Proceedings of the Twelfth Annual Conference of the Production and Operations Management Society,

POM-2001, March 30-April 2,2001, Orlando Fl.

Critical Factors in International Location Decisions:
A Delphi Study
(Track: Global Operations Management)

Bart MacCarthy and Walailak Atthirawong
Management and Human Factors Group
School of Mechanical, Materials, Manufacturing Engineering
and Management
University of Nottingham, NG7 2RD, United Kingdom
(email address:[email protected],[email protected])

Abstract
This paper explores critical factors that influence international location decisions in real world situations. We
first discuss the motivations of firms seeking to manufacture across borders. A comprehensive set of
international location decision factors is identified. The Delphi method is proposed as an approach to structure
this set of factors for particular circumstances. The approach to a Delphi study is described. It is being conducted
using a world-wide panel of experts that includes academics, government bodies and consultants. Issues in
conducting the Delphi analysis are raised.

Key words: Delphi Approach, International location decision

1. Introduction
As companies seek to serve international markets, there has been a growing number of
manufacturing plants located on a world-wide basis. International manufacturing is one of the
major parts of a firms competitive strategy today and beyond. Global expansion will offer the
potential to take advantage of economies of scale and entry to new markets (Badri, 1999).
Companies that decide to produce and source globally must consider a variety of factors,
which may not arise in location decisions in a single country. The additional factors which
differ from purely domestic activities include variation of host government policies, quality of
infrastructure and so on. To stay competitive in international environments, firms need to pay
attention not only to general factors but to the potential host countries factors as well.

The intent of this paper is to investigate critical factors in international location decisions
from the real world situation. The paper starts with the motivation of firms seeking to locate
manufacturing plants crossing national borders. In section 3, we follow by noting a variety of
factors influencing international location decisions which have been mentioned in the
literature. In the next section, the approach to a Delphi study is described. The methodological
procedure, the panel of experts and issues in conducting the Delphi study are proposed in
order to identify those factors from the real-world view. Finally, in section 5, conclusions and
ongoing research are highlighted.


2. Motivations for International Operations
In recent years, firms have changed their environment dramatically. Moving into a world-
wide markets involves significant changes. An important motive for international investment
comes from the increased need of firms to achieve their competitive advantage. Several
authors have described the motivation of firms seeking to manufacture abroad (e.g.
Christopher,1994; Dunning, 1994; Ferdows, 1997). These motives can be identified as
follows:

Proceedings of the Twelfth Annual Conference of the Production and Operations Management Society,
POM-2001, March 30-April 2,2001, Orlando Fl.

1. Access to low cost input factors which refers to labour, materials, capital and components
and so on in order to maximise profitability on manufacturing costs.
2. Access to local technological resources.
3. Proximity to markets, which results in faster and better customer service.

Ideally, these motivations would be clearly differentiated. However, international business
tends to undertake several reasons at the same time in making decisions. Before making any
decisions about the best country in which locates a new manufacturing plant, manufacturers
must evaluate many alternatives and factors involving international location decisions. In the
following section, we will discuss critical factors in international location decisions which
have been mentioned in the literature.


3. Factors to be considered in International Location Decisions
Several key elements are considered in the selection of international location process, some of
which are not relevant in domestic location decisions such as policies and incentives from
host governments, social factors, nature of supply base and the political climate of a foreign
country. These factors have been grouped and discussed by numerous authors and researchers
in a variety of ways. For example, Liang and Wang (1991) classify those factors into 2
categories: - objective attributes, which are defined in monetary terms such as transportation
cost, labour cost, etc. and subjective attributes, which have a qualitative definition such as
climate condition, etc. Alternatively, some studies (e.g. Dilworth, 1996) group the factors into
three general categories:- marketrelated factors, tangible cost factors and intangible factors.
Russell and Taylor III (1998) classify the factors into dominant factors, which are derived
from competitive priorities and have a strong impact on sales and costs (e.g. cost, time,
quality), and secondary factors, which are also important but can be ignored if others are
more important. Atthirawong and MacCarthy (2000) classify all of factors affecting
international location decisions, which are commonly cited in the literature, into twelve
headings. These factors are displayed in Table 1 below.

