Question

Which government policies are especially important in the decision about where to locate an international facility? Why do free trade zones often influence the location decisions of international businesses?

Answer 1

A International or Free Trade Zone is a specially defined area that is considered outside the Customs Jurisdiction in or near a Port of Entry. There are officially 256 general-use zones and 498 sub-zones in the US and Puerto Rico, according to the National Association of International Trade Zones. Overall, International Trade Zones provide an opportunity to help companies minimize overall produced costs and become more competitive in three very important ways: reducing supply chain cycle time; reducing import costs; reducing loss costs by enhancing protection.

The strong establishment of the European Union as a global trading block, and the rise of a rapidly rising, large middle class in China and India have resulted in a diminishing share of foreign direct investment (FDI) inflows into the US. Companies are rapidly investing money in these emerging and underdeveloped markets to build both the capacity and ability to satisfy the customers.

The International or Free Trade Zone is an important instrument for encouraging FDI. Comparing the FDI inflow dollars published in the UNCTAD 2009 World Investment Report shows that, as a direct result of the global financial crisis, FDI inflows to developing countries drop sharply. Undertakings slash spending

To ensure it is appropriate, credible and competitive against global location alternatives, economic development professionals need to step back and re-evaluate their location value proposition. International direct investors need to find a differentiating purpose for choosing their spot.

One of the main differentiating reasons why one place is preferred over another is cost of doing business. Costs that can not be offset and must thus be passed on to the customer in the price of a good or service are perceived negatively when a location comparison is made by an investor. Tools that help eliminate or significantly reduce these operational costs may therefore be critical to competing successfully Many multinationals have global supply chains, and the materials needed to manufacture the final product are imported from around the world to ensure the highest quality at the lowest price. From the company's viewpoint, tariffs reflect an operational expense which they would either have to pass on to the customer in the form of a higher price or to their shareholders as a decrease in profit margins.