Because of globalization, multinational corporations are setting up their organizations in India and Indian companies are extending their operations in other countries. In case of global locations there is scope for virtual proximity and virtual factory.
With the advance in telecommunications technology, a firm can be in virtual proximity to its customers. For a software services firm much of its logistics is through the information/communication pathway. Many firms use the communications highway for conducting a large portion of their business transactions. Logistics is certainly an important factor in deciding on a location—whether in the home country or abroad. Markets have to be reached. Customers have to be contacted. Hence, a market presence in the country of the customers is quite necessary.
Many firms based in USA and UK in the service sector and in the manufacturing sector often out sources part of their business processes to foreign locations such as India. Thus, instead of one’s own operations, a firm could use its business associates’ operations facilities. The Indian BPO firm is a foreign-based company’s ‘virtual service factory’. So a location could be one’s own or one’s business associates. The location decision need not always necessarily pertain to own operations.
Reasons for Global Location
The tangible reasons for setting up an operations facility abroad could be as follows:
a. Reaching the customer: One obvious reason for locating a facility abroad is that of capturing a share of the market expanding worldwide. The phenomenal growth of the GDP of India is a big reason for the multinationals to have their operations facilities in our country. An important reason is that of providing service to the customer promptly and economically which is logistics-dependent. Therefore, cost and case of logistics is a reason for setting up manufacturing facilities abroad. By logistics set of activities closes the gap between production of goods/services and reaching of these intended goods/services to the customer to his satisfaction. Reaching the customer is thus the main objective. The tangible and intangible gains and costs depend upon the company defining for itself as to what that ‘reaching’ means. The tangible costs could be the logistics related costs; the intangible costs may be the risk of operating is a foreign country. The tangible gains are the immediate gains; the intangible gains are an outcome of what the company defines the concepts of reaching and customer for itself.
The other tangible reasons could be as follows:
- The host country may offer substantial tax advantages compared to the home country.
- The costs of manufacturing and running operations may be substantially less in that foreign country. This may be due to lower labour costs, lower raw material cost, better availability of the inputs like materials, energy, water, ores, metals, key personnel etc…
- The company may overcome the tariff barriers by setting up a manufacturing plant in a foreign country rather than exporting the items to that country.
The intangible reasons for considering setting up an operations facility abroad could be as follows:
1. Customer-related Reasons
- With an operations facility in the foreign country, the firm’s customers may feel secure that the firm is more accessible. Accessibility is an important ‘service quality’ determinant.
- The firm may be able to give a personal tough.
- The firm may interact more intimately with its customers and may thus understand their requirements better.
- It may also discover other potential customers in the foreign location.
2. Organizational Learning-related Reasons
- The firm can learn advanced technology. For example, it is possible that cutting-edge technologies can be learn by having operations in an technologically more advanced country. The firm can learn from advanced research laboratories/universities in that country. Such learning may help the entire product-line of the company.
- The firm can learn from its customers abroad. A physical location there may be essential towards this goal.
- It can also learn from its competitors operating in that country. For this reason, it may have to be physically present where the action is.
- The firm may also learn from its suppliers abroad. If the firm has a manufacturing plant there, it will have intensive interaction with the suppliers in that country from whom there may be much to learn in terms of modern and appropriate technology, modern management methods, and new trends in business worldwide.
3. Other Strategic Reasons
- The firm by being physically present in the host country may gain some ‘local boy’ kind of psychological advantage. The firm is no more a ‘foreign’ company just sending its products across international borders. This may help the firm in lobbying with the government of that country and with the business associations in that country.
- The firm may avoid ‘political risk’ by having operations in multiple countries
- By being in the foreign country, the firm can build alternative sources of supply. The firm could, thus, reduce its supply risks.
- The firm could hunt for human capital in different countries by having operations in those countries. Thus, the firm can gather the best of people from across the globe.
- Foreign locations in addition to the domestic locations would lower the market risks for the firm. If one market goes slow the other may be doing well, thus lowering the overall risk.