Advantages of Producing Goods in Foreign Countries (IB2-03)

Cheaper Foreign Production

Companies produce their products in foreign countries because of the additional benefits derived compared to producing in their home countries. Availability of cheaper foreign skilled labor is one factor that attracts investors to foreign countries. Moreover, workers in these countries usually work for longer periods of time compared to the working periods in the home countries. This reduces the cost per unit and increases total production per unit time (Cohen, 2007).

Transportation Costs

The cost of transporting finished products to their destined markets, precisely, foreign market is remarkably expensive. A comparison between the costs of transporting products oversees and opening a branch in the foreign countries prompts companies to open manufacturing firms in foreign countries (Daniels, 2002). This is the case more so companies for soft drinks companies such as Pepsi among other companies. Investing in foreign companies thus enables the company to save notably on production expenses.

Lack of Domestic Capacity

Surplus domestic capital is rarely available since companies produce a certain capacity to meet domestic demand and at the same time avoid overproduction costs. Thus, sale of products to foreign markets would require an increase in domestic capacity (Daniels, 2002). Consequently, this raises expenses because of transportation and increased capacity costs. Therefore, building a plant in the market foreign countries reduces these costs for the company.

Need to Alter Products and Services

Different markets have different product specification demand. Thus, a company may be required to produce two similar products twice because of varying differences such as size, taste or container requirements (Cohen, 2007). Thus, opening a foreign branch makes it easy for the company to manage production and demand.

Trade Restrictions

The trade restrictions for countries across the globe vary depending on the laws and restrictions of the specific country. Thus, a foreign country can have a potentially large and lucrative market for a domestic company, but import restrictions for the foreign country can hinder importation of the subject products (Daniels, 2002). Thus, the producer country would benefit from building a plant in the foreign country so as to, effectively, capture the foreign market.

References

Cohen, S. D., & Oxford University Press. (2007). Multinational corporations and foreign direct investment: Avoiding simplicity, embracing complexity. Oxford: Oxford University Press.

Daniels, J. D., Radebaugh, L. H., & Sullivan, D. P. (2002). Globalization and business. Upper Saddle River, New Jersey: Prentice Hall.