Chapter 21 – Location Decisions

1. Location Decisions

A business may consider its location when:

• it is first established
• the existing location becomes unsuitable
• it wants to expand
• it wants to enter new markets
• it wants to reduce costs or increase profits.

2. Manufacturing Business Location

Important factors affecting where a manufacturing business locates include:

3. Production Method

4. Nearness to the Market

A manufacturer may locate near its customers to:

• reduce transportation costs
• make deliveries faster
• keep products fresh.

This is particularly important for perishable products such as milk, bread and cakes.

5. Raw Materials and Components

A business may locate close to raw materials when they are:

• heavy
• expensive to transport
• perishable
• needed in large quantities.

6. Availability of Labour

A business needs to consider:

• availability of workers
• employee skills
• wage rates.

If highly skilled workers are required, the business may locate where these workers are available. If large numbers of unskilled workers are required, an area with high unemployment and lower wages may be attractive.

7. Transport and Communications

Manufacturers often need access to roads, railways, ports and airports. Good transport links can reduce delivery time and transport costs.

8. Government Influence

Governments may encourage businesses to locate in certain areas by offering:

• grants
• subsidies
• other incentives.

This may happen in areas with high unemployment.

Governments may also prevent businesses from locating in particular areas because of pollution, environmental damage or danger to local residents.

9. Power and Water

Some businesses require reliable supplies of electricity and water. For example, a power station or factory requiring large quantities of water may need to locate close to a river or the sea. Reliable electricity may also be important where power cuts are common.

10. External Economies of Scale

A manufacturer may benefit from locating near other related businesses.

Being close to these organisations may provide faster repairs, easier access to components and useful specialist knowledge.

11. Location of Service Businesses

The important factors for service businesses can be different from those affecting manufacturers. The main factors include:

• customers
• labour
• technology
• rent and taxes
• nearby businesses
• owners' preferences.

12. Nearness to Customers

For many personal services, being close to customers is extremely important.

Customers need convenient access to these services.

13. Technology and Service Location

Technology has made location less important for some service businesses. Services can increasingly be provided using telephone, internet and digital communication.

14. Labour for Service Businesses

Some services require large numbers of workers or particular skills. Therefore, businesses may locate near towns, cities or areas containing appropriately skilled workers.

A large service business may find it difficult to recruit enough employees in a remote area.

15. Rent and Taxes

Businesses that do not need a prime city-centre location may choose the outskirts of a town because rent may be lower and local taxes may be lower.

Examples might include doctors, dentists and lawyers.

16. Location of Retail Businesses

Retailers have some special location considerations because customers normally need to visit the shop. Important factors include:

• number and type of shoppers
• nearby shops and competitors
• parking
• rent
• suitable premises
• deliveries
• security.

17. Number and Type of Shoppers

A retailer normally wants a location with plenty of potential customers. But the type of customer is also important.

18. Nearby Shops and Competitors

Locating near competitors is not always bad. For example, several clothing shops located together may attract more shoppers because customers know the area provides a wide choice.

19. Customer Parking

Easy parking may encourage more customers to visit. Poor parking may discourage customers and reduce sales.

20. Rent and Premises

Popular city-centre locations usually have more customers, higher demand for premises, and higher rent and taxes. Locations outside the centre may be cheaper but may attract fewer shoppers.

21. Security

A retailer may avoid locations with high levels of theft, vandalism or other crime.

Poor security may increase insurance costs, cause stock losses and discourage customers.

22. Choosing a Country for Business Operations

Businesses increasingly consider locations in different countries because of globalisation. Important factors include:

1. new overseas markets
2. raw materials
3. labour and wage costs
4. rent and taxes
5. government incentives
6. trade barriers.

23. New Overseas Markets

A business may locate production closer to an important foreign market if overseas sales are growing.

Possible benefits include lower transport costs, faster delivery and better access to customers.

24. Cheaper or New Sources of Raw Materials

A business may relocate when existing raw materials become unavailable, another country has cheaper materials, or transporting raw materials is expensive.

Some businesses, especially those using natural resources such as oil, may need to locate close to the source.

25. Labour and Wage Costs

Labour-intensive businesses may relocate to countries where wages are lower.

Businesses may also locate in countries where the required skilled labour is available.

26. Rent and Taxes

Businesses may choose countries where land is cheaper, rent is lower and business taxes are lower. This reduces operating costs.

27. Government Grants and Incentives

Governments may encourage foreign businesses to invest by offering grants, lower taxes and other financial incentives.

Governments do this because foreign businesses may create jobs, introduce new skills and bring new technology.

28. Trade Barriers

A business may locate inside a foreign country to avoid some import restrictions and reduce the impact of tariffs.

29. Government and Legal Controls on Location

Governments influence location decisions mainly for two reasons:

30. Planning Regulations

For example, a factory may not be allowed in a residential area because of pollution, noise, traffic or safety concerns. The business may therefore have to choose another location.

31. Government Grants and Subsidies

Governments may also use grants and subsidies to encourage businesses to locate in development areas.

Examples include a non-repayable grant and cheaper factory premises. These are often offered in areas with high unemployment.

32. Choosing the Best Location in an Exam

There is rarely one factor that automatically determines the best location. Students should:

1. identify the business type
2. identify the most relevant location factors
3. apply them to the case study
4. compare advantages and disadvantages
5. recommend the best location.

Quick Comparison

Key Definitions

What Students Must Know for the Examination