organisation - international business locations
Richard Bowett considers how multinationals make choices about where to locate their businesses.
Multinationals have located subsidiary businesses in other countries for many years. In recent years, this trend has gathered pace as part of globalisation. There are specific reasons why businesses might want to locate overseas.
1. To avoid import tariffs
Many countries place restrictions of one kind or another on imports, usually to protect their own domestic businesses. One of the main ways is to levy a tariff, or import duty/tax. So, instead of trying to export to that country, and paying the tariff, you can locate a subsidiary based in that country. The work of the WTO since the 1940s has vastly reduced the number and value of tariffs, so this reason is less pressing than it used to be. However, the EU still maintains tariffs on a range of goods, most notably agricultural produce.
2. The Labour Force
Wages vary enormously from country to country, mainly in line with different costs and standards of living. There are costs of employment to go on top of wages as well.
In the UK, for example, employers must pay NI contributions roughly in line with the employees’ wage. In Germany, for example, there are several additional costs due to welfare and pension payments which make the total cost of employment quite high. On top of these again are non-financial costs such as the level of worker protection from the law over dismissal, Health & Safety and statutory time off.
Finally, and importantly, productivity varies a great deal. It is no good setting up a business in Turkey, for example, if the wages are half the level of the UK if only to find that productivity is even lower, because the unit wage cost will then be higher in Turkey than in the UK. The combination of wages and productivity gives unit wage costs, and it is this that a business wants to be as low as possible, not wages per se.
3. Legislation & Bureaucracy
Some countries have an awful lot of laws and paper work before a business can get started. Some developing countries are particularly bad in this respect. So, although they look very cheap place to locate, when you take into account the general hassle factor, you may decide not to bother. In India, for example, it is often claimed that the only way to deal with the labyrinth of regulations is to "bribe" officials to clear you through them.
4. Political Stability
This is another factor that goes in favour of apparently "expensive" developed economies. Many cheap developing countries are politically unstable. Your expatriate managers may be kidnapped for ransom; your business may be forced to pay protection money (a big problem in Russia, for example); your premises may be looted or destroyed; and finally a new government could nationalise your assets as happened to all US businesses (mainly oil-related) in Iran in 1979.
5. Market Opportunities
This is a complex area. Partly it is to do with the level of competition from domestic businesses and other multinationals. Partly it is to do with the tastes and life-styles of local consumers. For example, the middle-class elites in many developing countries think it fashionable to buy Western products. Rising incomes in fast growing economies mean consumers have more money to spend. Some countries (eg India, China and Indonesia) have temptingly large populations, although many of them cannot afford imported goods (yet). It is also to do with the attitude of the local government and whether it welcomes foreign business investment.
6. Transport Costs
In general these have fallen dramatically in the last 50 years or so and are no longer as significant as they once were. However, they can still be important in some special cases. Some goods, for example polystyrene, occupy a lot of space for little bulk and little value, so it is never transported in its ‘expanded’ form as it is too expensive. Some parts of the world have very poor transport links and so goods only get there by being very expensive. And some parts suffer regular interruptions to transport links due to, for example, natural disaster such as severe weather, or from strikes.
7. Financial Incentives
Attracting big investments from foreign business brings many benefits, not least new jobs. So many governments create financial incentives. The UK, for example, has regional grants available, although these are not specifically targeted at foreign businesses. Ireland has had a lot of success with special low tax arrangements for foreign businesses. A number of countries have created water-side ‘Tax Free Zones’ where import/export businesses can do business without the paper work or expense of customs clearance and duties.
Globalisation has accelerated the existing trend toward overseas location. There is a lot of debate over what ‘globalisation’ means exactly, but one way of thinking about it is treating the whole world as your market and not just the country you start off in, or a few neighbouring countries. It follows from this that your Pakistani customers might like to buy from Pakistanis in a Pakistan based office of your business.
9. Corporate Image
Some businesses like to think of themselves as great global adventurers and levellers of barriers, so it suits the fantasies of their managers to open up all over the place. McDonalds has just had to start closing down in a big way because it would appear that they had pushed things too far.
10. The Euro
The single currency makes dealing with money eg accounting simpler, and this may encourage non-EU businesses to set up there.
This is also called ‘FDI ’. It has grown enormously over the last 20 years or so. The UK has been particularly successful in attracting large amounts of FDI in the last decade, although it appears to be slowing down at present. FDI brings many benefits.
1. It adds money to the capital account of the balance of payments, thus off-setting any current account deficit.
2. It involves spending a lot of money setting up a new, often large, businesses. This creates spending and demand for local suppliers, especially in construction.
3. The business, once open, will need regular supplies from local suppliers.
4. Jobs are created for local workers.
5. The output may be exported, or replace imports, which improves the current account of the balance of payments.
6. The new business may bring new technology, or management techniques, which the local economy can learn from.
7. Success for some foreign businesses may encourage more to come.
Our two revision notes on business location describe what businesses should do. A survey a few years ago found that most business location decisions in the UK led to a location within 25 miles of the home of the Managing Director. What does that suggest to you? Well, the MD is only one, albeit influential, person. More generally, any location decision is not going to work if employees aren’t happy about it. Employees have all sorts of life goals which aren’t merely to do with money. This, too, has to be taken into account.
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