Choosing where to locate a business or a particular facility can make the difference between success and failure. The ideal location minimises costs and maximises access to markets, labour and other resources.
Factors affecting location
Important considerations for manufacturing businesses include:
- Proximity to raw materials – heavy or bulky inputs are expensive to transport, so firms locate near the source.
- Access to markets – locating near customers reduces delivery times and transport costs.
- Availability and cost of labour – skilled labour may be needed; wages differ by region.
- Transport links – good road, rail, port or airport facilities lower distribution costs.
- Utilities and infrastructure – reliable supply of power and water and access to broadband.
- Government influence – local taxes, grants, planning laws and regulation can encourage or discourage location in a particular area.
- External economies of scale – clustering near other firms in the same industry can provide skilled labour and specialist suppliers.
For service businesses and retailers, factors such as customer footfall, visibility, parking, rent and competition are critical. Online businesses may prioritise logistics hubs and distribution centres rather than customer proximity.
| Business type | Main considerations |
|---|---|
| Manufacturing | Proximity to raw materials; transport infrastructure; availability of skilled labour; energy supply; government incentives; space for large facilities. |
| Service (e.g. call centres, IT) | Skilled labour; good communication links; reliable power and internet; attractive living conditions to attract staff. |
| Retail | High customer footfall; visibility; parking; competition; rental costs; local demographics. |
| E‑commerce | Efficient logistics; proximity to transport hubs; access to broadband; low operating costs; ability to reach global markets. |
Relocation and international location
Firms may relocate to reduce costs, be closer to markets or overcome labour shortages. When considering moving operations abroad, businesses weigh up lower labour and production costs against risks such as language barriers, political instability, exchange rate fluctuations and cultural differences. Multinational companies often locate production in countries with favourable tax regimes and incentives.
Examples and applications
A car manufacturer may build its factory near a port to import components and export finished vehicles more easily. Many technology companies cluster in Silicon Valley because of the availability of skilled engineers, venture capital and specialist suppliers – an example of external economies of scale. In contrast, clothing factories often locate in developing countries where labour costs are lower, though they must then ship products to consumer markets.
Service firms also consider location carefully. Call centres are often located in areas with a surplus of workers who can be trained quickly; some global businesses have moved call centres to countries like India and the Philippines to benefit from lower labour costs. Retail shops choose sites with high footfall, such as busy shopping streets or malls; however, online retailers like Amazon place warehouses near major transport hubs to deliver orders quickly.
Relocation decisions require careful analysis. A firm might move production overseas to save on wages, but hidden costs such as longer supply chains, quality control and communication issues can offset these savings. Governments sometimes offer tax holidays or grants to attract businesses to deprived regions, influencing location decisions.
