits for construction projects
The availability of trade credit
The efficiency of tax collection
The ease of resolving insolvency
Political stability
Some countries are politically unstable, this can mean it's too dangerous to do business in those countries. The exposure to financial loss may also be too high due to political tensions
Examples of 'hotspots' that may be avoided by businesses looking for an oversea market are Libya, Yemen, Ukraine, Syria and part of Latin America
One of the problems in some of these countries is kidnapping, it's widely reported that Western business people are common targets for kidnappers aiming to extract ransoms from employers and relatives
Natural resources
some types of business activities require large quantities of natural resources, for example mining this can limit the country and area of which the business can locate in
Businesses producing goods like steel are often very keen to set up near mines as the transportation of iron ore and coke can be very expensive as these materials are bulky and heavy
Likely return on investment
During the decision-making process SWOT analysis and PESTLE analysis can help to assess the suitability of different locations
Also quantitative techniques might be used to help make the final location decision
Quantitative techniques can aid evaluation of the financial costs and benefits of investing in particular locations