Changing business location abroad

Businesses change location abroad in two main ways. Some move their production facilities to a country where costs are lower, then ship the finished products back home to sell. Bringing these goods into the home country means they are imports. Others relocate to be nearer to new customers, so their products are close to the people buying them. A UK firm making backpacks could move its factory abroad to cut costs, then bring the bags back to Britain to sell.

Lower costs mean a bigger profit margin (the profit on each item as a share of its selling price), or a lower price for customers. Wage rates can be much lower abroad, land and rent can be cheaper, and raw materials may be nearby. If a UK firm pays £4 in labour per backpack but labour abroad costs £1.50, moving production cuts that cost straight away. The business can keep its selling price the same and keep the difference as profit, or drop the price to win sales.

Relocating abroad to be near customers can shorten delivery times and reduce transport costs. A company selling skateboards mainly in one overseas country could build a workshop there, cutting delivery from three weeks to two days and making it easier to react when a new design sells well. Being close also helps the business understand local tastes.

However, long supply chains are harder to manage. Logistics is the organising of moving, storing and delivering goods. Parts may be delayed by customs checks or bad weather, and shipping finished goods back home adds transport costs that can cancel out low wages. Holding more stock as a buffer ties up money. There is also a communication problem: staff may work different hours and speak different languages, so a query can take a day to answer. Weaker understanding can lead to mistakes in orders or quality, and managers may need to travel more.

The decision usually comes down to whether the saving on production costs is larger than the extra cost of moving goods and the loss of easy contact with the factory.