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PLANT LOCATION ANALYSIS

19 January, 2016 - 15:18

Subsidiary managers like to have a plant as close as possible to the markets they serve. Nearby factories offer many benefits, such as delivery flexibility, government support, and freedom from trade and/ or exchange restrictions. On the other hand, the size of the market, the technology, the quantity of raw materials and skilled labor available, and the general quality of the infrastructure in the host country might not justify the construction of a plant of a size sufficient to offer the necessary economies of scale. An MNC wishes to avoid what is called a "miniature replica effect" -too many plants, none of world scale. 1

Each firm knows that there are considerable advantages to be gained by the first firm to make the move. Government incentives will be more generous as the host country struggles to develop a new industry. Latecomers must work hard to overcome the leader's cutthroat prices and cost-of-entry strategies. The follower must deal with smaller market shares, rising entry costs, and fewer government incentives, all of which work to the benefit of the leader. As managers know, however, premature plant construction can prove as fatal as late arrival.

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Figure 13.7 Principal Forms of Social Profitability Calculations 
 

There are no foolproof techniques for determining the right time to build a plant at a given location. Trying to anticipate the competitor's move is, of course, the essence of managerial life. There are some sources of information, however, that may provide a manager with some hints as to what the com petition is up to. U.S. firms that wish to expand abroad must file certain reports with the Department of Commerce, the Department of the Treasury, and the Department of Justice. Thus a search through the files of these offices will often prove beneficial. Shipments of products and technologies thought to be vital to national security are monitored by the Department of Commerce. Other business activities such as capital transfers, distribution of dividends, and accumulation of income are monitored by the Department of the Treasury and the IRS for their impact on money transfers. The Department of Justice monitors foreign payments and potential antitrust violations.

Large multinational banks and insurance companies are also good sources of information, as are potential host governments, which generally require that firms intending to invest in that country register their plans with a government office or offices. The firms most likely to engage in plant construction are those that have had years of experience with a given market-MNCs that currently export and/or import or are involved in contractual agreements.