What factors should be considered in determining whether a firm should sell to buyers in a foreign country by exporting from its home country or by setting up local production in the foreign country to produce the products that are sold to the foreign consumers? When identifying these factors, clearly explain how and why they push the decision toward one or the other of the two available choices.

Question

What will be an ideal response?

Answer 1

POSSIBLE RESPONSE: The advantages and disadvantages of producing in the home country or the foreign country to serve buyers in the foreign country are location factors. (1) Comparative advantage can provide production cost advantage to one of the locations. (2) Scale economies can favor concentrating production in one of the locations. (3) Governmental barriers to importing into the foreign country or high international transport costs can favor production in the foreign country. (4) Membership of the foreign country in a trade bloc (that does not include the home country) can favor production in the foreign country, to serve both buyers in the foreign country and buyers in other member countries. (5) Government taxes and subsidies can favor one of the locations. (6) The need to adapt the product to the foreign buyers can favor locating production in the foreign country.