Introduction
Any business entity pursues the goal of minimizing costs, while making the most profit. As Buckley and Casson (2019) write, “any general theory of international business must also analyze the external environment and internal structure” (p. 1424). The external environment determines how successful companies will be in selling, while internal structure is essential in efficient production. Subsequently, the choice of markets for production and sales is highly dependent on how markets allow companies to produce and sell products.
Criteria for Locating a Market for Production
Companies have to consider how a corresponding market will influence their ability to manufacture products. According to Ketokivi et al. (2017), three concepts are central to the decision-making regarding production: coupling, specificity, and formalization. These concepts form the criteria for choosing markets for production. Ketokivi et al. (2017) underscore a surprising notion that not all companies choose locations because they have the lowest labor and production costs by pointing to 35 value chains performing manufacturing activities in high-cost Finland. Coupling, specificity, and formalization explain the reasoning behind the management’s decisions.
Coupling refers to “essential features of the interdependence between two entities”, which determine whether “decisions about one sub-entity can be made independently of decisions about other sub-entities” (Ketokivi et al., 2017, p. 21). The more complicated the process of production is, the tighter coupling will be. Furthermore, Ketokivi et al. (2017) argue that “tight coupling places production in the proximity to the market due to factors such as logistics costs, legal requirements to produce locally” (p. 23). As such, the type of product manufactured by the company determines the choice of cheaper production sites.
Specificity is the influence of relationships on the production of goods. As Ketokivi et al. (2017) explain, “A supplier may, for instance, commit to a relation-specific investment by building a component plant right next to the customer’s final assembly plant” (p. 23). Subsequently, the more reliant the manufacturer on their suppliers is, the more likely they are to cut costs by deploying production closer to the supplier. However, dependency on the supplier is not the only type of type of relationship, as market needs also influence decisions. If local producers are not dependent on the components or products of the original manufacturer, there is no reason for the company to place their production facilities in such a market.
Formalization refers to the ability of the company to use standard procedures. The more obstacles a company encounters in the process of procedure standardization, the lower formalization will be. Regarding the choice of markets, the criterion of formalization forces managers to predict production in a certain region will be different from other company’s production sites. The more differences there are, the lower the formalization is, which leads to higher costs. As a consequence, producers are more likely to choose markets, which allow formalization in order to cut the expenses.
Criteria for Locating a Market for Sales
Although as with the choice of markets for production, the ultimate goal is to make the most profit, choosing the market for sales is different. Martí et al. (2017) have conducted an analysis of “all foreign investments undertaken by Spanish firms in transition and developing economies between 1990 and 2010” (p. 326). Spanish multinational companies choose markets based on market size, quality, and proximity of other markets.
The first criterion that Spanish MNEs used for choosing markets was market size. The analysis by Martí et al. (2017) shows that Spanish companies preferred countries with large numbers of consumers, such as India, Brazil, and Argentina. The reasoning behind this criterion is simple: the larger the market is, the more likely it is that more consumers will be able to buy the company’s products.
The second criterion is the quality of the host market. It refers to the country’s income per capita, macrosocial stability, present infrastructure, and other factors that indicate the region’s investment attractiveness (Martí et al., 2017). The sheer number of consumers does not indicate that all of them are financially eligible to be the company’s customers. As a result, in countries with higher population income consumers are more likely to afford the prices set by the company.
The third criterion is the proximity of other markets to the one in which the company plans to operate. In modern world, almost any country has a neighboring market. Yet, some markets are closed and isolated to their neighbors, as it is the case with North Korea. The presence of an open neighboring market exposes the company to more consumers and further opportunities to conduct business.
Conclusion
Altogether, it should be evident that the main difference between the choice of markets for selling and markets for production lies in the underlying decision-making principle. When companies search for locations to manufacture in, they prioritize efficiency, which manifests in coupling, specificity, and formalization opportunities. At the same time, when companies intend to sell their products, they priorize market size, quality, and proximity of ther markets. In essence, production criteria relate to how quickly a market will allow the company to produce, while selling criteria determine how likely the market is to buy the products.
References
Buckley, P., & Casson, M. (2019). Decision-making in international business. Journal of International Business Studies, 50(8), 1424-1439.
Ketokivi, M., Turkulainen, V., Seppälä, T., Rouvinen, P., & Ali-Yrkkö, J. (2017). Why locate manufacturing in a high-cost country? A case study of 35 production location decisions. Journal of Operations Management, 49, 20-30.
Martí, J., Alguacil, M., & Orts, V. (2017). Location choice of Spanish multinational firms in developing and transition economies. Journal of Business Economics and Management, 18(2), 319-339.