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International Business
notes 4. The growth of ................. has also focused greater attention on the importance of product
quality.
Product factors
First is the product’s value-to-weight ratio because of its influence on transportation costs. Many
electronic components and pharmaceuticals have high value-to-weight ratios, they are expensive
and they do not weigh very much. Thus, even if they are shipped halfway around the world,
their transportation costs account for a very small percentage of total costs. Given this, other
things being equal, there is great pressure to manufacture these products in the optimal location
and to serve the world market from there. The opposite hold for products with low value to
weight ratios refined sugar, certain bulk chemicals, paint and petroleum products all have low
value-to-weight ratios; they are relatively inexpensive products that weigh a lot. Accordingly,
when they are shipped long distances, transportation costs account for a large percentage of total
costs. Thus other things being equal, there is great pressure to manufacture these products in
multiple locations close to major markets to reduce transportation costs.
The other product feature that can influence location decisions is whether the product serves
universal needs, needs that are the same all over the world. Examples include many industrial
products e.g. industrial electronics, steel, bulk chemicals and modern consumer products
e.g. handheld calculators and personal computers. Since there are few national differences in
consumer taste and preference for such products, the need for local responsiveness is reduced.
14.1.2 locating manufacturing facilities
There are two basic strategies for locating manufacturing facilities concentrating them in a
centralized location and serving the world market from there, or decentralize them in various
regional or national locations that are close to major markets. The appropriate strategic choice is
determined by the various country, technological, and product factors and is summarized in the
following table:
table 14.1: location strategy and manufacturing
factors concentrated manufacturing favoured Decentralized manufacturing
favoured
country factors
Differences in political Substantial Few
economy Substantial Few
Differences in culture Substantial Few
Differences in factor costs Substantial Few
Trade barriers Important in industry Not important in industry
Location externalities Stable Volatile
Exchange rates
technological factors
Fixed costs High Low
Minimum efficient scale High Low
Flexible manufacturing
technology Available Not available
Product factors
Value-to-weight ratio High Low
Serves universal needs Yes No
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