4.4 – Location Decisions

Owners need to decide a location for their firm to operate in, at the time of setting up, when it needs to expand operations, and when the current location proves unsatisfactory for some reason. Location is important because it can affect the firm’s costs, profits, efficiency and the market base it reaches out to.

Factors that affect the location decisions of a manufacturing firm:

• Production Method: when job production is used, the business will operate on a small scale, so the nearness to components/raw materials won’t be that important. For flow production, on the other hand, production will be on a large scale- there will be a huge amount of components and transport costs will be high- so components need to be close by.
• Market: if the product is a consumer good and perishable, the factories need to be close to the markets to sell out quickly before it perishes.
• Raw Materials/Components: the factories may need to be located close to where raw materials can be acquired, especially if the raw material is to be processed while still fresh, like fruits for fruit juice.
• External economies: the business may locate near other firms that support the business by provide services- eg: business that install and maintain factory equipment.
• Availability of labour: Businesses will need to locate near areas where they can get workers of the skills they need in the factory. If lots of unskilled workers are needed in the factories firms locate in areas of high unemployment. Wage rates also vary by location and firms will want to set up in locations where wage rates are low.
• Government Influence: the government sometimes gives incentives and grants to firms that set up in low-development, rural and high-unemployment areas. There may also be govt. rules and restrictions in setting up, e.g.: in some areas of great natural beauty. The business needs to consider these.
• Transport & Communication infrastructure: the factories need to be located near areas where there are good road/rail/port/air transport systems. If goods are to be exported, it needs to be set up near ports.
• Power and water supply: factories need water and power to operate and a reliable and steady supply of both should be ensured by setting up in areas where they are available.
• Climate: not the most important factor but can influence certain sectors. Eg: the dry climate in Silicon Valley aids the manufacturing of silicon chips.
• Owner’s personal preferences

 

Factors that affect the location decisions of a service-sector firm:

• Customers: service-sector businesses that have direct contact with customers need to locate in customer-accessible and convenient places. Eg; restaurants, hairdressers, post offices etc.
• Technology: today, with increasing use of IT to shop and make payments, customers do not need direct access to services and proximity to the market/customer is not a very important factor in location decisions. They locate away from customers in places where there are low rent and wage rates. Eg: banks
• Availability of labour: if large number of workers are required in the firm, then it will need to locate close to residential areas. If they want certain types of worker skills, they will need to locate in places where such skilled workers can be found. However, with work-from-home and technology, this is not that big of a factor nowadays.
• Climate: tourism services need to be located in places of good climate.
• Nearness to other business: some services serve the needs of large companies, such as firm equipment servicing and so they need to be very close to such businesses. Businesses may also set up where close competitors are to watch them and snatch away their customers.
• Rent/taxes
• Owner’s personal preferences

 

Factors that affect the location decisions of a retailing firm:

• Shoppers: retailers need to be located in areas where shoppers frequent, like malls, to attract as many customers as possible.
• Nearby shops: being located to other shops that are visited regularly will also attract attention of customers into the shop. Being near competitors also helps keep an eye on competition and snatch away customers.
• Customer parking availability:  when parking is available nearby, more people will find it convenient to shop in that area.
• Availability of suitable vacant premises: Obviously, there needs to be a vacant premise available to set up the business. Vacant premises can also help the business expand their premises in the future.
• Rent/taxes: rents and taxes on the locations need to be affordable.
• Access to delivery vehicles: if the retailer has home delivery services, then delivery vehicles will be required.
• Security: high rates of crime and theft can happen in shops. Shopping complexes with security guards will thus be preferred by firms.

 

Why businesses locate in different countries?

• New markets overseas.
• Cheaper or new raw materials available in other countries.
• Cheaper and/or skilled workers are available overseas.
• Rent/ taxes are lower..
• Availability of government grants and other incentives
• Avoid trade barriers and tariffs: when exporting goods to other countries, there will be some tariffs, rules and regulations to get by. in order to avoid this, firms start operating in the country itself, since there is no exporting/importing involved now.

 

The role of legal controls on location decisions

Governments influence location decisions:

• to encourage businesses to set up and expand in areas of high unemployment and under-development. Grants and subsidies can be given to businesses that set up in such areas.
• to discourage firms from setting in areas of that are overcrowded or renowned for natural beauty. Planning restrictions can be put into place to do so.

 

 

Notes submitted by Lintha.

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