Introduction: Why Pick One Country Over Another?
Welcome to one of the most exciting parts of Theme 4: Global Business! So far, you have learned about why businesses want to sell their products in other countries. But what about making them there?
When a company like Apple, Nike, or Tesla decides to build a new factory, they don’t just throw a dart at a map. They have to carefully assess whether a country is the right "production location." Choosing the wrong spot could cost billions. In these notes, we will break down the nine key factors the Edexcel syllabus says you must know. Don’t worry if it seems like a long list—we’ll use plenty of examples to make it stick!
The 9 Key Factors to Consider
Think of these nine factors as a "checklist" for a CEO. Let's look at each one in detail.
1. Costs of Production
This is usually the first thing a business looks at. Costs of production include the price of land, energy, and raw materials. If it is significantly cheaper to manufacture a t-shirt in Bangladesh than in the UK because the factory rent and electricity are lower, a business is likely to move there to increase its profit margins.
Example: Many aluminum smelting companies set up in Iceland because the geothermal energy (electricity) there is incredibly cheap.
2. Skills and Availability of Labour Force
It’s not just about "cheap" workers; it’s about competent workers. A business needs to know: "Are there enough people to work in my factory, and do they have the right skills?"
If you are building a high-tech pharmaceutical lab, you need scientists, not just low-wage manual laborers. If the local workforce lacks skills, the business will have to spend a fortune on training, which cancels out the benefit of low wages.
Quick Review: High-tech industries look for quality of labour; mass-production industries often look for quantity and low cost of labour.
3. Infrastructure
Infrastructure refers to the "bones" of a country: its roads, railways, ports, airports, and internet/communication systems. Even if production is cheap, it's useless if you can’t get your goods to the customer because the roads are flooded or the port is too small for big ships.
Analogy: Imagine you have the best kitchen in the world (the factory), but the road to your house is blocked (bad infrastructure). You can cook the food, but you can’t deliver it to the hungry customers!
4. Location in a Trade Bloc
A Trade Bloc is a group of countries that agree to trade with each other without tariffs (taxes on imports). If a US company builds a factory in Poland (part of the EU), it can sell its goods to Germany and France without paying any extra import taxes. This makes their products much more price competitive.
5. Government Incentives
Sometimes, governments "bribe" businesses to come to their country! These incentives can include tax breaks (paying less tax for 5 years), grants (free money to build the factory), or low-interest loans. Governments do this because a new factory creates jobs for their citizens.
6. Ease of Doing Business
How much "red tape" is there? Some countries make it very hard to start a business—you might need 50 different permits and months of waiting. Others make it easy. The World Bank actually ranks countries on this. A business prefers a country where they can get up and running quickly.
7. Political Stability
This is a huge risk factor. Businesses hate uncertainty. If a country is at risk of civil war, a coup, or if the government suddenly decides to seize foreign factories (nationalisation), a business will stay far away. They want to know their investment is safe for the next 20 years.
Did you know? Many businesses pulled out of Russia in 2022 not just for ethical reasons, but because the political instability made it too risky to keep their factories and shops running there.
8. Natural Resources
If your business needs a lot of a specific raw material (like timber, oil, or copper), it makes sense to build your factory right next to the source. This reduces transportation costs and ensures a steady supply.
9. Likely Return on Investment (ROI)
This is the "bottom line." After looking at the costs, the taxes, the risks, and the infrastructure, the business calculates the Return on Investment (ROI).
\( \text{ROI} = \frac{\text{Net Profit}}{\text{Cost of Investment}} \times 100 \)
If the ROI in Country A is 15% and in Country B it's only 5%, the business will almost always choose Country A.
Common Mistakes to Avoid
Mistake 1: Thinking only about low wages. Many students write that businesses move solely for "cheap labour." This isn't always true. If the workers are unskilled or the electricity constantly cuts out (bad infrastructure), the "cheap" workers actually become very expensive for the business.
Mistake 2: Forgetting the difference between a 'market' and a 'production location'.
- Assessment as a Market: Can I sell my goods there? (Focuses on disposable income).
- Assessment as a Production Location: Can I make my goods there? (Focuses on costs and infrastructure).
Memory Aid: The "C.I.S. G.E.P.N.I." Mnemonic
Having trouble remembering all nine? Try this (admittedly slightly strange) mnemonic:
Costs of production
Infrastructure
Skills of labour
Government incentives
Ease of doing business
Political stability
Natural resources
Inside a trade bloc
...and Likely ROI!
Key Takeaways for Your Exam
When you are answering an exam question about choosing a location, always try to balance the factors. For example:
"While Country X has very low costs of production (Point), the political instability might mean the likely return on investment is too risky (Counter-point). Therefore, the business might prefer Country Y which has better infrastructure even if wages are slightly higher (Evaluation)."
Quick Review Box:
- Low Costs: Boosts profit margins.
- Trade Blocs: Avoids tariffs.
- Stability: Reduces risk.
- Infrastructure: Ensures efficiency.