Assessment of a country as a production location - 4.2.3.

Production - A process of workers combining various material inputs and know-how in order to make something for consumption by the customer, known as the output.

Production can also be defined as the total amount of output produced in a time period. The more that can be produced in a specific period of time, the more efficient the business becomes in using its resources.

There are 9 factors that have to be considered when assessing a country as a production location;

1. Costs of production
2. Skills and availability of labour force
3. Infrastructure
4. Location in trade bloc
5. Government incentives
6. Ease of doing business
7. Political stability
8. Natural resources
9. Likely return on investment

COSTS OF PRODUCTION

In highly competitive mass markes, having low costs of production will be a significant advantage. This means low wage cost will see FDI to the country in order to take advantage of the labour force and its low wage costs. This allows businesses to drive costs down, allowing them to follow a low costs strategy if required. 

Other costs, such as land, might also be significantly lower in areas such as Eastern Europe in comparison to the UK or USA. Again, this will lead some businesses to produce in foreign countries. 

However, labour costs are not always the most important factor when considering production in another country. For example, BMW decided to base the new Mini production in the UK even though labour costs would be more expensive compared to another country e.g. India. Yet car production is capital rather than labour intensive, so labour costs are a small part of the costs of a car, and the brand was associated with the UK. 

SKILLS AND AVAILABILITY OF LABOUR FORCE

A business must consider the level of literacy and skills of the local workforce. The UK is seen to have a highly skilled labour force. However, despite this, there is often a shortage of suitably skilled workers i.e. lack of availability. 

This can be resolved by locating in other countries and utilising the skills of workers there. This often involves training workers to the required standard. However, as this leads to a rise in the individual worker's living standards, there is often plenty of supply of labour for these jobs.

INFRASTRUCTURE

This refers to the facilities that support everyday economic activity - for example, roads, phone lies and gas pipes. Businesses need to consider the availability of infrastructure that supports the production process , such as good access to power and reliable road networks. At the same time communication is vital, particularly for services, in order to be able to communicate with customers and other businesses. 

LOCATION IN TRADE BLOC

Locating to a trad bloc such as the EU, ASEAN and NAFTA allows easier access to markets within those countries, with lower export rates. This will increase the benefits of setting up production inside of the trade bloc. As well as this those businesses who have located production within trade bloc countries will recieve no tariffs or import quotas as products are not treated as imports, as well as glocalisation of prodcts to meet local needs. For example, Japanese car manufacturers such as Nissan and Toyota have invested heavily in production in the UK as a way of selling cars competitively within the EU. 

Often FDI will be invested into countries that reside in a trade bloc e.g. Nissan have said a main reason why they have located in the UK is because of its membership to the EU. After the vote to leave the EU there might be a reductionn in future investment into the UK.

GOVERNMENT INCENTIVES

National and local goverment can provide incentives e.g. grants if a business were to invest in the UK through production. This could be provided in order to create jobs, particularly in deprived regions. Nissan were given a grant by the UK government in order to locate in the unemployment blackspot of Sunderland in North East England. It might als be the case that governments wish to transfer intellectual property e.g. the skills and knowledge base of the new business locating in the country.

EASE OF DOING BUSINESS

In terms of location, ease of doing business refers to how responsove governments are to demands of the business. Again excessive bureaucracy will increase both time and costs for a business e.g. paperwork required for a location permit. Governments might not want a business to compete with domestic businesses and therefore take a difficult stance in allowing them to set up in a location, even if this appears to breach regulations of the trade bloc within which they exist e.g. the EU. 

At other times, Governments can pick and choose who they want to locate in their country as so many businessses want to be close to the market e.g. China. 

POLITICAL STABILITY

It is perhaps even more difficult for a business to locate in a country due to political stability than it is to export products to that country. Corruption has been seen to be a major influence on whether large foreign businesses are allowed to set up in some countries. Normally, this is the MNC paying a bribe to local civil servants in order to cut through bureaucracy and use their local influence to get things done. 

Even if a business manages to obtain planning permission for new production facilities it is often difficult to get skilled management to oversee operations, particularly in war torn countries.

NATURAL RESOURCES

These are materials or substances occurring in nature which can be exploited for economic gain - for example raw materials like iron ore, coal or large forests or lakes. Some countries are blessed with an abundance of natural resources that can be used for economic gain e.g. fossil fuels such as gas and oil and minerals such as diamind and metals. Therefore, it is sensible to set up production in orderto ensure a supply of these resources. This has led to MNCs moving into countries globally and having a significant influence on those countries. In Iceland, water heated by volcanic activity means the country creates the vast majority of its power and heat for business for free. A business may decided to move production to reduce costs of power or raw materials. 

LIKELY RETURN ON INVESTMENT

As is the case for most businesses, the bottom line is profit.

The likely return on investment is a performance measure used to evaluate the potential profitability of an investment or to compare the reurns ffrom a number of different investments. This is likely to be a measure such as ARR or NPV; either method could give a solid basis for making an investment decision. Clearly the business and its investors will need to be sure that the investments will make a satisfactory profit and will look at issues such as opportunity cost and the risk versus return.  This is a strategic decision; heavy investment is required to move into new countries. When a decision to proceed is underway, it is not easy to undo.