Answer to Question #79660 in Finance for Justin Jian Hui Lam

Question

Capitalising on Low-Cost Labour. Some MNCs establish a manufacturing facility where there is a relatively low cost of labour, but they sometimes close the facility later because the cost advantage dissipates. Why do you think the relative cost advantage of these countries is reduced over time? (Ignore possible exchange rate effects.)

Answer 1

It’s strategy in which a company sources materials from countries with lower labour and production costs in order to cut operating expenses.
The primary principle is to obtain sourcing efficiencies through identifying and exploiting cost arbitrage between geographies.
Trends in the world labor market lead to higher wages in countries that previously led in this indicator. Companies did not take this factor into account when planning their production process. Thus, they either transfer their production to other countries or are closed in this countries. Translating the production process to another country of the company does not insure itself against the recurrence of the situation with the growth of wages.
In addition, low-cost labor is unskilled labor. Without high quality indicators, any company loses its profits.
When setting priorities, it is important to understand the role of labor in the production process and its role as its effectiveness.