Companies may find more advantages by producing in foreign countries rather than by exporting to them due to a variety of reasons.

A.    Cheaper to Produce Abroad

Competition requires companies to control their costs and to choose production locations with this factor in mind.

B.   Transportation Costs

Some products and services become impractical to export after the cost of transportation is added to production costs.  In general, the farther the target market is from the home country, the higher the transportation costs.  Also, the higher transportation costs are relative to production costs, the more difficult it is to be competitive through exporting.  Some services are impossible to export and require establishing operations in the target country.

C.   Lack of Domestic Capacity

As long as a company has excess capacity, it can service foreign markets and price on the basis of variable rather than full costs.  When demand exceeds capacity, however, new facilities are needed and are often located nearer to the end consumers in other countries.

D.   Need to Alter Products and Services

Special requirements for products in some markets may require additional investments that are often better made in the country the company intends to sell to.  The more that products must be altered for foreign markets, the more likely production will shift to those foreign markets.

E.    Trade Restrictions

Although import barriers have been on the decline, some significant tariffs continue to exist.  In these situations, avoiding barriers through production in the target country must be weighed against other considerations such as the market size of the country and the scale of technology used in production.  When barriers fall within a group of countries, companies may be attracted to make direct investments to serve the entire region since the expanded market may justify scale economies.

F.    Country of Origin Effects

Consumers may prefer goods produced in their own country over imports because of nationalistic feelings.  For some products, consumers may prefer imported goods from specific countries due to a perception that those products are superior.  Other considerations like the availability of service and replacement parts for imported products, or adoption of just-in-time manufacturing systems may influence production locations.

 

Refereces:

Daniels, J., Radebaugh, L. and Sullivan, D. (2014). International business: environments and operations. 13th ed. China Machine Press, pp.P480-481.