Opportunities for Location-Based Advantages Increasingly, companies are locating different value chain activities in different parts of the world to exploit location-based advantages that vary from country to country. This is particularly evident with respect to the location of manufacturing activities. Differences in wage rates, worker productivity, energy costs, and the like, create sizable variations in manufacturing costs from country to country. By locating its plants in certain countries, firms in some industries can reap major manufacturing cost advantages because of lower input costs (especially labor), relaxed government regulations, the proximity of suppliers and technologically related industries, or unique natural resources. In such cases, the low-cost countries become principal production sites, with most of the output being exported to markets in other parts of the world. Companies that build production facilities in low-cost countries (or that source their products from contract manufacturers in these countries) gain a competitive advantage over rivals with plants in countries where costs are higher. The competitive role of low manufacturing costs is most evident in low-wage countries like China, India, Pakistan, Cambodia, Vietnam, Mexico, Brazil, Guatemala, the Philippines, and several countries in Africa and eastern Europe that have become production havens for manufactured goods with high labor content (especially textiles and apparel). Hourly compensation for manufacturing workers in 2012 averaged about $1.46 in India, $1.74 in China, $2.10 in the Philippines, $6.36 in Mexico, $8.95 in Hungary, $9.46 in Taiwan, $11.20 in Brazil, $12.10 in Portugal, $20.72 in South Korea, $24.77 in New Zealand, $35.71 in Japan, $35.34 in the United States, $35.67 in Canada, $45.79 in Germany, and $63.36 in Norway. Not surprisingly, China has emerged as the manufacturing capital of the worldâ€”virtually all of the worldâ€™s major manufacturing companies now have facilities in China.
For other types of value chain activities, input quality or availability are more important considerations. Tiffany entered the mining industry in Canada to access diamonds that could be certified as â€œconflict freeâ€ and not associated with either the funding of African wars or unethical mining conditions. Many U.S. companies locate call centers in countries such as India and Ireland, where English is spoken and the workforce is well educated. Other companies locate R&D activities in countries where there are prestigious research institutions and well-trained scientists and engineers. Likewise, concerns about short delivery times and low shipping costs make some countries better locations than others for establishing distribution centers.
The Impact of Government Policies and Economic Conditions in Host Countries Cross-country variations in government policies and economic conditions affect both the opportunities available to a foreign entrant and the risks of operating within the host country. The governments of some countries are anxious to attract foreign investments, and thus they go all out to create a business climate that outsiders will view as favorable. Governments anxious to spur economic growth, create more jobs, and raise living standards for their citizens usually enact policies aimed at stimulating business innovation and capital investment; Ireland is a good example. They may provide such incentives as reduced taxes, low-cost loans, site location and site development assistance, and government-sponsored training for workers to encourage companies to construct production and distribution facilities. When new business-related issues or developments arise, â€œpro-businessâ€ governments make a practice of seeking advice and counsel from business leaders. When tougher business-related regulations are deemed appropriate, they endeavor to make the transition to more costly and stringent regulations somewhat business-friendly rather than adversarial.
On the other hand, governments sometimes enact policies that, from a business perspective, make locating facilities within a countryâ€™s borders less attractive. For examle, the nature of a companyâ€™s operations may make it particularly costly to achieve compliance with a countryâ€™s environmental regulations. Some governments provide subsidies and low-interest loans to domestic companies to enable them to better compete against foreign companies.
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