The Pros and Cons of Relocating Companies to Developing Countries

Introduction 

Industrial relocation is one of the hottest topics of globalization today. It is a contentious issue that carries a great deal of confusion to manufacturers. In the U.S, the magnitude of delocalization and the state of the unemployment problem is stoking fears of the rejuvenated competition from lower-wage nations and economies in transition. According to the American National Statistics Institute, 98, 500 job opportunities were lost in the industrial sector in 2013 ( Buckley & Clegg, 2016 ). The most affected areas are textile, automobiles, electronics, and footwear. Delocalization is affecting workers from virtually all industrialized countries, and the debate over the phenomenon is becoming increasingly political particularly in America where free trade and demonizing capital has become the national sport. This paper seeks to clarify the issue of delocalization, its benefits, and drawbacks and last, but not least, consider the social, economic and political effects of a company relocation. 

Like in most established nations, labor costs in the U.S are fairly high. This has prompted many companies with facilities in the U.S to find other advantages such as New Zeeland, India, China and other South American nations where labor costs and raw materials are relatively cheap. Such moves have been deemed to carry both benefits and drawbacks which should be considered before taking such steps ( Brown et al., 2004 ). 

Benefits of Relocating a Company to a Developing Country 

Relocation helps companies to unearth brand new business opportunities 

Moving businesses to a developing nation allow a company to access unexploited markets outside the United States. Moving on to less developed niches before competitors arrive can offer a company the chance to turn into a brand that nation trusts. By the time rivals get on, the company would have established itself and developed roots that make a company stable. All that is required is suitable statistical surveying that can foretell the most appropriate nation to relocate to (Zhai et al., 2016) . In China, for instance, probably the markets that have remained unexploited include jewelry, trendy snacks and vitamins, beauty accessories and fashion. A company must then gauge the dangers versus rewards of entering such marketplaces. 

Many developing governments provide incentives for business owners. 

Part of what makes relocation of both big and small companies affordable is the chance to capitalize on incentives and tax cuts offered by developing countries. Corporations in the United Kingdom, for instance, paid a normal corporate tax rate of ten percent, as indicated by the 2015 U.S. Congressional Budget Office (CBO) report. In the U.S., companies’ pay rate in the same year was twenty-nine percent making it the third highest rate on the planet ( Andresen & Margenfeld, 2015 ). This distinction alone could spare a company thousands of dollars. Many developing nations offer incentives that attract foreign investment. For example, Malaysia’s federal government enables business investors to discover approaches that can help them to save cash. In New Zealand, companies can combine their businesses in a day and register their property in two. Similarly, Norway's government communicates digitally with foreign companies that have the intentions of investing in their country hence making registration and tax compliance processes more direct and straightforward. 

Establishing a company allows for affordable moves with long-term profit margins 

Any company located in the U.S that has outsourced from developing countries knows about reduced labor costs and how much this can contribute to high-profit-margin if they relocated their businesses to such countries. Although it takes longer to establish a business overseas, it can be worth to save costs in the long run ( Brown et al., 2004 ). Developing countries have low production costs and employees’ salaries. This means that companies can still have sufficient capital to source for more markets, carry out market research, produce new products or scale up their company. 

Relocation breathes a new life into a company 

Developing countries like Singapore and New Zeeland have business-friendly laws and doing business in such countries is much more comfortable. While countries like the U.S will require companies to heavily rely on experts and consultants to enable you to explore the formality of doing business, developing countries have conducive laws that help companies to locate their businesses rather than to hurt them ( Rossman, 2018) . If things are becoming tough in the U.S market, it is time to move into a different nation. Revenue potential and tax incentives at the very last can breathe new life into a stagnated company if it is established outside America ( Amiti & Wei, 2004) . It can even provide energy for all the operations of the company. It likewise may be the move that achieves many years of future accomplishment for the company image. All these can be attained if companies can attempt relocating. 

Drawbacks of relocating companies 

Currency Risk 

When companies relocate to developing countries, they are forced to sell their products locally, and this exposes them to currency rate fluctuation. Regardless of whether they manufacture products from imported raw materials from other foreign countries, it makes no difference in terms of currency risks. Suppose a company that produces leather suits has relocated to Turkey. It cost the company 120 Turkish liras to make. If it is assumed that 2 liras equivalent is to 1 U.S. dollar, then the suit costs $60. If the liras gain value, so 1.5 liras is equivalent a dollar, the same suit will cost $80 ( Radło, M. J. (2017) . 

Logistics 

Regardless of emotional advances in information and transportation innovation, a company that moves to a developing country still incurs substantial logistical challenges. To begin with, shipping products over the Atlantic or Pacific in search of markets takes several months. As a result, urgent and unexpected orders can't be fulfilled as fast as it would be if the company were located in the U.S where there is a ready market ( Amiti & Wei, 2004) . Quality issues are an additional aspect that companies which decide to relocate to developing countries have to deal with. At times, the companies incur high expenses as they send their experts to analyze samples in developed countries before asserting that the product is suitable for use or it meets the market standards. 

