Locating Abroad (AQA A-Level Business): Revision Notes
Locating Abroad
Businesses can choose to establish some or all of their operations in other countries. This strategic decision helps companies reduce costs and increase revenue when trading or manufacturing goods internationally.
Why businesses locate abroad
Reducing production costs
One of the primary reasons companies move their operations overseas is to cut costs. This cost advantage comes from several sources.
Labour costs are typically much lower in many overseas locations compared to the UK. Companies can employ foreign workers at significantly reduced wage rates, which substantially lowers their overall production expenses.
However, this practice has attracted criticism, as some businesses have been accused of paying wages that are too low for workers to maintain a decent standard of living – raising ethical concerns about exploitation.
Land and office space tends to be considerably cheaper in many international locations, particularly in emerging markets. Property costs can represent a substantial saving for businesses looking to expand their physical presence abroad.
Utilities such as water and electricity may also cost less in certain countries, providing additional operational savings that contribute to improved profit margins.
Accessing new international markets
Locating operations close to overseas markets offers businesses several strategic advantages for growth and expansion.
When a company establishes a presence near an international market, it becomes much easier to identify local market trends. Being on the ground allows businesses to observe consumer behaviour patterns and respond more quickly to changing demands.
Having a physical presence abroad enables companies to gain local knowledge about customer preferences, cultural differences and shopping habits. This deeper understanding reduces the likelihood of making costly marketing errors and can help businesses discover new market niches they might otherwise have missed.
Proximity to a new international market makes distribution of products significantly easier and more efficient. Companies can reduce their distribution costs because products don't need to be transported as far to reach customers in that market.
Avoiding trade barriers
Some countries implement trade barriers to protect their domestic industries from foreign competition. These barriers can take various forms, including taxes (tariffs) on imported goods or restrictions on the volume of products that can be sold.
By establishing operations within a country that has trade barriers, businesses can effectively get around these penalties. Instead of importing goods from abroad and facing high tariffs, they produce locally and are treated as a domestic company.
How Trade Barriers Create Opportunities
Imagine a UK furniture company that wants to sell products in Country X, which has a 40% tariff on imported furniture.
- Without local operations: The company pays £100 to manufacture in the UK, then pays £40 in tariffs, making the total cost £140
- With local operations: The company manufactures directly in Country X, avoiding the tariff entirely and potentially reducing production costs due to cheaper labour and materials
This gives them a significant advantage over competitors who continue to import.
There's an additional competitive advantage here: trade barriers that protect domestic industries from international competition can make those industries inefficient. A foreign company that locates within a protected market may be more efficient than local competitors, giving it a significant competitive advantage.
Improved transport and communication links
Modern developments in transport and technology have made international business operations much more practical and manageable.
The price and availability of air travel have improved dramatically, making it easy for business people to travel between international locations for meetings, inspections and relationship building.
Many countries with emerging markets have been investing heavily in their infrastructure. This means they now have better road and rail networks and improved ports, making it easier to move goods and materials efficiently.
Technological advances have transformed how businesses communicate internationally. Companies can use email and video-conferencing to maintain contact with overseas operations without managers needing to leave the UK constantly. This reduces travel costs whilst maintaining effective oversight.
Offshoring
Offshoring refers to the practice of moving specific parts of a business operation to cheaper countries. Rather than relocating the entire company, businesses often offshore particular departments to take advantage of cost savings.
Common offshoring destinations
Companies most frequently move operations to China, India, Malaysia, Mexico and Indonesia. These countries have become popular destinations because they all offer substantially cheaper labour than the UK.
Businesses often offshore their call centres or payment processing departments to these locations. This practice is called offshoring because the work is moved to an overseas ("off-shore") location.
Challenges with offshoring
Whilst offshoring can effectively cut costs, it's not always beneficial for a company's image.
The media and trade unions frequently criticise companies for moving UK jobs overseas, arguing that this harms domestic employment.
This criticism can damage a company's reputation, particularly if customers perceive that the business prioritises profit over supporting the UK workforce.
