Question

According to the multinational management textbook what are some of the advantages and disadvantages of setting up production in developing nations.

Answer 1

One of the main advantages of opening a production facility in another country is the cost reduction of the production. Labor is often one of the largest cost of manufacturing, and foreign labor can be extremely cheap compared to American workers. Higher spending on energy, real estate, taxes and supplies can also help to reduce production costs outside the US.

You might need to spend more on management to maintain quality control of your product, including recruiting one or more managers to live near the production facility. The other way to track efficiency is by periodically sending managers to the facility to increase the travel expenses. When moving production abroad this can reduce the savings you gain. You may have access to a skilled manufacturing workforce and suppliers who know how to produce high quality products if you are located in a region where other manufacturers have clustered.

If you manufacture goods outside the world, you add a host of shipping and distribution costs and issues like tariffs, taxation, logistics and time delays. Given these challenges, producing the goods overseas could still be a more cost-effective option due to slightly lower production costs. Depending on where you sell your goods, it may be possible to produce in a foreign country

You may not be able to expect the same stability you find in the U.S. when you do business overseas, such as in the Electricity and government policies. In the form of a coup, insurrection or terrorism, political instability may rear its head. You might also have to deal with a culture of corruption and organized crime, with little or no law enforcement in a position to help.

As more and more American businesses are shipping jobs abroad, more US corporations are pressuring consumer groups and unions for boycotting. When word comes out that your product is not made in the U.S., this may be reported by the media, social media campaigns that harm your reputation or your rivals may use this reality to take market share from you in their ads. On the other hand, if you open a production facility in a country or region where you sell your product, you may gain increased sales from the positive public relations that you receive, not to mention decreased regulations on imports and businesses.