The Impacts of Relocating Production to a Developing Country (Term Paper Sample)

 
THE IMPACTS OF RELOCATING PRODUCTION TO A DEVELOPING COUNTRY
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The Impacts of Relocating Production to a Developing Country
Introduction
The decisions for a firm to relocate are undertaken within a multiplicity of socio-economic frameworks and are influenced by both internal and external factors. In the literature on economic geography, there is a general acceptance that technological improvement, market expansion, and operational cost reduction encompass the principle incentives for relocating. The business community considers firm relocation an entrepreneurial endeavor to guarantee higher profits. Many entrepreneurs relocate their firms to stay afloat when faced with an economic recession. Changing the location of a business has a tremendous impact on the firm’s economic performance. The firm’s business competitiveness is affected by internal and external changes. This research paper aims to elucidate the benefits of a firm relocating to developing countries. Notably, despite there being advantages such as the benefit of reduced cost of production as a result of cheap labor and raw materials, there are challenges related to a poor socio-economic environment. 
Economic Benefits 
Relocation to developing countries leads to reduced labor costs and expanded markets. An essential benefit of operating in developing countries is that many have lower operating costs and significantly reduced labor costs. According to research on the issue, certain companies could save as high as 50 % in remuneration. At some point, an enterprise might be faced with a shrinking market as well as a loss of business due to the proliferation of competitors. For such firms, relocating to a developing country can create a significant change in their bottom and avert an imminent failure (Heikkilä et al., 2018, p. 228). In developing countries, Foreign Direct Investment (FDI) has been linked with lower production costs as a result of cheap labor as well as raw materials (Panizzolo et al., 2018, p. 780)). Reduced costs are also associated with the capacity to offer local production for overseas markets. Relocating to a developing country can also ensure business survival due to the ability to reach untapped markets (Flaaen, Hortaçsu & Tintelnot, 2020, p. 8). Transferring a firm’s operations to a developing country assists the company to gain entrance into new markets in which the demand for the company’s products and services is likely to be high.  
Social Benefit
Relocating firms to developing countries results in creating employment opportunities and the transfer of novel technologies to developing countries. Multinational corporations wishing to relocate to developing countries normally have access to cutting-edge technology, which capacitates production success (Kapitsinis, 2019, p. 333). On the other hand, developing countries face a debilitating lack of essential technology. Despite a wealth of natural resources, for instance, oil and diamonds, African countries have not witnessed significant GDP growth. This situation could be due to developing countries’ reliance on natural resources. Of note, the natural resource export causes the exchange rate to rise, making their numerous different products more expensive. Resultantly, unemployment becomes a problem that the entrance of foreign companies can solve. Furthermore, funneling human and physical capital from other industry sectors to the development of natural resources reduces the size of those other industries (Kapitsinis, 2019, p. 335). Fortunately, when well-established companies relocate to developing countries, the local human capital is engaged in production, leading to employment creation. 
Notably, the initial competition in the new location will probably be lower. Significantly, relocation to developing countries enhances brand recognition globally (Flaaen, Hortaçsu & Tintelnot, 2020, p. 21038). Within the progressively global economy, improved brand awareness is essential for firms that want to keep expanding, particularly if the current market in which the firm was operating has reached saturation.
Political Benefit
When multinational companies relocate their production to developing countries, it improves the host country’s reputation. The host country might be facing socio-economic problems hindering industrial production. Corruption and poor governance taint the economic health of the production environment in developing countries. A study conducted in 67 countries discovered that economic growth increased by 1.3 %, with corruption reduced by a single standard deviation (Kapitsinis, 2019, p. 336). Developing countries with people of diverse backgrounds, customs, languages, and cultures tend to have high rates of corruption. A company will stand to gain significantly if it relocates to a country that is rich in natural resources. A country with a lot of natural resources stands to gain from the production and sale of those resources. Research has shown that the human capital in the host country tends to improve with the entry of multinational corporations as the existent personnel works competitively when faced with more competent capital. When firms relocate their production to new countries, there is an integration between the stronger reputation of the incoming company and the structures already found in the host country. Therefore, in such a case, when the reputation of the host country is low, the entrance of the new company results in the improvement of conditions in the host country. 
Economic Drawbacks
High tariffs also pose a significant challenge to operations in the new country. Tariffs changes are linked with the alterations done to the value chain in the foreign country. New operations in the new country are undertaken by breaking the value chain in order to gain advantages for undertaking different activities in distinct countries that ought to be traded off with the feeble linkages among stages within the value chain. Some of the factors that ought to be considered include increased costs of inventory and transportation costs (Jia et al., 2018, p. 267). However, when the learning curve is protracted, the time costs of transportation of shipping can be substantial to warrant an alternative decision.
Despite the substantial economic advantages linked with a firm transferring its production activity to a developing country, there also exist economic demerits that impact both the host country and the organization. The initial economic disadvantage is elevated competition within the local market, which has a vital influence on local businesses (Panizzolo et al., 2018, p. 780). These multinational organizations have more efficient and enhanced production operations than local companies, which is a disadvantage that causes issues concerning the products and services provided by the firms, resulting in the shutdown of such firms and a lack of earnings by local companies.
Social Drawbacks
Relocation to developing countries negatively influences the host country’s environmental regulations and the people’s culture. For instance, the proliferation of multinational corporations in developing countries has a tremendous impact on the policies. Multinational corporations have strong control over essential businesses concerning mineral resources and different industrial sectors due to their huge financial strength (Panizzolo et al., 2018, p. 780). The production activity of the relocating business tends to impact the environment directly; hence, their presence creates the need for the formulation of more befitting environmental policies. 
According to Ferronato & Torretta (2019, p. 1060), firms that relocate their manufacturing operations to developing countries frequently wish to cut costs and increase profits, and as a result, they may disregard the environmental influences of their undertakings. As a result, some of these firms may endeavor to influence the host country’s environmental regulations to come up with loopholes that will enable them to profit. As a result, this will cause issues and may result in significant penalties for both the firm as well as the host country. Due to the likely dissatisfaction of the local firms with the entering companies, the firms can face resistance from the local community. 
Political Drawbacks
Many developing countries face political instability due to rapid and successive changes in leadership. Relocating to a developing country brings an aspect of uncertainty. Companies formerly operating within a stable environment, for instance, in the United States, enter into a new environment where