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Assessing Countries as Production Locations

A clear guide to assessing countries as production locations, covering costs, labour, infrastructure, trade blocs, government incentives, political stability, natural resources and likely return on investment.

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Created by an experienced Head of Business and examiner

AQA | Edexcel | Cambridge | Eduqas | WJEC | OCR | GCSE

KEY POINTS

Businesses compare countries as production locations when deciding where to manufacture goods, assemble products or provide services.
A country may be attractive if it offers lower production costs, skilled labour, strong infrastructure or access to important markets.
Exam-board factors include costs of production, skills and availability of labour, infrastructure, trade bloc location, government incentives, ease of doing business, political stability, natural resources and likely return on investment.
Low labour costs are not enough on their own if quality, reliability, transport or political stability are weak.
Trade blocs can make a country more attractive by reducing tariffs, customs barriers or market-access problems.
Government incentives such as grants, tax relief or infrastructure investment can reduce the cost or risk of investment.
Likely return on investment is the overall judgement, weighing the benefits of the location against the costs, risks and strategic fit.
Strong exam answers compare factors in context rather than simply listing reasons why one country might be cheaper.

KEY DEFINITION

Production location

A production location is the country, region or site where a business chooses to make goods or provide services, based on factors such as costs, labour, infrastructure, government policy, trade access and risk.

Main Explanation

Assessing Countries as Production Locations

Assessing countries as production locations means judging where a business should make goods, assemble products or provide services. This is a strategic decision because the location chosen can affect costs, quality, reliability, customer access, risk and long-term competitiveness.

Production Costs

One key factor is cost. Businesses may compare labour costs, energy prices, rent, transport costs, raw materials and taxes. A lower-cost country may help a business reduce average costs, improve profit margins or compete using lower prices. However, low wages do not always mean low total costs. Poor quality, delays, unreliable suppliers or high training costs can reduce the benefit.

Labour Skills and Availability

Businesses must consider whether the country has the right workers available. Some firms need low-cost labour for large-scale production. Others need skilled engineers, technicians, designers or managers. A skilled workforce can improve productivity, quality and innovation. Poorly trained labour may lead to mistakes, waste and lower efficiency.

Infrastructure

Good infrastructure makes production easier and more reliable. This includes roads, ports, airports, rail links, electricity, water, internet and logistics networks. Weak infrastructure can cause delays, higher transport costs and problems getting materials or finished products to the right place on time.

Trade Blocs and Market Access

A country may be attractive if it is inside a trade bloc. This can make it easier and cheaper to sell goods across member countries. Producing inside a trade bloc may help a business avoid tariffs, reduce trade barriers and reach a larger market.

Government Support

Governments may offer incentives to attract businesses. These can include grants, tax breaks, training support, cheaper land or special economic zones. These incentives can reduce costs, but the business must judge whether the benefits are long term or only temporary.

Ease of Doing Business

A country may be more attractive if it is easy to set up and operate there. This includes registering a business, gaining permission to build, importing materials, employing workers, paying taxes and enforcing contracts. Too much bureaucracy, corruption or slow legal processes can increase costs and risk.

Political Stability and Risk

Political stability is important because production often involves long-term investment. Unstable government, conflict, sudden changes in laws or industrial unrest can disrupt production and increase risk.

This is especially important if the business needs expensive factories, specialist equipment or long-term supplier relationships.

Natural Resources

Some businesses locate close to natural resources such as minerals, timber, water, crops or energy supplies. This can reduce transport costs and improve supply reliability. However, natural resources alone are not enough if infrastructure, labour skills or political stability are weak.

Overall Judgement

The best production location depends on the needs of the business. A clothing manufacturer may prioritise labour costs and speed of supply. A car manufacturer may focus on skills, infrastructure, supplier networks and trade access. A food producer may focus on natural resources, reliability and safety standards. The final decision should be based on whether the expected benefits justify the costs and risks of investing in that country.

✎ EXAMINER TIP

When answering questions on production location, avoid simply listing factors. Explain which factors matter most for the specific business, then judge whether the expected return justifies the cost, risk and complexity of producing in that country.

KEY FORMULAS(s)

Profit and Profitability Formulas

These key formulas help you calculate different profit measures and profitability ratios used in business.

Gross Profit

Gross profit = Revenue − Cost of sales

The profit made after deducting direct costs.

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Remember: profit shows how much money has been made, while profitability shows how efficiently revenue is being turned into profit.

DATA TABLE

Income Statement for North Coast Coffee Ltd

This statement shows how revenue is converted into gross profit, operating profit and net profit.

Revenue

£250,000

Output

Fixed Costs

Variable Costs

Total Costs

Revenue

Profit / Loss

0 candles £1,200 £0 £1,200 £0 -£1,200

Net profit is the final profit remaining after all costs and expenses have been deducted from revenue.

Cost, Capability and Risk in Production Location Decisions

This chart shows that a country’s attractiveness depends on the balance between lower production costs, operational capability and the risks that could affect long-term return on investment.

WORKED EXAMPLE

Worked Example: North Coast Coffee

How many coffees must be sold to break even?

Fixed Costs

£1,800

equity + long-term debt

Break-even output = Fixed costs ÷ Contribution per unit

Contribution per unit = Selling price − Variable cost

£3.50 − £1.10 = £2.40

Step 1: Calculate contribution

£3.50 − £1.10 = £2.40

Contribution per unit is the amount each coffee contributes towards fixed costs.

