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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

Why do U.S. corporations build manufacturing plants abroad when they can build them at home?

Summary Introduction

To identify: The reasons behind establishment of manufacturing plants in forgein country instead of home country.

Introduction:

Globalization:

It refers to a process which indicates the operations of the company at  global level (in foreign countries).

Answer

The reasons behind establishment of manufacturing plants in foreign country are mentioned below:

  • Low-cost production
  • Avoidance of government rules and regulations
  • Large market
  • Availability of raw material
Explanation
  • Low-cost production: The companies can easily be benefited through the establishment of manufacturing plants in such countries which will be proved low-cost region because high production cost reduces the profits of the company. For example: availability of cheap labor.
  • Avoidance of government rules and regulations: To avoid the strict policies or rules and regulations imposed by government for manufacturing units, companies establish their manufacturing units in such countries, which have liberal business policies in comparison of domestic country.
  • Large market: A company can explore market of foreign countries to attract customers of that country and utilizes this as an opportunity, which can help for the growth of the company.
  • Availability of raw material: The raw materials are diversified geographically all over the world. So, in order to get the raw materials easily, companies needs to establish its manufacturing plant according to the availability, which incurs high cost to acquire raw material. This will keep the cost of raw material low.
Conclusion

Hence, the factors due to which company establish manufacturing units in abroad includes low cost of production, availability of market and raw material, and liberal government policies.

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