Assessing a country as a production location

Factors to consider

• Costs of production: wages, land, rent, energy, taxes, transport to customers.
• Skills and availability of the labour force: low wages are worthless if productivity is low or the right skills are scarce.
• Infrastructure: ports, roads, reliable power, internet.
• Location in a trade bloc: tariff-free access to the whole bloc.
• Government incentives: grants, tax breaks, special economic zones.
• Ease of doing business: permits, bureaucracy, corruption, legal protection.
• Political stability.
• Natural resources: raw materials, energy, water.
• Likely return on investment (ROI): the expected profit relative to the cost of setting up.

Unit labour costs

What matters is labour cost per unit of output, not the wage alone:

unit labour cost = wage cost / output per worker.

A country with wages twice as high may still be cheaper if workers produce three times as much.

Return on investment

ROI = (annual profit from the investment / cost of the investment) x 100. Shareholders often care most about ROI, but the October 2023 series examiner report noted that good answers considered the trade-off between short-term returns and long-term performance rather than just listing location factors.

Weighted scoring: give each factor a weight (summing to 1), score each country, multiply and add. The highest total is the preferred location, but weights and scores are subjective.

A weighted scoring table (illustrative)

Worked example

Country P: wage $12 per hour, 4 units per hour. Country Q: wage $30 per hour, 12 units per hour. Which has lower unit labour costs?

1. P: 12 / 4 = $3.00 per unit
2. Q: 30 / 12 = $2.50 per unit

Answer: Country Q, despite higher wages, because productivity is much higher.

Check yourself

1. Workers in Country R earn $18 per hour and produce 6 units per hour. Calculate the unit labour cost.
   Show answer

   $3.00. 18 / 6 = $3.00 per unit.

2. A factory abroad costs $60 m to build and is expected to make annual profit of $8.4 m. Calculate the ROI.
   Show answer

   14 %. 8.4 / 60 x 100 = 14%.

3. Using the weighted scoring table in this lesson, what is Country B's weighted total?
   Show answer

   6.85. 0.30x6 + 0.25x9 + 0.20x5 + 0.15x8 + 0.10x6 = 6.85.

4. If the weight on skills rose to 0.35 and labour cost fell to 0.20 (others unchanged), what would Country A's weighted total be?
   Show answer

   6.75. 0.20x8 + 0.35x6 + 0.20x7 + 0.15x5 + 0.10x9 = 6.75.

5. A government offers a ten-year corporate tax holiday in a special economic zone. This location factor is
   • natural resources
   • political stability
   • infrastructure
   • government incentives
   Show answer

   government incentives. Tax breaks and grants are incentives to attract investment.

6. Explain why low wages alone may not make a country a good production location.
   Show answer

   If workers are less skilled or less productive, output per worker is low, so unit labour costs may be higher and quality may suffer despite the low wages.. Unit labour cost depends on productivity as well as wages.

7. Why should a weighted scoring table be used with caution?
   • It only works with two factors
   • It always picks the cheapest country
   • It ignores all numerical data
   • The weights and scores are subjective judgements
   Show answer

   The weights and scores are subjective judgements. Different managers could choose different weights and reach different answers.

Practise with instant feedback Print this lesson

Sources

• Pearson Edexcel International Advanced Level in Business specification (first teaching 2018)
• Pearson Edexcel IAL Business WBS14/01 examiner report, October 2023 series (published January 2024)

Last updated 8 November 2026. Spotted a mistake? Tell us.