Production in a Developing Country

Question 1

From an advanced-country multinational’s (MNC) perspective, analyse some of the potential advantages and disadvantages of setting up production in a developing country”. Advantages include: Labour Costs & Corporation tax, Broader market base & tax exemptions. Disadvantages include: Exploitation of workers & Bad publicity, Political instability & Trading issues.

Advantages

Labour Costs and Corporation tax

One of the prime advantages of a MNC locating some of its branches in other countries is that they will save money on expenses when they locate in this country. Trends over past few decades include MNCs locating in countries MNCs (eg. Nike and Adidas), whose factories do not require highly skilled or educated labour, tend to locate in developing countries where labour is plentiful and the minimum wage rate is low.  that have lower wage rates and corporation tax rates to save money and maximize profits. The standard of living is much less in most of these countries, so the working standards that these workers have are not the same as an average developed world person. This saves on the companies’ factories upkeep/overheads and avoids big HR departments and employee benefits (eg. quality food); although abuse of these factors can lead to bad publicity and boycotts. MNCs may also take advantage of lower corporation taxes in certain countries to reduce expenses and maximize profits. Struggling countries will sometimes use a lower corporation tax as a way of enticing MNCs to locate in their country.

Broader market base

Another advantage of production setup in a developing country is the broader market base the company could potentially reach. Opening for business abroad makes it possible to reach customers on a global scale. A broader market base is a huge advantage to any company as it builds on its’ brand and image, making it more well-known worldwide and more often the consumers’ first brand choice. Setting up in a developing country enables a company to provide locals with more work opportunities. Job development is another advantage to setting up in a developing country. As employees, will be mostly locally recruited, governments usually try to attract firms to areas where needed most meaning governments might offer benefits.

Tax Exemptions

Today nearly all developing countries offer multinationals reductions in, or exemption from, import duties and income taxes for a period. Multinational companies benefit from lower taxes on imports and exports by manufacturing in developing countries. Developing countries use this as an incentive to draw in manufacturing business from developed countries. India, for example, offers customs duty exemption on goods imported for authorised operations, as well as any goods exported by a unit to any place outside India.

Disadvantages

Political Instability

Doing business in a developing country brings uncertainty and can be difficult for companies used to a stable government structure & steady political leadership. An unstable political system can have negative effects on economic matters, for example, the possibility of war, changing market policies, uncontrollable inflation, tax increases, and changing laws regarding the sourcing of raw materials. Even simple obstructions like the government making it harder to move supplies or get permits for business can have a fatal affect. These issues can hinder equipment supply, delay projects, discourage labour and thus, jeopardize the business’s long-term success. Political dysfunction discourages foreign investors in emerging market; for example, many Asian countries were shunned by businesses due to the frequency of regime changes due to unstable government climate.