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Chapter 21

Q. 21.FSE.5

Maine Co. has a facility that produces basic clothing in Indonesia (where labor costs are very low), and the clothes produced there are sold in the United States. Its facility is subject to a tax in Indonesia because it is not owned by local citizens. This tax increases its cost of production by 20 percent, but its cost is still 40 percent less than what it would be if it produced the clothing in the United States (because of the low cost of labor there). Maine wants to achieve geographical diversification and decides to sell its clothing in Indonesia. Its competition would be from several existing local firms in Indonesia. Briefly explain whether you think Maine’s strategy for direct foreign investment is feasible.

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Verified Solution

Maine Co. does not have an advantage over the other producers in Indonesia because the competitors also capitalize on cheap land and labor.