You are the CEO of a U. S. firm which produces computers for the U. S. market. Com-puter production consists of two steps: (1) manufacturing computer screens, mother- boards, keyboards, etc. (components production), and (2) assemblying these compo- nents into a computer (assembly). You have until now produced computers entirely in the U. S., but are considering relocating the production of a new computer model to lower-wage China. Both steps of the production process require skilled and unskilled labor, but component production is relatively more skilled-labor intensive. China is less productive than the U. S., and each stage of the production process requires more workers in China. However, wages are lower in China: Unskilled workers in the U. S. earn $10 an hour, while skilled workers in the U. S. earn $20 an hour. These numbers are $2 and $10 respectively in China. The table below summarizes the unit labor requirements in the U. S. and China in both stages of the production process (in hours of labor):
U. S. China
Components Assembly Components Assembly
Unskilled labor 10 10 20 40
Skilled labor 5 2 10 4
Skill/unskill ratio 1/2 1/5 1/2 1/10
(a) You realize that there is a big market for computers in China: you could sell 600,000 computers there at a price of pChina $360. How will you organize production for the U. S. and Chinese markets? Now what is the minimum level of U. S. sales QUS that would justify your Chinese operations?
(b) You have already implemented your optimal strategy from part (d) and, if nec- essary, incurred the fixed cost of setting up a plant in China. Your marketing manager informs you that the European Union is another potentially profitable market for your computers. You have until now never produced or sold computers in Europe. Production costs there are the same as in the U. S., and setting up a plant in Europe costs $50 million. Transportation costs between any two coun- tries (U. S.-Europe, U. S.-China, and Europe-China) are the same as in part (b). How will you service the European market if you expect to sell 500,000 omputers there? What if you could sell 3,000,000 computers?
(c) Based on your analysis above, what are 4 factors that determine companies' in- centives to go multi-national?