BREAK-EVEN OUTPUT:

750 coffees per month

EXAM TIP

Always explain what the number means for the business. Do not just calculate the break-even point.

Create a 5 pointed blue outlined star ic

Factors Affecting Production Location Decisions

This diagram shows the main exam-board factors businesses consider when assessing a country as a production location, including costs, labour, infrastructure, trade access, incentives, risk and likely return.

APPLICATION

Nissan Sunderland

Nissan Sunderland provides a useful real-world example of how a country can be assessed as a production location. The plant shows that businesses do not choose production locations only because of low costs. They also consider skills, infrastructure, supplier networks, government support, market access and long-term strategic fit.

For a car manufacturer, labour skills are very important. Vehicle production requires trained employees, engineering capability, quality control, logistics expertise and the ability to adapt to new technology. A country or region with an experienced manufacturing workforce may therefore be more attractive than a lower-wage location with weaker skills.

Infrastructure is also essential. Automotive production depends on reliable transport links, access to suppliers, energy, warehousing, testing facilities and the ability to move finished vehicles to customers. If infrastructure is weak, delays and inefficiency could increase costs and reduce competitiveness.

Government support can also influence the attractiveness of a location. Support for investment, skills, clean technology or local infrastructure can reduce the risk of major production decisions. However, managers must judge whether incentives are enough to justify the investment over the long term.

The case also shows why likely return on investment matters. Car production requires high fixed costs, expensive equipment and long-term planning. A production location is only attractive if the expected output, quality, cost control and market access are strong enough to justify the investment.

However, the UK is not automatically the best production location for every manufacturer. Businesses may still compare it with other countries that offer lower labour costs, larger domestic markets, stronger trade access, cheaper energy or faster-growing demand. This means managers need to weigh advantages against risks.

Nissan Sunderland shows that a production location decision is a strategic judgement. The most attractive country is not always the cheapest. It is the country that offers the best overall combination of cost, capability, infrastructure, reliability, government support and long-term return.

This independent educational case study is not affiliated with, endorsed by or sponsored by Greggs plc. Any financial figures used alongside this example should be treated as simplified or hypothetical estimates created for teaching purposes.

ANALYSIS

EXAM FOCUS

Analysis questions require you to examine a business concept or issue in detail, breaking it down into its component parts. You should explain how and why something happens and consider its impact on the business.

How to Approach Analysis Questions

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Identify the key issue or concept

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Break it down

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Explain how and why

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Reach a reasoned conclusion

Read the question carefully and highlight the focus of the analysis.

Consider the different factors, causes or impacts related to the issue.

Provide clear explanations using business terms and links points to context.

Evaluate the overall implications for the business.

Example Analysis Question

North Coast Coffee is considering using break-even analysis before opening a second café.

Advantages

• Sales forecasts may be inaccurate.

• Assumes costs and revenue remain constant.

• External factors may reduce reliability.

• Ignores qualitative business factors.

Disadvantages

• Sales forecasts may be inaccurate.

• Assumes costs and revenue remain constant.

• External factors may reduce reliability.

• Ignores qualitative business factors.

Key Exam Tip

If you find it difficult to expand your answer and show the type of depth that an examiner is looking for in a top response, consider using the 'so what' approach.

Tesco carry out market research - so what? - this allows them to better understand customer needs - so what? as a result Tesco can provide goods more likely to sell - so what? - this will increase Tesco profit and ensure higher levels of customer satisfaction - so what? this means that customers are likely to become more loyal to Tesco.

Avoid These Exam Traps

Students often lose marks on calculation and analysis questions by making these mistakes. Watch out for them in your exam!

1

Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.

Tip:

Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.

2

Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.

Tip:

Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.

3

Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.

Tip:

Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.

Be precise. Read the question carefully. Show your working.

Small mistakes can cost big marks.

EXAM PRACTICE

Practice Question

Apply your knowledge of profit and profitability to answer this exam-style question.

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MINI CASE STUDY

North Coast Coffee Ltd is a premium coffee business which sells freshly roasted coffee beans through its online store and a small chain of independent cafés. The business has experienced strong sales growth due to increasing demand for high-quality speciality coffee products.

The business generates annual revenue of £250,000. Its cost of sales, including coffee beans, packaging and direct production costs, totals £100,000. North Coast Coffee Ltd also faces operating expenses of £80,000, including marketing, employee wages, rent and administration costs. In addition, the business pays £20,000 in interest and taxation each year.

The owner, Mia Thompson, is reviewing the company’s profitability because rising wage costs and increased competition in the premium coffee market have started to place pressure on operating profit margins. She is considering increasing prices slightly in order to protect profitability while still maintaining customer demand.

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EXAM QUESTION

Analyse the possible reasons for BrightBite’s falling profit margins and evaluate strategies it could use to improve profitability.

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HOW TO ANSWER

P

Point

E

Explain

A

Apply

C

Consequence

H

However...

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MODEL ANSWER

P

Point

Increasing prices could improve the profitability of North Coast Coffee Ltd because each sale would generate a larger amount of revenue and potentially increase profit margins.

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EXAMINER TIP

For full marks, make sure you analyse causes rather than just listing them, and evaluate realistic strategies with clear judgement. THINK: Which strategy would have the biggest impact and why?

CALCULATOR

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