These are comprehensive lists of factors involving international location decisions. It is clear
that not every factor is relevant for every firm and may will not give the same priority when
firms decide to make a real decision. Firms will consider only some particular criteria
involving their businesses or the particular country in which they are located or wish to locate.
In other words, there may be only a few important factors and they dominate the decision in
each business (Stevenson, 1996). Moreover, these factors might depend upon size of business,
sector or location of parent company. For instance, a US firm in the consumer products sector
might look for a new location in a country which has a large market size, adequate,
infrastructure, cheaper labour cost and offer favourable incentives and other privileges from
host government.

The linkage between a subset of factors and type of business in which firms located, location
of manufacturing plant, location of parent company or nature of firm is not yet defined in the
literature. Likewise, most research does not investigate whether all these factors are still
recognised and well documented in practice or not. Here we discuss the application of the
Delphi technique to help clarify these difficult issues and add to the research knowledge in
this area.



Proceedings of the Twelfth Annual Conference of the Production and Operations Management Society,
POM-2001, March 30-April 2,2001, Orlando Fl.

4. The Delphi Approach and Methodological Procedure
4.1 The Approach
A Delphi study is a systematic, iterative process to elicit a consensus from a group of expert
opinions concerning the future. The method was originally developed as a short-term
forecasting approached by the Rand Corporation in the late 1940s(Benson et al, 1982; Klassen
and Whybark, 1994). Due to the fact that a single opinion may be incorrect and misinformed
and may tend to a narrow view, it is assumed that a group of representative experts will
provide a more accurate response than one opinion. In the Delphi approach the experts do not
come face-to-face with one another. The Delphi technique has been recommended as a
structured group communication process because a number of rounds of questionnaire can
reduce the influence of dominant individuals and develop a consensus of expert opinions on
subjective issues (Ray and Sahu, 1990; Azani and Khorramshahgol, 1990; and Klassen and
Whybark, 1994). As Ray and Sahu (1990) state, the Delphi method is a helpful tool to explore
and judge miscellaneous future scenarios, and is likely to provide more information than other
methods.

According to Benson et al. (1982) there are three particular features to the Delphi method: (1)
anonymity among the panel of experts, (2) controlled feedback, and (3) statistical group
response. The method is therefore different from brainstorming which allows the interaction
of individual opinion and no anonymity which may result in induced answers. The panel of
experts must be selected carefully, representing the group of people who are familiar with the
problem under consideration. Then they will be asked to participate in responding to a
questionnaire in writing. After the questionnaire is returned, all comments by the respondents
are combined in order to modify the questions for another round of the Delphi process. The
process is repeated until a consensus is reached. The most important part of the process is
designing the questionnaire. The questionnaire should be simple and easy to understand for
the respondents to provide answers. By avoiding a complex questionnaire and providing some
examples, a simpler questionnaire will help the experts to give more accurate answers. The
Delphi method has been applied and is well demonstrated in a range of application areas. An
application concerning location planning is reported by Azani and Khorramshahgol (1990).
Klassen and Whybark (1994) have applied the Delphi method to identify the key barriers in
the management of international operations.

4.2 The Methodological Procedure

4.2.1 Major Issues
The objective of this study is to elicit a consensus of judgements on issues of critical factors
in international location decisions and to classify these factors under type of business which
firms located, location of manufacturing plant, location of parent company and the nature of
business. The major issues in this study are as follows:

1. Identification of motivations of firms that seek to manufacture across the borders.
2. Determination of steps in international location decision process.
3. Identifying the most difficult problem in making an international location decision and
recommending ways to overcome the problem.
4. Identification of factors relating to international location decisions by asking the experts
indicate the importance of each of the thirteen major factors using a seven-point scale.
Explanatory on the importance of sub-factors and the sectors, types of business or
countries in which they are most relevant.

Proceedings of the Twelfth Annual Conference of the Production and Operations Management Society,
POM-2001, March 30-April 2,2001, Orlando Fl.

