Globalization has arrived. Trade and flows of capital are freer than earlier, despite a few hiccups once in a way. Multinational corporations are setting up their shops in India and Indian companies are extending their operations in other countries – there are India-based companies in USA, in Europe and in the eastern countries such as China.
When should a firm think of setting up a manufacturing plant or service operations in a foreign country? With the advance in telecommunications technology, firm can be in virtual proximity to its customers. For a software firm much of its logistics is through the information/communication pathway, anyway. Many firms use the communications highway for conducting large portions of their business transactions. This is not to deny the importance of logistics in business in the present day. Logistics is certainly an important factor in deciding on a location whether in the home country or abroad. Markets have reached. Customers have to be reached. Customers have to be contacted. Hence, market presence in the country of the customers is quite necessary. However, ‘logistics’ in today’s parlance may not be the conventional kind of logistics.
Many firms in USA and UK – in the service sector and in the manufacturing sector — often outsource part of their business processes to foreign locations such as India. Thus, instead of one’s own operations, a firm could use its business associates’ operations facilities. So, a location could be (1) one’s own and/or (2) one’s business associate’s. The location decision need not always necessarily pertain to own operations. Due to globalization these days the supply chains (for materials, information and mental capacity) have spread to countries abroad.
Reasons for a foreign location:
Reaching the customer>
One obvious reason for locating a facility abroad is that of capturing a share of the market expanding worldwide. The growth of the GDP of India and China at around a phenomenal 8 percent is huge and is a big reason for the multinationals to have their manufacturing/operations facilities in these countries. Same is the reason for India based companies to set up their operations in China. But what does ‘capturing a good share of the market’ got to do with location near that market? An important reason is that of providing service to the customer promptly and economically. Much of this may indeed be logistics dependent. Therefore ‘cost and ease of logistics is a reason for setting up manufacturing facilities abroad. By logistics we mean here the set of activities that closes the gap between production of goods/services and reaching of these intended goods/services to the customer to his satisfaction. Reaching the customer is thus the main objectives. The tangible and intangible gains and cost depend upon the company defining for it self as to what that ‘reaching’ means. The tangible costs could be the logistics related costs; the intangible costs may be the risks of operating in a foreign country. The tangible gains are the immediate gains; the intangible gains are again, an outcome of what the company defines the concepts of ‘reaching’ and ‘customer’ for itself.
Other tangible reasons:
The other tangible reasons could be as follows:
1. The host country may have/offer substantial tax advantages compared to the home country
2. The costs of manufacturing and/or running operations may be substantially less in that foreign country. This may be due to
* lower labor costs
* lower raw material (inputs, in general) costs
* better availability of the inputs (component materials, energy, water, ores, metals, key personnel)
3. The company may overcome the tariff barriers by setting up a manufacturing plant in a foreign country rather than exporting the items to that country.