Text b where to locate the business
Location decisions
The decision about where to locate is crucial to many businesses. It can affect their sales, costs, profitability and perhaps even their survival. For example, a firm which is located too far away from its market may incur extra transport costs which reduce profits. Why might a company need to make a decision about where to locate?
New businesses will need to carefully consider where to locate their initial premises.
Existing businesses may need to expand, but may be unable to do so on their present sites.
The modernization of a business may involve moving to more up-to-date premises.
A business aiming to cut its costs might achieve this by re-locating.
A multinational company aiming to set up a new plant in another country for the first time may evaluate a variety of possible locations worldwide.
There
are many factors which will influence a business’s decision about
where to locate. It is likely that any location decision will be
influenced by a few or many of these factors. When deciding where to
locate its premises, a business usually weighs up all potential
costs and benefits of setting up in a particular area. This may be
carried out with the use of cost-benefit analysis.
Markets and transport costs
For many firms, being close to their market is often the single most important factor in choosing the location. A variety of businesses may be influenced by this factor.
Businesses that produce products which are more bulky than the raw material that go into them, such as Caspian Sea Oil platforms, are likely to locate close to their market. The components and materials used to assemble Caspian Sea Oil platforms are far less bulky than the end product – the platform itself. Therefore, the production of such platforms takes place in locations close to where they will eventually be used – the Caspian Sea coast – in cities such as Baku. If production was located elsewhere, transport costs may be very high. There may also be problems transporting the product to its final destination.
Suppliers of components and intermediate goods may set up close to their main customers.
Many financial service businesses locate their premises in New-York, London, Tokyo, etc.
The growth of the tertiary and the decline in the “heavy industry” has resulted in many secondary and tertiary industries. There are businesses that are able to locate premises where they wish. Given this freedom many have chosen to locate by their markets.
Most service industries tend to be located near to markets. Businesses providing the general public with services like dentistry, dry cleaning and care maintenance must locate their premises in areas which are accessible to people.
Communication
The ease of communications can be important in a firm’s location decisions. Access to motorways, rail networks, ports and airports may all be important. By reducing travel time, motorways may encourage firms to locate premises in areas which might have been as remote from markets or costly in terms of transport.
The accessibility of ports and airports might also be important. This is often true of firms which export their goods. For firms which produce light, low bulk, but high value products, air transport might be the best means of reaching both overseas and domestic markets. More bulky and heavy goods might be transported by sea. Businesses which use a great deal of imported raw materials might also locate close to a port.
Labor
Firms re-locating from one part of the country to another will aim to take most of their staff with them. This should cut down on disruption and avoid the need to recruit and train large numbers of new staff. Sometimes businesses try not to move very far so that staff can travel from their existing homes.
However, if re-location is the long way from the original position, persuading existing staff to move can be difficult. Selling existing homes, buying new homes, disrupting children’s education and removal costs can be real obstacles. When choosing a site, firms need to find out whether existing employees can be persuaded to move and whether other sources of labor with the right skills can be recruited locally. Factors that existing staff may feel are important may be the cost of housing, the quality of the local environment, the quality of the local schools and perhaps the number of the traffic jams in the area. For example, the high price of the houses and the amount of traffic in the areas such as New York, Tokyo and London has contributed to drift of employees away from these regions in the late 1980s and early 1990s.
Labor skills are not evenly distributed throughout the country. If a firm needs a particular type of skills labor there may be regions especially suitable. For example, a firm which is contemplating a new venture in carpet manufacturing might choose Ashkhabad as a possible location. Ashkhabad is famous for carpet manufacturing and could offer a firm new to the industry a ready supply of appropriately skilled and semi-skilled workers. Other examples of these regional advantages include car workers in Togliatti, oil workers in Vorkuta.
Where an industry is concentrated in a particular region advantages, such as expertise in local schools and colleges, research facilities in nearby universities and sympathetic and supportive local government agencies often exist. These are known as external economies of scale.
Telecommunications and information technology
An
increasingly important fact is likely to be access to
telecommunications links. Telecommunications networks such as
Ostankino have the capacity to send and receive voices, data and
pictures at great speed. Parts of the country which can provide such
facilities are becoming increasingly attractive to firms. The
information technology revolution has meant that firms can link
separate branches or sections of their operations by computer
screen. Large firms with the head office in Moscow, for example, are
able to place personnel in location hundreds of miles from the
capital. Businesses no longer need to concentrate their office staff
or production in one location because of the communication problems.
They can also employ people working at home and contact them via the
computer or fax machine.
Government influence
Since the 1920s the government has played a role in business location. Business activity is rarely geographically balanced. There have always been regions which suffer from a lack of business and employment. Also, regions that were once prosperous have suffered when the local industry declined. For example, the Far East region of Russia was hit as the shipbuilding industry declined. The South Siberian region declined when the coal industry collapsed. In the past these have been called “assisted areas”. The government has attempted to help with the use of regional policy. The government attempted to attract businesses to the areas and restrict development in the prosperous areas. A range of incentives was offered, particularly to the manufacturers. Investment grants, tax breaks, employment subsidies and rent-free factory space were some examples.
Another situation turned out in the European countries. For example, in the UK the government criticized many features of regional policy. They objected to the automatic use of investment grants and felt that the chosen “assisted areas” were too broad. They were also committed to lower levels of government spending. The government defined areas eligible for assistance as “development areas”. Development areas are regions which are most severe in terms of decline. Intermediate areas still qualify for assistance, but do not enjoy the same benefits as development areas.