IBUS90003 Chap.6 Location Strategy: Opportunities, Costs and Risks
Location Strategy: Opportunities, Costs and Risks
Choosing where to operate is one of the most important strategic decisions an MNE makes, and this chapter follows the Week 3 seminar's approach to it. Location choice is highly firm-specific: what the firm sells, why it is going abroad, which part of the value chain it is moving and how its managers perceive distance and risk all change the answer.
Because resources are limited, firms must decide where to put sales, production and administration, in what order to enter countries, how much effort each one deserves, and what they give up by committing to one place over another. The seminar organises the screening into three buckets. Opportunities are sales potential for market seekers and access to resources or strategic assets for others.
Costs include the liability of foreignness and the cultural, administrative, geographic and economic distances of the CAGE framework. Risks are political, economic or monetary, and competitive.
Sales potential is hard to estimate, so managers use indicators such as GDP and its growth, income per head, population and its structure, income distribution and urbanisation, while remembering that inequality, culture, trading blocs and technological leapfrogging can make those numbers misleading.
The relevant factors then shift with the motive: market seekers look at size, income and competition; resource seekers at input quality, political risk, regulation and infrastructure; strategic asset seekers at the target firm itself. The Amazon pre-seminar case anchors the chapter with its lessons on tailoring strategy, local scale and determined local rivals.
What this chapter covers
- 01
Why location choice is firm-specific
- 02
Four decisions forced by limited resources
- 03
Opportunities, costs and risks as a screen
- 04
Market indicators and their blind spots
- 05
Location factors for each investment motive
- 06
Rational and behavioural influences on location
Worked example · free
Screen two countries for a call centre operation
- 1Identify the motive: this is labour-related resource seeking for a service activity, so labour, skills and infrastructure dominate the screen.
- 2Weigh the costs together: poor infrastructure can wipe out a wage advantage through outages and lost service quality, so Country A's low pay is not decisive.
- 1Recommend Country B, noting that language skills and reliable communications support service quality, and name the wage gap as the cost of that choice.
Key terms
- Location Strategy
- The set of choices about which countries host which activities, in what order they are entered and how much is committed to each.
- CAGE Framework
- Ghemawat's way of describing distance between countries along cultural, administrative, geographic and economic dimensions.
- Political Risk
- The chance that government action or instability in a host country damages a foreign firm's operations or the value of its assets.
- Minimum Efficient Scale
- The smallest output at which a business reaches competitive unit costs, which multi-domestic firms must achieve separately in each country.
Location Strategy: Opportunities, Costs and Risks FAQ
Why is GDP per capita not enough to judge a market?
Average income hides inequality, so a poor country can still hold a large affluent segment, and countries with similar incomes may want very different products because of culture and taste.
What did the Amazon case teach about emerging markets?
Each emerging market differs, so strategy must be tailored; small cautious steps limit losses but also limit success; retail needs local scale; and local rivals with local knowledge can defend against large MNEs.
How does a trading bloc change a location decision?
Membership of a regional trading bloc can turn a small or low-income country into a production base for a much larger market, so its own population understates its value.
Why do resource-seeking firms care so much about regulation?
Their operations involve high sunk costs and cannot easily relocate, so a stable legal and regulatory environment protects an investment that would otherwise be exposed for many years.
Exam move
Memorise the three-bucket screen of opportunities, costs and risks, and under each bucket list three items you could apply to any country. Then learn the four caveats that make raw indicators misleading, because Part 1 questions sometimes ask why a country with modest income can still be attractive.
Build a small table linking each motive to its location factors, using the seminar's lists, and practise choosing the right row before you compare countries. For the case part of the exam, rehearse a location paragraph that starts with the motive, weighs two or three factors and ends with the opportunity cost of the choice.
Revisit the Amazon case questions and write brief answers in your own words: whether it succeeded in China, what drove its location choices, how its entry strategy changed and who its key rivals were. Finally, connect this chapter to Chapter 1, since CAGE distance and the liability of foreignness are the cost side of every location you screen.
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