Country as a Production Location - PDF

LOCATING PRODUCTION A new business organisation, or an existing business that is expanding its operations, will need to consider which country it wants to base its production in. For example, French car manufacturer Renault has factories in Morocco, Slovenia, Turkey, Russia, Romania and Argentina -...

LOCATING PRODUCTION A new business organisation, or an existing business that is expanding its operations, will need to consider which country it wants to base its production in. For example, French car manufacturer Renault has factories in Morocco, Slovenia, Turkey, Russia, Romania and Argentina - only about 25 per cent of Renault\'s cars are now produced in France. There are several factors to consider when choosing a suitable foreign location. These are discussed in this chapter. According to a report published by Deloitte in 2016, China was the most competitive nation for manufacturing Around 29 per cent of China\'s GDP is generated by manufacturing, and labour costs were \$3.28 per hour. Around 93 per cent of China\'s exports are manufactured goods. However, by 2020, China is expected to be replaced by the USA at the top(see Table 1). The report also said that a nation\'s \'talent\' was the most important driver of manufacturing competitiveness. This was followed by cost competitiveness, productivity and then supplier network. COSTS OF PRODUCTION Many businesses locate factories in countries that have low production costs. By keeping costs 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 other parts of the world. This is illustrated in the high position of five Asian countries in Table 1. Low wage costs are often an important factor in attracting businesses. This is particularly true for businesses that employ a large labour force. In2017, US company, Chembio Diagnostics, said that it would move some of its production to Malaysia after a rise in the minimum wage in New York, According to Sharon Klugewicz, president of Chembio\'s Americas division,\'We\'re looking more and more toward automation and moving some of the work to the lower-cost facility in Southeast Asia.\' Labour costs in some countries that were traditionally low, such as China, have started to rise and look set to continue their upward trend. More recently, the lowest wages were to be found in Myanmar, Bangladesh and Cambodia. However, some of these locations are politically unstable and may have poor infrastructure. The rising cost of energy and land is having an increasing impact on the location plans of some businesses. For example, energy prices in Europe were rising fast in 2013. This was beginning to have a negative impact on business location decisions. SKILLS AND AVAILABILITY OF LABOUR FORCE A business needs to consider the cost of labour when selecting locations for its production facilities. It also must consider the quality of human capital. A business is not likely to locate a factory to another country only for cheaper labour. A business has to also consider whether the labour force in a country has the skills required to maintain quality standards. Businesses cannot afford the consequences of poor-quality work. In some countries where labour is cheaper, workers might be unskilled and poorly educated. This means that a business locating production in that country may have to invest substantial sums of money in training, unless all the work on offer is unskilled. India is rapidly becoming an attractive location for manufacturing operations. India\'s strengths are its mixture of high- and low-skilled labour and the potential to sell to its huge market of 1.2 billion consumers. Although much of the population is poor, their incomes are rising. India also has a healthy number of university graduates. This is very important, since many businesses need manufacturing engineers, design engineers and supervisors. India compares well to other countries in the Mighty 5 (MITI-V). Fairly recently, a number of businesses have moved production back from east Asia in a process called reshoring, which in some cases may be because of poor quality control in east Asian factories. For example, in 2017, reports said that reshoring and foreign job announcements increased by 170000 in the USA. This increase was due to lower taxes and the rules and regulations becoming less strict. However, the USA has to become more competitive to bring back 10 per cent of the 5 million jobs that have gone offshore. Any business that locates production in a particular country will have to ensure that there are enough workers near the chosen site. The business will also have to consider whether there would be enough workers in the future if the facilities needed to expand. INFRASTRUCTURE When considering a suitable country for a location, the quality of infrastructure is important. In some countries the infrastructure might be poor. For example, in some developing countries where labour might be cheap, the quality of infrastructure might be inadequate to support a large production facility. Any of the following factors might be encountered. Roads might be poorly constructed and inadequately maintained. In some countries they may be unsealed. This slows down the transportation of finished goods to customers, and raw materials and components to the site from suppliers. Some areas might be at risk of natural disasters, such as flooding, which may cause a break in the supply of vital components. Increasingly, access to a good broadband network is of great importance to businesses when considering locations for production. This is because businesses need rapid and reliable Internet connections to communicate with stakeholders and facilitate e-commerce. Some countries may still be developing their broadband networks, while other networks might be slow and unreliable. Some countries may not 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 not exist or may not be sufficiently developed. This might be a problem if large or heavy goods need to be transported in large quantities. There may be a lack of investment in education. This can affect the quality of human capital and may discourage managers and other senior staff from locating near the site as families moving to the location would desire good-quality schools for their children. There may be a difference in the quality of hospitals. This may discourage senior employees from moving away from their home country. The quality of healthcare might also impact on the quality and health of human capital. A lack of commercial services and suppliers may discourage a business from locating in some countries. Businesses may need access to printers, IT support, bankers, insurance providers, advertising agencies, cleaners, maintenance companies and manufacturers of components. Some countries cannot guarantee such facilities. Before locating a factory overseas, a business will need to identify its infrastructure needs and determine whether a particular country is able to meet them. LOCATION IN A TRADING BLOC Some businesses locate production facilities in certain countries to avoid trade barriers, such as tariffs and quotas. This can be achieved by building a plant inside a trading bloc. The output of a business located inside a trading bloc will be free from trade barriers when sold to any member of that bloc. For