Answer to Question #79663 in Finance for Justin Jian Hui Lam

Question

Reversal of FDI A number of global auto manufacturers have decided to stop producing cars in Australia and closed down their plants.
a. What are the potential reasons behind an auto MNC’s decision to cease production in Australia?
b. One solution to prevent a foreign auto manufacturer from leaving Australia is to offer a subsidy. Explain how a subsidy may induce an auto maker to remain in Australia?
c. It was observed that even after receiving subsidies from the Australian government, several foreign auto makers decided to cease manufacturing in Australia. Explain the reasons behind this outcome.

Answer 1

a) The largest automakers in Australia were corporations such as Ford, Toyota and Holden. The main reasons for the closure of production were:
1) Increase in the cost price of production due to rising labor costs. There is no sense to pay lot of money for simple job of workers.
2) The population of Australia is 25 millions of people. For the automotive market, this is a country with a weak potential.
3) The Australian government abolished duties on imports of cars from outside. This decision led to increased competition in the automotive market.
b) No way. There are no subsidies that could justify an economically unprofitable production.
c) Because it is much more profitable to produce cars in countries with cheap labor and then import them to Australia.