Assessing a Country as a Production Location (Edexcel A Level Business): Revision Note

Factors to consider before setting up production locations in other countries

• Businesses may choose to set up production facilities in other countries

  • Production includes both manufacturing and any services associated with the business, such as call centres

• This is a different process from choosing a country as a potential market for customers

Assessing production locations abroad

Costs of production

• Businesses want to keep costs of production low, as doing so can help them increase their profit margin or allow them to sell at a lower price to gain a competitive advantage

• Costs of production vary between countries due to differences in wage levels, the cost of land and premises, energy prices, and business taxation

  • E.g. many clothing manufacturers locate production in countries such as Bangladesh and Vietnam, where wage levels are significantly lower than in the UK, allowing goods to be produced more cheaply

Skills and availability of the labour force

• The quality of the workforce is important, as this will directly impact the quality of the goods and services produced in an economy

  • Businesses will need to consider factors such as literacy rates and whether the workforce has the right skills needed for the business

• Businesses may choose to locate production in a market where the labour costs are lower

Infrastructure 

• Infrastructure, such as roads, ports and electricity supply, affects the production process

• Poor infrastructure can lead to delays in receiving raw materials or distributing finished goods, increasing costs and reducing a business's ability to meet demand on time

• Strong infrastructure allows materials and products to move quickly and reliably, helping to reduce transportation costs

  • A business locating a factory in a country with poor rail and road links may face regular supply chain disruption

  • Strong port and logistics infrastructure allows raw materials to arrive on time and finished goods to be exported efficiently

Location in a trading bloc

A business located in a market in a trade bloc will be able to access many advantages, such as reduced protectionist measures 

• E.g. Japanese companies Nissan and Toyota invested in manufacturing facilities in the UK (prior to Brexit) to gain access to the EU market

Return on investment

• Assessing the return on investment in different markets will reduce the risk of the initial investment not being paid for

• Investment appraisal techniques (payback method, average rate of return and discounted cash flow) can be used to estimate a business's potential return on investment

Natural resources

• It is often important that a business has easy access to raw materials, as this can help to reduce transportation costs and reduce any potential delays to the production process

Political stability

• Businesses may be at risk of not gaining a return on their investment in a country with political instability

  • A country with political instability will be subject to corruption, a lack of law enforcement and higher levels of crime

  • There are more likely to be disruptions to production

• An economy with a stable economy and government is seen as a less risky investment for a business

Ease of doing business

• A business will want to be located in an area where there is limited bureaucracy so the process of establishing production facilities is not delayed or does not incur high costs

Government incentives

• Businesses may be offered incentives, such as grants, business loans and tax breaks) by the government

• Governments offer these incentives because the investment can create jobs, boost tax revenue and improve the country's reputation as a place to do business

  • These incentives lower the cost of setting up, making the country more attractive compared with alternative locations

• E.g. many countries offer reduced corporation tax rates or grants specifically to attract manufacturing or technology investment, competing with neighbouring countries for the same investment