Page 274 - DMGT545_INTERNATIONAL_BUSINESS

Unit 14: International Production and Logistics Management

in Germany because GM believed the designers in its German subsidiary had the skills most notes
suited to the job at hand. (They were most capable of producing a design that added value.)
Components were manufactured in Japan, Taiwan and Singapore because of favourable factor
conditions – relatively low cost, skilled labour – suggested that those locations had a comparative
advantage in the production of components (which helped the costs of value creation). The car
was assembled in South Korea because GM believed that due to its low labour costs, the costs
of assembly could be minimized there (also helping to minimize the costs of value creation).
Finally the advertising strategy was formulated in Great Britain because GM believed a particular
advertising strategy there was able to produce an advertising campaign that would help sell the
car. (This decision was consistent with GM’s desire to maximize the value added.)

Did u know? For a firm to survive in global market, it should base itself where factor costs
are most conductive to its business.

In theory, a firm that realizes location economies by dispersing each of its value creation activities
to its optimal location should have a competitive advantage vis-à-vis a firm that bases all of its
value creation activities at a single location. It should be able to better differentiate its product
offering thereby raising perceived value, (V) and lower its cost structure (C) than its single
location competitor. In a world where competitive pressures are increasing, such a strategy may
become an imperative for survival.
If transportation costs and trade barriers are introduced, the situation is somewhat complicated.
Due to favourable factor endowments, New Zealand may have a comparative advantage for
automobile assembly operations, but high transportation costs would make it an uneconomical
location from which to serve global markets.
The location of production facilities of a global corporation may be influenced by a number of
factors.

14.3.2 nature of organization

The organizational model is a major determinant of the location. For example, in a Multinational
Company, the subsidiaries do most of the production for their respective markets. In an
International Company and Global Company, there is tendency to centralize core production
activities in the home country. The transnational corporation is characterised by globally
integrated networks of production facilities and other factors.

14.3.3 cost

Given other factors (like political factors, organizational model and strategic-orientation etc.),
the overall cost of operations is often the most important consideration in the location decision-
making. Important factors, which determine the cost, include the following:

l z Scale Economies: Where there are large-scale economies in production, production tends
to concentrate in one or very limited number of locations. Such concentration may be in the
home country or foreign countries.

l z Nature of Assembly Operations: If there is large economies of scale in production of
components and if the assembly operations are labour intensive, the locations of components
manufacture and assembly operations could be different. The assembly operations may be
carried out in countries where the labour is very cheap.

l z Taxes and Transport Costs: The import duty structure also influences the location of
production phases. If the import duty is very high on finished product and comparatively
low on components it would encourage assembling of the product in the foreign market. If

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