5. Identifying factors that need to be considered in international location decisions under
location of manufacturing plant in different geographical areas i.e. Western Europe,
Eastern Europe, Japan, United Stated, Middle-East, Far-east, Africa, Latin America from
experts points of view.
6. Identifying factors that need to be considered in international location decisions under
location of parent company I United States, United Kingdom, Western Europe and Japan
from experts points of view.
7. Identifying factors that need to be considered in international location decisions under
type of business i.e. Automotive/Motor Vehicles, Electronic Products/IT and Software,
Electronic Equipment and Appliances, Textiles/Apparel, Consumer products/ Food and
Beverages, Rubber/Plastics, Chemical/Petroleum and Coal and other businesses from
experts points of view.
8. Identifying factors that need to be considered in international location decisions under
nature of firm i.e. world-class manufacturing, large company and medium-sized company
by identifying the top four important factors from experts points of view.

The following assumptions are also made in this study:

1. Those factors are different according to types of business which firms conduct.
2. Those factors are different according the size of business which firms conduct.
3. Those factors are different according to location of parent company.
4. Those factors are different according to geographical areas.


4.2.2 The Pilot Study
An initial pre-test was conducted with 6 experts who attended the International Conference
for Production Research (ICPR-special 2000) in Thailand during 2-4 August, 2000. The list of
factors involving international location decisions was developed from the related articles,
existing documents and other archives. The questionnaire was sent to each person beforehand
and followed by an interview to receive comments. The pre-test helped to clear up the
ambiguities and group similar sub-factors within the same criteria. Rearrangement among
sub-factors had been done and then thirteen major criteria were identified for the first round of
the Delphi study.

4.2.3 The Delphi Panel
The Panel of experts was designed to have representatives from academics, government
bodies and consultants world-wide. Thirty-eight persons with experience involving
international business/operations were selected to participate in the first round of the Delphi
study. The questionnaire was mailed to the panellists in late October 2000. Another reminder
letter was sent via email to all experts who had not replied between November and December,
2000.The Delphi study was conducted in strict confidence and anonymity was guaranteed to
respondents.


5. Conclusion
The Delphi study has been employed to investigate and identify critical factors relating to
international location decisions outlined in the early section of this paper. Moreover, it has
been proposed to underline those factors under type of business, location of manufacturing
plant, location of parent company and nature of the firm from the real world situation. The

Proceedings of the Twelfth Annual Conference of the Production and Operations Management Society,
POM-2001, March 30-April 2,2001, Orlando Fl.

nature of the method is a time-consuming process as it may need a number of rounds of
questionnaire / iteration to reach the consensus of the final results. However, this method is a
valuable technique in developing a consensus of subjective issues in strategic planning.

The final study is still far from complete. The first round responses are being analysed and
collated in order to send back to the same participants to get feedback and comments. The
early indications are that factors considered in the decision making process are not equally
important, some may be ignored in some businesses and some sectors. The considerations
seem to depend upon the above assumptions, especially by the type of business. We intend to
publish the final results arising from the study when it reaches the consensus or overall
clarify.


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Proceedings of the Twelfth Annual Conference of the Production and Operations Management Society,
POM-2001, March 30-April 2,2001, Orlando Fl.

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Proceedings of the Twelfth Annual Conference of the Production and Operations Management Society,
POM-2001, March 30-April 2,2001, Orlando Fl.


Table 1: Critical factors in International Location Decisions

Factors Considerations/details
Favourable labour climate labour costs, quality of labour force, skills,
availability of labour force, labour unions,
attitude of present employees, wage rate,
labour unions, productivity
Transportation costs costs involving transporting materials and
finished goods, delivery times, distribution
costs
Proximity to markets and customers location of demand, number of customers,
size of markets, delivery speed
Proximity to suppliers and resources quality of suppliers, alternation suppliers,
competition for materials from other
companies, nature of supply process,
location of suppliers
Proximity to parent companys facilities distance between plant and parent company
Location of competitors number of competitors nearby, type of
manufacturer
Quality of environment/climate related
factors
geographical characteristics of plant, level
of quality of life index,
Political environment factors record of government stability, stability of
regime, effective of government,
consistency of government policy
Tax structure related factors tax structure, custom duty, tariffs, quotas,
regulatory barriers, bureaucracy
Social environment factors culture, customers life, language
differences, norm and custom, customer
characteristics, standard of living
Economic related factors currency, exchange rate, interest rate,
inflation, employment level
Other related factors Utility costs, water supply, power supply,
infrastructure, telecommunication, etc.