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

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Written by: Jennifer Aryiku, Economics Content Creator

Reviewed by: Steve Vorster, Economics & Business Subject Lead

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

Factors to assess when deciding considering setting up production facilities in another country

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, skills and availability of labour force, infrastructure, location in trade bloc, government incentives, the ease of doing business, political stability, natural resources available, and the likely return on investment

Factors when assessing production location

Factor	Why is this factor important?
Costs of production	Businesses want to keep costs of production low as this 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 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 within a trade bloc will be able to access many advantages such as reduced protectionist measures E.g. Japanese companies Nissan and Toyota have 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 tell a business what their potential return on investment could be
Natural Resources	It is often important that a business has easy access to their raw materials as this can help to reduce transportation costs and help to 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, lack of law enforcement and higher levels of crime It is more likely to have disruption 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 locate 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 Tip

In Paper 3 you may have a question with different location options and you need to evaluate the financial and non-financial 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!

Last updated: 25 October 2024

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