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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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