Unexpectedly Intriguing!
13 April 2006

Previously, we looked at a study by KPMG that provided a snapshot of the relative costs of launching a new business in several nations, which found the lowest costs of doing so to be in Singapore. But since every business in the world can't locate its new facilities in Singapore to take advantage of its low operating costs (they wouldn't be the lowest for long if they did!), what location-sensitive cost factors would drive a business' decision to pick one nation over another?

Rather than the absolute magnitude of the various cost components for each nation, the key factors that would influence the decision of where to locate a new operation lie in the type of expense and the variation within each component.

In its study, KPMG broke the various location-sensitive cost components down into the relative percentages of the total cost of starting and running a new business for ten years (Exhibit 5.1 of the 1.7MB PDF document of the report.) The following charts show the relative importance of these cost components for both manufacturing and non-manufacturing operations:

Relative Location-Sensitive Costs, Manufacturing

Relative Location-Sensitive Costs, Non-manufacturing

The charts above provide a quick way to see both the full range of the relative magnitude of each of the various major location-sensitive cost components for each of the nine nations of KPMG's study, as well as the degree of variation between the nations.

For a manager tasked with site selection, the degree of variation of the various cost components is what drives the decision to place the business in one nation over another. Here's why: By trading off the options for different locations, the business owners get to better control where their scarce resources go. In this case, the scarce resource is the money the businesses must devote to operating their new facilities.

Why, for instance, would a business select a nation that would require them to pay a higher percentage of their costs in the form of taxes, for which their business might receive very little benefit, when they could instead locate their operation where they may face higher labor costs, but for which they might receive a much larger benefit for the business itself (in the form of actual labor)? What other compelling options would have to be factored into the business' decision making to make the high-tax nation, in this case, represent the best choice?

No one claims this process is easy. There are many factors, both knowable and unknowable, that will determine whether the decision is the right one or not.

If you were that manager, what trade-offs would you choose to make? If you're right, that's great! Fame and/or fortune will be your reward. But how willing to be wrong are you? The wrong choice could not only wreck your career, it could kill your business too!

In the end, it's really just a question of your confidence in your own decision making ability and how willing you are to take a chance. Because if you're that manager and you're not willing to take any risk, perhaps you should consider a different line of work altogether.

Then again, you might just be French....

About Political Calculations

Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

ironman at politicalcalculations

Thanks in advance!

Recent Posts

Indices, Futures, and Bonds

Closing values for previous trading day.

Most Popular Posts
Quick Index

Site Data

This site is primarily powered by:

This page is powered by Blogger. Isn't yours?

CSS Validation

Valid CSS!

RSS Site Feed

AddThis Feed Button

JavaScript

The tools on this site are built using JavaScript. If you would like to learn more, one of the best free resources on the web is available at W3Schools.com.

Other Cool Resources

Blog Roll

Market Links

Useful Election Data
Charities We Support
Shopping Guides
Recommended Reading
Recently Shopped

Seeking Alpha Certified

Archives