Re-shoring
Re-shoring occurs when a business moves departments back to its country of origin after previously offshoring them.
Reasons for re-shoring
Several factors are driving companies to bring operations back to the UK:
Customer attitudes are changing. Consumers have become more aware of how businesses operate overseas, and many customers prefer to support companies that treat overseas workers fairly. Businesses that are perceived to treat overseas staff poorly can suffer a bad reputation and face customer backlash.
Quality and control often improve with re-shoring. When manufacturing takes place in the same country as the head office, it's easier to monitor and control the production process. This can lead to improvements in the quality of products and processes.
Distribution becomes cheaper and more efficient when products don't need to be shipped internationally. Businesses can offer better delivery services to customers when production facilities are located closer to the final market.
The wage gap between UK workers and overseas workers has been decreasing in some countries. Whilst overseas labour was once extremely appealing due to very low costs, as wages rise abroad, the cost advantage diminishes. However, for many companies, overseas labour remains too appealing to abandon entirely, so re-shoring is happening gradually.
Country specialisation and benefits to specific departments
How countries specialise
Some countries have developed particular expertise in providing specific skills or services. This specialisation occurs when countries that excel in certain areas attract numerous businesses from overseas companies, creating a competitive environment that drives down prices and improves services.
Country Specialisation Examples
India has specialised in communications (such as call centres) and IT services. The country offers competitive prices and has a large pool of suitably trained workers. Many businesses choose to relocate their customer service department to India to take advantage of this specialisation.
China and Brazil have abundant cheap and skilled labour. Some businesses have moved their manufacturing departments to these countries to benefit from low labour costs. However, these products may be made to a low standard because companies often focus on high-volume production rather than quality.
China also attracts many Research & Development departments. Companies relocate these functions to be closer to manufacturing operations and to access skilled low-cost labour and good infrastructure.
The Philippines has developed strong work ethics and excellent digital communication infrastructure. Some businesses have relocated their IT departments to the Philippines to benefit from the skilled workforce and technological capabilities already established there.
Problems with specialisation
When countries become too specialised in particular services, problems can emerge.
Workers may lose motivation when the majority of available jobs are concentrated in the same industry. The dominance of a single industry can also lead to diseconomies of scale.
There's also a risk that another country will develop the same skills or services and provide them more efficiently, undermining the competitive advantage of the original specialist location.
Non-financial benefits and costs
Understanding non-financial impacts
Non-financial benefits and costs are the positive and negative impacts a business has on the outside world. These effects don't show up directly in a company's profits, but they can significantly affect its reputation.
Before making decisions about locating abroad, businesses must carefully consider the impact they will have on the country they are moving into.
Benefits to the host country
When companies locate abroad, they create new jobs in the host country. This employment can increase people's income and improve their standard of living.
Companies also invest in the host country by paying for factories, roads and other infrastructure needed to operate their business. These investments benefit the local government and contribute to economic development.
Costs to the home country
However, there are non-financial costs to consider. Locating abroad can lead to a loss of jobs and investment in the company's original country.
The country receiving the investment may also experience negative impacts. Overseas workers can be exploited if they aren't adequately protected by employment laws, and pollution risks may increase.
Balancing financial and non-financial factors
Although it can be challenging to assign an exact financial value to these non-financial considerations, companies must still weigh up how these issues affect their reputation.
A damaged reputation can ultimately impact sales and profitability, making non-financial considerations important from a business perspective.
Key Points to Remember:
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Locating abroad helps businesses cut costs (lower wages, cheaper land, reduced utilities) and access new markets more effectively.
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Offshoring means moving specific departments to cheaper countries (like China, India, Malaysia), whilst re-shoring means bringing those operations back home.
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Companies can avoid trade barriers by producing within protected markets, gaining a competitive advantage over less efficient local firms.
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Countries develop specialisations in particular services (e.g., India in IT and call centres, China in manufacturing), creating competitive environments that benefit businesses.
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Businesses must consider non-financial impacts – how their location decisions affect jobs, investment and reputation in both home and host countries.