Costing and Economics of Textile Production

1. Explain how the institutional factors of production of a country can affect the decision-making process in a foreign multinational company when it is considering the establishment of a manufacturing facility.

a. management sharing schemes

A multinational company decides to invest in a country where they will have full control of their company, therefore in countries where certain restrictions and management constraints are made the company will not invest, the multinational company will therefore invest in countries where they will have full control of their company.

The company may be forced to employ managers from in the host company who may take control of the company against their will, political influence and pressure may also influence in the host country the running and control of the company.

Other conditions may be put in place such that in order for the company to run it has to sell its some of its share to the public in the host company, bearing in mind that the share holders are the decision makers this makes the multinational company loose full control of the company.


Costing and Economics of Textile Production

Therefore in when an investment is done in a foreign country control of the company may be taken over by foreign manager and politicians who put conditions to the running of the company.

b. local infrastructure

A company will invest in country in which support infrastructure is available; a company will invest in a country with good transport network, good energy and electricity services and good communication network, a country with poor infrastructure will not be appropriate to invest in as it will not enable smooth running of the company. [1]

Poor infrastructure will not enable the company to transport its goods on time and this may also cause an increase in the cost of production of its goods and therefore it will be less likely for the multinational company to invest.


Costing and Economics of Textile Production

c. Factors of production

Some countries have abundant resources and factors of production, example raw materials used for production or even abundant skilled and cheap labour, when such advantages exist then there is a high likelihood for a multinational company to invest, a good example of this is why many multinational companies invest in third world countries, because there is abundant and cheap factors of production. However multinational companies will be less likely to invest in countries where such advantages do not exist.

d. competition in the market

Multinational companies will invest abroad for the purpose of making their products competitive markets, by producing in a foreign country the cost of production is usually lower and therefore they will invest to expand their market area. The existence of competition in foreign countries will also determine their decision to invest, a country where there exist similar manufacturing companies of the same product will not be a good country to invest in, and this is because of


Costing and Economics of Textile Production

competition that will arise from the already existing company.

The existence of demand for their products in the market will also increase the possibility to invest in a foreign country, if the demand for its products is high in a foreign country then the greater is the possibility to invest in that country, if there is less demand for its products then they will not invest in that country.


Costing and Economics of Textile Production

2. A small east African state has a small foreign debt problem, but the major problem in the country is one of the unemployment and sections of the population are under-nourished.

The country is an exporter of medium quality cotton and has no real manufacturing industry. The majority of the working populations, therefore, work on the relatively primitive. It has been suggested that the government establishes a textile industry within the country, to help to solve some of their problems.

Describe how the establishment of a textile production plant might benefit the country, and explain any possible disadvantages.


Better employment prospects

The opening of a new manufacturing industry will reduce the rate of unemployment in this country, there will also be increased employment both directly and indirectly, the industry will employ people to undertake professional jobs such as accountants, auditors, managers and supervisors, in case this country does not grow cotton in large scale there will be an incentive for cotton growing and this will lead to increased employment.


Costing and Economics of Textile Production

Improved balance of payments

The balance of payment of the country will improve where the countries previous imports will reduce, this will be caused by the fact that cotton will no longer be imported and people will rely on the cotton locally produced. If this industry produces excess then the country will be in position to increase its exports and therefore improve the balance of payment. [2]

Reduced debt

As the balance of payment improves the debt problem will also be solved, increased exports by the company to its trading partners will eventually create a favourable balance of payment and therefore reduce foreign debts.

Further investment

Investment in the cotton industry will also lead to further investment such the investment into complementary producing industry that provide raw materials to the cotton industry and also the investment in industries that process cotton into final goods, this industry will further lead to investment in that it may decide to trade its shares to the general public.

Satisfied population

The population of the country will be in a position to purchase final goods made of cotton at lower price, this will lead to a more satisfied population in that their real income will increase.

More centralized population


Costing and Economics of Textile Production

A more centralised population will also be an advantage to the industry in that the population will tend to migrate and settle near their work place, the workers will settle near the industry to save on transport costs and therefore there will be the emergence of a more centralised population and also towns.

Export production zone

An export processing zone will emerge, this will be caused by the development of this industry that will lead to the emergence of other complementary industries, example other industries that support the cotton industry and those that process the cotton into finished consumer goods.

Government income from taxes and duties

A new industry will be source of income to the government, the revenue will collected through taxes and export duties such as tariffs, the government therefore will increase its revenue through sales taxes, export taxes and tariffs. [3]

Possible disadvantages


Costing and Economics of Textile Production

Increased split of population

The new industry ones established will cause an increased split in the population in that more towns will develop and therefore cause a further split in population.

Worsened balance of payment

For the country to start up this industry it will need to invest on machinery the industry will be financed through debts and also that the machinery will have to be imported into the country, this will cause a worsening in the balance of trade. [4]

More centralize of population

The development of a more centralised population may cause disadvantages caused by the development of urban centres, this will include increased crimes and insecurity and also immorality.

Imported labour


Costing and Economics of Textile Production

The company may not have a skilled labour force to work in the industry, this will cause them to import skilled labour from other countries and therefore the industry may not solve the problem of unemployment.

Increased expectations of population

The population may expect that the company will provide employment and cheep goods to them, this might not be the case because the cost of producing this goods may be high and therefore produce goods at high cost and therefore high prices.

No income from taxes from company

The company may produce goods at higher prices than the previously imported ones, countries have comparative advantages in certain goods they produce, the government may therefore choose not to tax the infant industry due to high production cost, the government may therefore decide to subsidise the industry in order to protect it from competitive imports.

Draw population from land

The development of this industry will cause urban rural migration as more and more people move from rural areas to the urban area where this industry is situated; this is a disadvantage in that it will cause overpopulation and overcrowding in the urban area.


Costing and Economics of Textile Production

Shanty towns

Overcrowding in urban areas where the industry is situated will cause a shortage of social amenities such as hospitals drainage and this will cause health hazards to the residing population.


H. Stratton (1999) Economics: A New Introduction, Pluto Press, USA

P. Samuelson (1964) Economics, McGraw-Hill publishers, USA

[1] H. Stratton (1999)

[2] H. Stratton (1999)

[3] P. Samuelson (1964)

[4] H. Stratton (1999)