3.2.2 Assessing the potential of economies

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    FACTORS INFLUENCING EXPANSION INTO A MARKET

     

    • Levels of growth of disposable income – exporters must know the potential profitability of different economies. Growing income means there is promise but this depends on the distribution of income e.g. high taxes affect disposable income and lower taxes may mean more spending so more businesses invest.
    • Ease of doing business – businesses wanting to invest abroad must comply with governmental regulations, red-tape bureaucracy can increase a firm’s costs of production. There is also the question of whether there is legal protection for the business. As well as this, language/culture barriers will affect the ease of business.
    • Exchange rate – businesses looking for export markets will benefit from a depreciation of currency as they become more price competitive. If businesses are looking for production abroad, they will benefit from an appreciation of their own currency as foreign premises and workers become cheaper.
    • Infrastructure – availability of communication between the two economies is important as to set up a business.
    • Political stability – investors will avoid signs of political strife as they indicate low incomes implying low demand. Corruption in economies will hinder the level of investment. Wars mean poverty so businesses affect this.

     

    FACTORS INFLUECING THE LOCATION OF PRODUCTION SITES

     

    • Costs of production – the lower the costs of production, the more attractive a site becomes, especially for businesses heavily based in production as they will have a high proportion of labour costs e.g. Apple choosing to produce in China due to proportionately lower costs.
    • Skills and availability of labour force – there is a trade-off between paying low wages and recruiting staff that have the necessary skills, which is what lead Dyson to Malaysia. Businesses must be aware of the costs of training new recruits.
    • Infrastructure – businesses in dynamic markets will need good communication with offshore production and reliable energy suppliers which is why companies may avoid areas such as India which suffer from chronic power outages.
    • Political stability – countries with difficult political situations will be less desirable as there is a higher level of risk in these economies.
    • Location in trade bloc – trade blocs have fewer if any trade barriers (focus is on tariffs) which will lower their cheaper production costs and increase sales. An example of this is Airbus which is a joint venture between the UK, Germany, France and Spain which is made possible by the trade bloc.
    • Government incentives – governments can incentivise production by providing subsidies for companies. The level of corporation tax can affect whether businesses choose to produce in certain countries e.g. Dell producing in Limerick, Ireland.
    • Ease of doing business – if businesses can easily communicate with locals or have effective managers that can work abroad, they will likely choose areas which speak the same language.
    • Likely return on investment – firms are more likely to be located in a site where ROI is high and predictable (stable economy) as this allows them to plan for the future and ensure profitability.

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