Influences on the Choice of Production Location (Cambridge (CIE) O Level Business Studies): Revision Note

Factors to consider when choosing a country to produce in

• A multinational company (MNC) is a business that has operations in more than one country

  • This can include physical stores, manufacturing plants, factories, offices and service operations

• Globalisation means that many firms can now consider establishing production locations worldwide rather than just their home country

• When choosing a location in another country, a business will consider several factors 

Explaining the factors

1. Trade barriers

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

  • E.g. Chinese companies are increasingly locating operations in countries with trade agreements with the EU and US to circumvent restrictions on products made in those countries

2. Financial incentives

• Governments may offer incentives (e.g. grants, business loans and tax breaks) to locate in their country as MNCs bring in investment, foreign currency and job opportunities

3. Access cheaper or skilled labour

• Businesses may choose to locate production in a market where labour costs are lower or where significant numbers of workers have specialist skills

  • Clothing brands frequently locate production facilities in lower-wage countries such as Bangladesh or Turkey, where skilled workers produce high-quality garments

4. Lower taxation

• Some countries tax businesses and their employees at very low rates

  • Ireland's low rate of corporation tax has attracted large multinationals, including Google and Microsoft, to the country

5. Alternative sources of raw materials

• Some countries have cheaper raw materials or are sources of rare raw materials that are used in the production process

6. Access to new markets

• Many businesses choose to locate near to customers in another country to reduce transport and distribution costs

• This is particularly important when markets in the businesses home country have become saturated

• External factors such as changes in the law may have made the home market unviable so growth may only be possible by moving the business to an alternative location

The role of legal controls on production location decisions

• Laws are rules created by the government of a country with the aim of regulating the actions of its citizens and businesses

  • Regulation is the process of enforcing the laws that have been created and ensuring that businesses abide by them

• Governments and local authorities can incentivise businesses to locate in particular areas

  • In areas of high unemployment or industrial decline grants or reduced tax rates may be offered to businesses that create jobs or improve communities

• In some cases, businesses are deterred from locating in particular areas

  • E.g. In areas of outstanding natural beauty, strict bylaws or city ordinances may regulate the type of business activity that is permitted

  • E.g. A country with strict environmental laws might not be an attractive location for a manufacturing company that produces a lot of waste

LEDCs and MEDCs

• The presence or absence of laws can affect a businesses's choice of location differently in less economically developed countries as compared with more economically developed countries

1. Less economically developed countries 

• Less economically developed countries often have fewer laws and less enforcement of their existing laws, which is likely to be attractive to some businesses 

  • Businesses enjoy lower costs as they have to meet fewer legal requirements, such as safe handling of waste material

  • Labour can be paid very low rates as no minimum wages exists

  • Employees and customers have less opportunity to pursue legal action

2. More economically developed countries

• Developed economies with extensive laws can be attractive to businesses who desire to locate in region with

  • Good infrastructure

  • Highly-skilled workers

  • High standards of living

Measures used by local government to influence location decisions