Producing Goods in a Developing Country

There are a number of reasons that could motivate a company based in the United States to move all or a part of its production to a less developed country. There also are different ways to interpret ôproductionö. Consider that latter issue first; the common assumption is that the issue implies that an automobile manufacturer or a clothing manufacturer producing goods in the United States wants to move production to a less developed country to take advantage of lower labor costs. A company such as Wal-Mart, however, that sells goods at retail (forget SamÆs Club for the sake of this discussion) in effect shifts its production from the United States to a less developed country when it shifts buying its merchandise from producers in the United States to producers in less developed countries to take advantage of lower product prices. General Motors might to choose to shop overseas to obtain lower labor costs, while Wal-Mart may choose to shop overseas to obtain lower product prices, but both companies would be reacting to factor costs in their supply chains. The decision by each company in this illustration is a function of supply and demand wherein changes in the factors costs in the supply chain affect the supply and demand relationship.

First, consider the case of General Motors. The company faces stiff competition not only from domestic automobile manufacturers but also

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nsider the level of quality control in China at the SAIC plant compared to the level of quality control in the General Motors manufacturing plants in the United States. If the rejection rate or the failure rate on the components manufactured in China was too high in relation to the rejection rate or the failure rate on components manufactured in the United States, General Motors could actually lose money on the strategy that was intended to lower production costs. It also is possible that an automobile manufacturer in a situation such as the one described in the preceding discussion might choose not to pass along the cost reductions realized by shift some component production from the United States to China. The implied assumption in the discussion above involving General Motors was that the companyÆs product - automobiles - was price sensitive and that the price elasticity of demand was negative and greater than one (i.e., for every change in the price of the product, the demand for the product moved a proportionally greater amount in the opposite direction). If, however, a product was (a) price insensitive (i.e., the demand for the product was steady regardless of what changes in price occurred); or (b) had a very low (less t
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Approximate Word count = 1258
Approximate Pages = 5 (250 words per page)

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