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Exchange Rates and Currency Risk1
6.3 – ASSIGNMENT: LOCATION DECISIONS (PLG1)The wage rate and productivity may show the economics of the country but if thecurrency exchange rates are unfavorable, any savings left will be reduced. Organizations cantake advantage of favorable foreign currency rates by relocating or exporting to thatparticular country. However, currency values fluctuate in most countries. In other words, agood location now may be a disastrous one a few years down the road.CostsCost can be categorized into tangible and intangible cost. Tangible cost refers to coststhat are identifiable and can be measured such as labor, material, taxes, rental, utilities, etc.Costs such as transportation of materials and goods and site construction depend on thelocation of intent. Some governments have incentives given that would affect the cost of thelocation. Intangible costs are less quantifiable such as education, quality, employees’ attitude,community attitude, etc.. Therefore, the management of the organization has to take intoaccount those hidden and non-hidden cost to ensure that setting up an office in that locationwould be beneficial. A low tangible cost area may also mean that the intangible cost in low.Even if the organization saves money on the rental, materials, etc., they may have ended upmaking a loss due to the low quality of the product or delays in production.Political Risk, Values and CultureThe political risk usually refers to the governments’ view towards private andintellectual properties and stability may be constantly changing. The decisions that thegovernment made for a particular location may not last forever. The location may seem goodnow but a few years down, there is a possibility that the government would need that landback, which would be a cost to the organization to relocate again.