Myzo Co. (based in the U.S.) sells basic household products that many other U.S. firms produce at the same quality level and these other U.S. firms have about the same production cost as Myzo. Myzo is considering direct foreign investment. It believes that the market in the U.S. is saturated and wants to pursue business in a foreign market where it can generate more revenue. It decides to create a subsidiary in Mexico that will produce household products and sell its products only in Mexico. This subsidiary would definitely not export its products to the U.S. because exports to the U.S. could reduce the parent’s market share and Myzo wants to ensure that its U.S. employees remain employed. The labor costs in Mexico are very low. Myzo will comply with some international labor laws. By complying with the laws, the total costs of Myzo’s subsidiary will be 20 percent higher than other Mexican producers of household products in Mexico that are of similar quality. However, Myzo’s subsidiary will be able to produce household products at a cost that is 40 percent lower than its cost of producing household products in the U.S. Briefly explain whether you think Myzo’s strategy for direct foreign investment is feasible.
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