4-2-3-assessing-a-country-as-a-production-location

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Factors to consider before setting up production locations in other countries

Businesses may choose to set up production facilities in other countries
This is a different process from choosing a country as a potential market for customers
In this sense, production includes both manufacturing and any services associated with the business, e.g. call centres

Assessing production locations abroad

When setting up production facilities in another country, several factors need to be assessed to ensure a successful outcome
These include the costs of production, the skills and availability of the labour force, infrastructure, the location in a trade bloc, government incentives, the ease of doing business, political stability, the availability of natural resources and the likely return on investment

Factors to consider when assessing production location

Factor	Why is this factor important?
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
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	Businesses need to consider the infrastructure needed, such as roads, as this will affect the production process E.g. the transportation of raw materials for the production process
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 investments	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 (e.g. grants, business loans and tax breaks) by the government

Examiner Tips and Tricks

In Paper 3, you may have a question with different location options. You will need to evaluate the financial and nonfinancial factors to determine which location would be the best option for a particular business. This may also involve performing calculations for an investment appraisal or quantitative sales forecasting (Theme 3).

Remember, there is a difference between whether a business is choosing a location as a potential market or for production facilities!

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4-2-3-assessing-a-country-as-a-production-location

Factors to consider before setting up production locations in other countries

Assessing production locations abroad

Factors to consider when assessing production location

Examiner Tips and Tricks

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