Impact of globalisation on location
The growth of multinational corporations (MNCs) means that location decisions increasingly balance cost factors with access to a wide range of markets. The location factors described in the previous sections largely still apply, but there is now an international element. One of the main features of globalisation is the increasing trend for moving the whole of an organisation, or some of its functions overseas; a process called 'offshoring'
Advantages to businesses relocating overseas derive primarily from that country's ability to provide better economic and commercial value than existing national locations. It is not just the cost of the factors of production that matters, but their quality of these resources. For example, lower labour costs may be offset by employees who are less skilled, productive and cost-effective. Factors such as labour, land and infrastructure (e.g. transport and utilities) directly influence production costs. Other factors, such as environmental and cultural amenities have indirect effects that can help maintain a skilled labour pool and other direct inputs.
The main driving forces or push factors for locating overseas include:
- Cost reduction - labour and materials may be considerably cheaper overseas. These savings have to be considered together with any the additional distribution and transportation costs. Employers in Western Europe looking to save on wage costs are increasingly relocating operations to Eastern Europe, Asia and Latin America. The Federation of European Employers publishes statistics on competitive wage costs within Europe and between Europe and other nations.
- Avoiding excessive government regulation and interference - large MNCs often threaten to relocate to minimise what they see as unnecessary regulation and interference in their business activities by local and national governments. Sometimes the threat to move is sufficient to persuade politicians to change unpopular restrictions and regulations and laws. If these are not amended, the firm may carry out its threat to move operations to other countries.
- Avoiding protectionism - import restrictions can be by-passed by manufacturing in the country or community concerned. This is a significant reason for the inward investment into the EU trading bloc. Asian car manufacturers have developed significant production facilities in Europe to avoid trade barriers. Cars assembled or manufactured within the EU may be moved and sold without import taxes or other trade barriers, even if the firm's headquarters and ownership is not within the EU.
- Economies of scale - large international, multinational industries, such as oil and petrochemical industries, have gained high levels of economies of scale from operating globally.
- Access to global markets - a huge growth in newly-industrialised and developing countries are changing the epicentre of economic and commercial power activities. By 2050, the BRIC grouping of countries: Brazil, Russia, India and China are expected to account for over 40% of the world's population, and 60% of global GDP. Firms presently located in the mature economies such as the US, Japan and Europe recognise that location within these rapidly developing markets is preferable to simply exporting to them.
- Competitive strategy - business decisions to move operations overseas may be to obtain 'First Mover Advantage' or as a defensive strategy in response to competitors, which have decided to make the move.
- Impact of exchange rate fluctuations - firms may locate production facilities in a number of different countries a protection against movements in currencies relative to others. For example, as a currency in one country strengthens against the currencies of its trading partners, exports will appear to be more expensive in those countries, China, for example has maintained the value of its currency, the Renminbi at an artificially low level against the US dollar to ensure that Chinese exports to the US remain relatively cheap and therefore competitive, whereas US exports will appear expensive in China compared to local manufacturers. One solution for US companies is to open production facilities in China.
- Overcoming a saturated domestic market - it is common for certain businesses to find it difficult to expand in a domestic market which is already working near capacity. Supermarkets have found this problem in many European countries. Chains like Carrefour and Tesco have sought expansion in new markets overseas. Overseas location may be used as an extension strategy.
However, there are problems and disadvantages associated with locating overseas. These restraining forces can include:
- Language and communication barriers - this may seems obvious, but it still needs to be tackled. Language issues may relate to communication between staff and between the organisation and external groups such as suppliers and customers. This may be the result of different languages, dialects, or simply caused by distance
- Cultural differences - this can be a real problem if it is not considered in advance, and the necessary adjustments made. Dress, food and behaviour are major areas where problems can occur, if one is not careful. Cultural differences are of particular concern to the marketing department which must be aware of consumer preferences, religious taboos and traditions, when deciding on product ranges. The HRM department will also need to be sensitive to the cultural differences in the workplace that will affect relationships and working behaviours.
- Regulations and legal restrictions - health and safety legislation, transport restrictions, ingredients and dietary regulations will differ from country to country. A firm would be advised to seek local agents and/or partners who understand the local environment, to guide them through the location and settlement process. This can, however, be costly.
- Ethics, morals and social responsibility - firms will do well to exercise extreme care when relocating all, or some of their operations overseas, to ensure that they and all their suppliers act with the utmost ethical integrity and do not seek to exploit labour in the countries where they are locating operations. US firms such as Nike have faced adverse publicity about alleged use of child labour and the operation of 'sweatshops in countries such as China, Vietnam, Indonesia and Mexico, which negatively affected their corporate image, and consequently sales. Nike has been forced to spend millions of dollars attempting to improve their ethical reputation, but failed to persuade all their critics of their true commitment to the highest ethical standards.
The Board of Directors can employ a range of business and financial tools, to evaluate the possibility of location, or the outsourcing of functions, overseas. Decision trees and force field analysis will help with the collection of data and the balancing of pros and cons, whereas investment appraisal and break-even analysis will assist in financial consideration of associated costs and revenues.