International operations can reduce a firm’s costs by generating economies of sc

Question

International operations can reduce a firm’s costs by generating economies of scale that it would not otherwise enjoy or by giving a firm access to low-cost labor and/or raw materials. The first of these strategies involves mostly exporting products made in a firm’s home country to a nondomestic market while the second involves mostly importing products made outside a firm’s home market to its home market. Describe the differences between these two strategies in terms of the types of investments that firms following these two strategies must make in their nondomestic markets and the different management control problems these firms are likely to face.

Explanation / Answer

Difference between the strategies in terms of investments

If we manufacture the products all along in the domestic country then we will be probably making it in bulk and may lead to enjoy the economies of scale because the fixed cost per unit will keep on decreasing till the time we increase the number of products produced. And then we will incur some logistics cost and tax to sell it in the non-domestic market. The investment is pretty less in this type of strategy because of the economies of scale and also no separate investment to build a facility of production in the non-domestic market. Also, if we manufacture the products in the domestic market, investing in the domestic market, and as we know the culture and environment of the country better here and also exporting the product outside will help the nation in increasing the net exports.

Whereas if we plan to develop a facility outside the market and because either the raw material or labor or both are cheaper there and then import the products from that country to the domestic country then first of all it will lead to a big investment there and the return on investment will be lower as compared to the first strategy. This is because the tax implied to the non-domestic company in any country is higher than the company of domestic origin, and also the important goods levy heavy taxes, which will compensate the lower cost of manufacturing the cost of producing the product. Also, the Net Export will give negative outcome for the domestic country which will lead to further reduction of GDP.

Thus, in spite of producing the product in the non-domestic market, we can import the raw material from there and then build the facility and manufacture the products in the domestic market itself to enjoy the low tax, economies of scale, Better Net export and better perception of the consumers.

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