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A LevelBusinessEdexcelRevision Notes4. Global Business4.2 Global Markets & Business ExpansionAssessing a Country as a Production Location

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

Revision Note

Jennifer Aryiku

Written by: Jennifer Aryiku

Reviewed by: Steve Vorster

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 in assessing production locations abroad include costs, skills, infrastructure, incentives, business ease, stability, resources, trade blocs, and ROI.

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 Tips and Tricks

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!

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    Author
    Reviewer
    Jennifer Aryiku

    Author: Jennifer Aryiku

    Expertise: Economics Content Creator

    Jennifer has completed a degree in Economics at City University London and a PGCE in Business and Economics Education from the Institute of Education, UCL. She is passionate about young people and helping in their education. She has over 10 years experience which includes working as an Academic Mentor and Head of Economics & Financial Education. Jennifer has also co-written an Economics workbook and is an examiner for UK exam boards.

    Steve Vorster

    Author: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.