the impact of globalisation on location and relocation decisions

9.1 Location and Scale – Location

Objective

To understand how globalisation influences the choice of location and the decision to relocate a business, and to apply the Cambridge A‑Level Business (9609) framework for evaluating location options.

Key Concepts

• Globalisation: The increasing integration of economies, cultures and markets through trade, investment, technology and migration.
• Location decision: Choosing the most appropriate site for a new operation or for an existing operation that may be relocated.
• Relocation: Moving an existing activity (manufacturing, service centre, headquarters, etc.) to a different site.
• Off‑shoring, Near‑shoring, Reshoring (On‑shoring): Strategic approaches to locating production in relation to the home country.

9.1.1 Factors that Determine Location

Differences Between Local, National and International Location Decisions

Scale of Operations (9.1.2)

• Economies of Scale
  • Internal economies*: Cost reductions arising from within the firm (technical, managerial, financial, marketing). Example: a car manufacturer spreading R&D costs over a large output.
  • External economies*: Cost advantages gained from industry concentration (shared suppliers, skilled labour pool, infrastructure). Example: a cluster of electronics firms in Shenzhen benefiting from specialised logistics.
• Diseconomies of Scale – When a firm becomes too large, coordination costs, bureaucracy and over‑complexity raise unit costs. Example: a multinational with fragmented decision‑making leading to slower response times.
• Impact on Unit Costs & Competitive Advantage
  • Higher output → lower average cost (up to the optimum point).
  • Location choices can amplify or diminish scale benefits (e.g., locating near a major port reduces transport costs, enhancing economies of scale).
• Strategic Implications
  • Large‑scale producers may favour off‑shoring to exploit both internal economies (mass production) and external economies (supplier clusters).
  • Boutique or craft producers may deliberately limit scale to maintain quality and brand image, influencing a near‑shoring or on‑shoring decision.

Strategic Location Choices in a Globalised World

• Off‑shoring: Moving production to a distant country to exploit lower labour or input costs.
  Example: A UK apparel company shifts garment manufacturing to Bangladesh.
• Near‑shoring: Relocating to a neighbouring or regionally close country to combine cost benefits with reduced distance.
  Example: A German automotive parts maker opens a plant in the Czech Republic.
• Reshoring (On‑shoring): Bringing previously off‑shored activities back to the home country, often for quality control, brand image or risk reduction.
  Example: An American electronics firm re‑opens a US assembly line.

Impact of Globalisation on Location Decisions

1. Access to International Markets – Proximity to ports, airports or logistics hubs enables rapid distribution to global customers.
2. Cost Advantages – Global supply chains allow firms to locate where the total cost of production (labour, materials, energy) is lowest.
3. Technological Connectivity – High‑speed ICT reduces the need for physical closeness, supporting remote coordination and virtual teams.
4. Regulatory & Tax Environment – Differences in corporate tax, customs duties and trade agreements can create strong location incentives.
5. Risk Management & Diversification – Spreading operations across several countries mitigates political, economic and natural‑disaster risks.

Relocation Decisions in a Global Context

When a firm evaluates relocation, it weighs push factors (drivers that make the current site less attractive) against pull factors (attractions of alternative sites). Globalisation amplifies both sets of factors.

• Push Factors: rising domestic wages, tighter environmental regulations, market saturation, unfavourable tax changes, community pressure.
• Pull Factors: lower production costs abroad, access to emerging markets, favourable trade blocs, government incentives, availability of specialised talent.

Decision‑Making Framework – Weighted Scoring Model

To compare alternative sites objectively, the Cambridge syllabus recommends a weighted scoring model:

Location Score = Σ (weight_i × rating_i)

• weight_i = importance assigned to factor i (total of all weights = 1.0).
• rating_i = performance of the site for factor i (typically 1–10).

Steps

1. Identify the relevant factors (as listed in 9.1.1).
2. Assign a weight to each factor reflecting its strategic importance.
3. Rate each potential site against every factor.
4. Calculate the weighted sum to obtain a comparative score for each site.

Illustrative Decision Flowchart

Summary Points

• Globalisation widens the pool of viable locations from purely domestic to truly international.
• All nine syllabus‑required location factors are relevant; each must be examined through a global lens (e.g., cost now includes global labour arbitrage, tax now includes double‑tax treaties).
• Off‑shoring, near‑shoring and reshoring are distinct strategic responses to global cost, market and risk considerations.
• Scale of operations (economies & diseconomies of scale) directly influences the attractiveness of a location and should be evaluated alongside the nine factors.
• Relocation decisions must balance short‑term cost savings with long‑term strategic positioning, brand reputation, corporate social responsibility and supply‑chain resilience.
• Quantitative tools such as the weighted scoring model provide a transparent, evidence‑based basis for site selection.

Practice Questions

1. Explain how a free‑trade agreement (e.g., the EU‑UK Trade and Cooperation Agreement) might influence a company’s decision to relocate production to a neighbouring country.
2. Using the weighted scoring model, calculate the location score for two potential sites. (Assume the weights and ratings shown below.)

   Factor	Weight	Site A Rating	Site B Rating
   Labour Cost	0.30	8	5
   Market Access	0.25	6	9
   Infrastructure	0.20	7	8
   Political Stability	0.15	9	6
   Tax Incentives	0.10	5	8

   Which site scores higher and why?

3. Discuss two risks associated with locating production in a low‑cost offshore country and suggest one mitigation strategy for each.
4. Define off‑shoring, near‑shoring and reshoring. For each, give a real‑world example and the primary strategic driver behind the choice.
5. Explain the difference between internal and external economies of scale and illustrate how each can affect a firm’s location decision.