International business operates in more than one country, region or continent. The location of international business is an important factor to the performance of any international business.
Punnett and Ricks proclaim that the location of any business depends on factors e.g. the raw materials location, the labor force, infrastructure, government laws and regulations, the target market and even the viability of expansion. Because of these factors, the location of a business must be scanned well as it will determine the costs of operation.
The location of international business must also take into consideration the cultures as the beliefs and practices differ from region to region.
It is therefore categorical that the location of an international business has a heavy weight on the performance of the business. The first theory of international business location is the agglomeration theory (Hofstede, 99).
The theory asserts that since companies and people are concentrated in the same places, the businesses should also be located in these regions. The location of companies should thus be placed where there are people. The theory capitalizes on the fact that people are important factors of production and therefore the success of the business depends on this production factors.
The theory has several advantages. To begin with, businesses that are located where there are people will incur a small portion of their finances on the transportation of these goods. The target market will be closer to the company thereby making the transportation costs to be low.
Another advantage of this theory is that the international business located where people are will be capable getting the required human factors of production. With these skills available for the company to utilize, the company will be in a position to improve the efficiency and therefore realize high returns. The high supply of labor will also enable the international business to get labor costs at low cost. This will further reduce the operation costs and thereby increase the business profits.
Moreover, the location of people in the same place may mean that the cultures and beliefs will be shared. In circumstances where there arte diverse cultures, the international business will be forced to take a long time in order to segment its market and customize its products.
The marketing department will also have to customize the promotion message in order to attract the varied interest. Wirth the same cultures and operations, 5the business will be in apposition to reduce the costs of product development and promotion, this will thus lead to increased returns.
Strength of this theory is that with the location of production factors at the same place, the need and risk of international variation of exchange rates will be eradicated. Adverse exchange rate fluctuation will make the business incur high business costs which will reduce the company’s income.
Despite the several advantages of this theory, it also suffers from many drawbacks. First, the likelihood of people getting concentrated in one place is almost equal to zero. This is because of the fact that the population distribution does not depend on the company’s location but other factors. The location of people will not at any given point be at the same region as they exist different regions and economic regions around the world.
Another drawback of this theory is that the government regulations will affect the location of any business. The government in most instances wants the company’s location to be at places away from the resident areas. This is because the close location of business to the people may lead to the pollution of the environment thus affecting the human health. The business also has the corporate responsibility to look into the affairs of the community at large hence should not be ethically located.
Again, it will be rare for all the production factors to be placed at one point. It will always be realized that some factors of production are nor available and must therefore be imported from other regions. Not any single region can be endowed with all the production factors.
The second theory is that of orthodox. The theory is built on the short comings of the agglomeration theory (Buckley, 66). The theory explains that international businesses will not realize a constant return to scale in its production across the globe. Businesses have to be located depending on the growth prospects and opportunities.
This is because; the business should be focused to achieving increased returns. The theory therefore tends to discourage the location of the business in regions with declining return. It can therefore be said that this theory is aimed at maximizing the shareholders wealth which is in line with any profit making firm.
This theory of location benefits from the following advantages. It takes into account growth prospects. As such the business will realize continued growth in its operation and increase the value of its returns. The business wills also retrench its production in regions with declining results. By doing so, the synergy will be greater and thereby the survival growth.
The second advantage of this theory is the fact that in carefully scanned the environment before determining the location. By doing so, the business will be able to avoid losses that arise because of lack of proper feasibility study. This as well will mean that the production will take into account the need to customize its production and this will enhance the customers’ satisfaction a fact that is important in international business.
Allen and Raynor (12), London, Ted, and Stuart, Hart, (25) that, orthodox theory is also genuine in that all factors of production and the demand will vary depending on the economic factors. The global economy experiences different economic conditions at different times and therefore the business location must take into account these factors.
Failure for the business to consider the economic conditions will make is realize declining returns that may hinder the business going concern. The globe experiences different inflation level, tastes and preferences thereby making the location to be dependent and demand.
This theory is also important as it considers that different regions are endowed with different factors of production. This therefore makes the location to depend on the factors location. Companies will tend to locate their operations in regions that will economies on the costs of production. For example, companies will be located in areas that are close to the most important production factor that areas that are far away. The models of transportation will be used to calculate the cheapest means of production.
Finally, the location theory also makes the operation efficiency to be enhanced. This is because the business will be located in areas which are likely to make the business grow. The location will look into the government regulations and other legal factors and this will make the business reduce the costs of paying the costs that are caused with the high regulation charges.
On the contrary, orthodox theory suffers from various drawbacks. To begin with, this location theory will; demand a lot of resources top conduct the feasibility and viability study, this will thus increase the start up cost and reducer the initial returns.
The theory may also fail to address the long term objectives as the business returns may be viable for a while before they begin to decline, this means that the business location may have a short life span. Continued long term prospects may be difficult to determine.
Since the theory only considers the returns to the business, it will not help solve the solution requirement for non profit international companies. Welch and Wilkinson (225) say that, “Some international business may not have the sole objective of achieving only economic objectives.” Other factor should thus be considered i.e. the expectation of the society and the need to provide services.
The location of international businesses should therefore be carefully evaluated in order to make the businesses realize good returns. Other theories advocate factors like regionalization, integration and alliances in order to influence the business location. It will thus be important for international business managers to integrate several factors in the determination of business location. Because of the crucial role of culture in international; operation, it should be given the due gravity.
In conclusion, there is no single theory that can explain the determination of business location. A trade off must thus be made depending on the weights and contribution by each factor in its impact on the business operation.
Allen, Dwight. and Raynor, Michael. Preparing for a New Global Business Environment: Divided and Disorderly or Integrated and Harmonious? Journal of Business Strategy 25, 2004. Print.
Buckley, Peter. What is International Business? Basingstoke, Hampshire; New York, NY: Palgrave Macmillan, 2005. Print..
Hofstede, Kraut. Culture’s Consequences: Individual Differences in Work Related Values. Beverly Hills, CA: Sage Publications, 1980. Print.
London, Ted and Stuart, Hart. Reinventing Strategies for Emerging Markets: Beyond the Transnational Model. Journal of International Business Studies 35, no. 5 2004. Print.
Punnett, Ricks, D. International Business. Cambridge, MA: Blackwell Publishers, 1997. Print.
Welch, Catherine and Wilkinson, Ian. The Political Embeddedness of International Business Networks; International Marketing Review, 2004. Print.
Concepts of International Business