Rising Costs 

As most companies move their facilities to developing nations, the local labor market of the host countries notices and wages starts to rise. More employees start to flood the market, and if they are not offered the best pay, they start to seek other jobs that pay well. In so doing, managers are compelled to offer higher wages to hold their talents ( Brown et al., 2004 ). Prices of other basic things, for example, the land where factories can be located and other utilities, become more expensive. This results in greater expenses for these items, which can invalidate a significant part of the cost favorably offered by the foreign location. 

Political Risks 

Most developing nations have genuinely flimsy or unpredictable political landscapes that can change rapidly. When new leaders are elected, it may make it harder to work together in that nation. This can run from forcing new guidelines on companies or raising utility costs or expenses to nationalize production facilities. At times, it is hard to predict what actions will be enacted, which makes it difficult for companies to take countermeasures. Even with political advancements in inconsequential corners of the world can affect costs (Zhai et al., 2016) . For instance, an emergency in the Middle East that leads to higher oil expenses may inflate the delivery expenses of moving items from India to America . 

Social effects of Relocating a Company 

Services such as healthcare and education in developing countries cannot handle the rapid increase in the population. Healthcare and education facilities impact developing nations. As more industries move into these countries, they attract more people who serve as employees, other investors like housing, and other small retailers. As a result, the healthcare facilities in the area and schools become overwhelmed. Unlike in the U.S and other developed nations that cater to the needs of the elderly, developing countries like India, Singapore, and Bolivia do not have such programs ( Singla et al., 2017 ) . If companies are relocating to these countries, demeanors will be forced to abandon schooling and seek employment in these companies to support their big families. 

Housing facilities is another big challenge in developing countries. Establishment of industries follows the usual factors such as nearness to raw materials, passable roads, labor and many more. In some cases, delocalized companies may be situated in areas that do not have adequate housing facilities. These force workers to stay in makeshift houses while others end up living in unfit houses that can promote the outbreak of epidemics such as cholera and typhoid (Zhai et al., 2016). Last but not least, food shortages are not something new in developing nations. The main motive for relocating companies is to secure cheap labor that can enable them to earn substantial profits. Thus, working with starving employees will not be possible. 

Economic Effects 

Developing countries have high unemployment woes. This means if one or two companies are intending to relocate to such nations, they will not provide enough jobs for the high numbers of people in the country who are not employed. At the same time, relocating companies move along with their job opportunities to the new state (Zhai et al., 2016). This means that they leave many people in their country of origin unemployed. Most developing countries languish in abject poverty. This relates to the high numbers of people who are born into such families. As a result, companies that are relocating have a likelihood of lacking skilled personnel since the majority of the population is not learned. One common characteristic with the relocation of companies to developing nations is that the working population is made of many young people who work in short shifts. 

Political Effects 

Most companies that are relocated to developing nations do not excel as opposed to retaining them in developed nations. The explanation that elaborates this statement is that the population of these nations is made up of young people. This forces most governments to concentrate on providing the primary needs hence neglecting other important sectors of a country like infrastructure, housing, and pension to the elderly. In regard, these companies spend more money on catering to employee’s pension schemes, medical insurance, and housing. Government policies in developing countries are never constant. As governments come and go, new policies are created which affects the operations of these companies ( Buckley & Clegg, 2016 ). Examples of these policies include an increase in taxation, employment policies and terms of trade which may give room for unfair competition as a result of dumping. 

Conclusion 

In conclusion, the decision to relocate is made within diverse social, economic and political frameworks which are greatly affected by both internal and factors. This paper has examined the relocation of companies from developed to developing countries with the motive of minimizing expenditure and maximizing on profits. Most companies which have tried to relocate to overseas have found themselves in a dilemma because of the benefits and drawbacks that are associated with the entire process. 

References 

Andresen, M., & Margenfeld, J. (2015). International relocation mobility readiness and its antecedents. Journal of Managerial Psychology , 30 (3), 234-249. 

Amiti, M., & Wei, S. J. (2004). Fear of service outsourcing: is it justified? (No. w10808). National Bureau of Economic Research. 

Brown, D. K., Deardorff, A., & Stern, R. (2004). The effects of multinational production on wages and working conditions in developing countries. In Challenges to Globalization: Analyzing the economics (pp. 279-330). University of Chicago Press. 

Buckley, P. J., & Clegg, J. (Eds.). (2016). Multinational enterprises in less developed countries . Springer. 

Radło, M. J. (2017). Offshoring and outsourcing as new challenges for industry in the EU. In The New Industrial Policy of the European Union (pp. 67-85). Springer, Cham. 

Rossman, V. (2018). Capital cities: Varieties and patterns of development and relocation . Routledge. 

Singla, A., Ahuja, I. P. S., & Sethi, A. P. S. (2017). The effects of demand pull strategies on sustainable development in manufacturing industries. International Journal of Innovations in Engineering and Technology , 8 (2), 27-34. 

Zhai, W., Sun, S., & Zhang, G. (2016). Reshoring of American manufacturing companies from China. Operations Management Research , 9 (3-4), 62-74.