example, one of the reasons why Japanese car manufacturers, such as Nissan, Honda and Toyota, have located car factories in the UK is to avoid EU trade barriers. Cars made in the UK, even though the business owners are Japanese, can be sold in France, Germany, Italy and all other EU member countries without attracting tariffs. This makes the cars cheaper when sold in these countries. GOVERNMENT INCENTIVES Governments may be able to influence the location of business. They are usually keen to attract foreign direct investment (FDI) because of the benefits it brings, such as income and employment. They can do this by providing incentives to businesses to locate their production facilities in their country. Governments may offer financial incentives, such as tax breaks, lower rates of company tax, interest-free loans, cheap land and better rates on business premises. For example, Bangladesh offers some of the most attractive packages of fiscal, financial and other incentives to foreign entrepreneurs in south Asia. Some examples include: Tax Exemptions. New business investments are exempt from tax for between five and seven years(15 years for investment in electric power). Duty. All import duties are removed for export- oriented business ventures. Income Tax. Double taxation can usually be avoided because Bangladesh benefits from bilateral investment agreements. Exemptions from income tax of up to three years for the expatriate (i.e. living in another country) employees in industries are specified in the relevant schedules of the income tax ordinance.。 Remittances. Capital, profits and dividends can be returned to the investor\'s own country without penalty.。 Easy exit. Business investors can withdraw their investment either through the decision of an annual or extraordinary general meeting and the money raised can be returned to the investor\'s own country with authorisation from Bangladesh Bank. Ownership. Foreign investors can set up operations independently or in joint ventures with Bangladeshi partners. Other incentives. Six-month multiple entry visas for investors; tax exemptions on royalties or technical know-how fees received by foreign investors; tax exemption on the interest on foreign loans (subject to conditions) and permanent residency (if investing \$75000). In addition to financial incentives, governments might be able to use other methods to attract businesses. For example, they might reduce \'red tape\' (bureaucracy), liberalise trading laws, invest in education and training to improve the skills of the labour force and invest in infrastructure to facilitate the free movement of goods and people. Tax regimes are very important to businesses when considering location. According to research published by PricewaterhouseCoopers (PwC), a large financial services company, around 63 per cent of the 1344 CEOs surveyed worldwide said tax policy was an important consideration when choosing a location. Some of the lowest corporation tax rates around the world are to be found in Ireland where they are 12.5 per cent, Hungary(9 per cent) and Uzbekistan(7.5 per cent). The world average is 22.5 per cent. 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. Examples include corporation tax holidays and reductions in standard taxes, such as VAT and customs duties. EASE OF DOING BUSINESS When choosing a suitable location, the commercial environment is a very important consideration. This is often referred to as the \'ease of doing business\'. It is a lot easier to do business in some countries than others. It is important to choose a location where it is easy to do business because trading restrictions and additional costs can be frustrating and expensive for businesses. The ease of doing business may depend on factors like the following:. the ease with which businesses can be started and closed down the efficiency with which contracts are enforced the amount of bureaucracy, e.g, the ease with which permits can be obtained for construction projects。 the availability of trade credit the efficiency of tax collection. the ease of resolving insolvency. Table 4 (Activity 2) shows the Top 10 easiest places in the world to do business in2017. New Zealand is ranked no. 1, while many of those nations at the bottom of the rankings are developing countries, which may have poor infrastructure and political instability. These rankings are likely to provide a very useful guide to businesses looking for a suitable overseas location. They will also provide some incentive to governments to introduce measures that might improve their ranking - that is, if the government is concerned about flows of FDI into the country. POLITICAL STABILITY Some countries are politically unstable. This might mean that it is too dangerous to do business there. Alternatively, the risk of possible financial loss might be far too high due to political problems. Examples of places that might be avoided by foreign businesses looking for an overseas location include, for example, Syria, Somalia and parts of Latin America. One of the problems in some of these countries is the risk of kidnapping. It is widely reported that business people are common targets for kidnappers aiming to extract ransoms from employers and relatives. Latin America is reported as one of the most dangerous places for kidnapping. Statistics on kidnapping are not reliable, but reports estimate them to be between 5000 and 10000 per year. In some countries, political systems are corrupt, and bribery is commonly reported as an accepted feature of \'doing business'. In 2013, the most commonly recorded issues by the Institute of Business Ethics media monitoring were bribery, corruption and facilitation payments. In some countries, political systems mean bribery is common practice but most businesses are likely to avoid trading with countries where this is the case. Finally, businesses may avoid locating operations in some countries due to their human rights records. One of the main reasons for this is to avoid consumer boycotts(i.e. refusal to buy a product or take part in an activity) or shareholder disapproval. NATURAL RESOURCES Some types of business activity, like mining, require large quantities of natural resources. Mines can only be sunk in locations where there are proven mineral deposits. This means mining companies can only choose locations where these deposits exist. Up until recently, when commodity prices were very high, Africa attracted a number of mining companies. For example, Rio Tinto@ acquired a coal-mining project in Mozambique for \$2.7 billion in 2011. However, following a fall in commodity prices, even Africa suffered a drop in foreign business interests Businesses that use natural resources in their production processes are also likely to set up near their sources. For example, steel producers may locate production plants near iron ore mines or coal mines. ArcelorMittal, the Luxembourg-based multinational steel producer, has operations in more than 60 countries around the world. It is the largest steel company operating in South Africa, where it has several mines and steelworks producing long and flat steel for a range of different industries. Steel producers are keen to locate close to mines as the transportation of iron ore and coal can be very expensive because these materials are big and heavy.