4.4.1 Location and Relocation of a Business
Factors relevant to the location decision of manufacturing businesses and service businesses
Location has a huge impact on the success of businesses.
You need to know the factors that will influence the location of both a manufacturing and service business, or the decision to locate internationally.
You also may need to recommend a location from a choice of two or three options, or decide which factor is most important in a location decision.
| Past Paper Question Example Paper 2 (b) Consider the advantages and disadvantages of the following three locations for new Bernie’s new cafe. Recommend the most suitable location. Justify your answer. [12] – Airport – Out of town shopping mall – Town centre – Recommendation |
We will look at the main factors which affect location; however, every type of business is unique and will have different needs and priorities when making a location or relocation decision.
One of the most important considerations is cost. How much is the location to rent or buy? Some locations may also have higher taxes.
Both manufacturing and services will want to minimise cost. However, generally the more popular an area is with consumers, for example a city centre, the higher the cost. Manufacturing businesses may find locations with easy access to employees or transportation links have a higher cost. If there is a shortage of space available this will also push up costs and restrict the location options open to a business.
Businesses must also consider where they are allowed to locate? Location may also be restricted by laws and rules that don’t allow businesses to operate in different areas, for example factories can’t locate in an area where nature is protected.
High transport costs may influence the location of a factory close to a supplier or the customers market.
Businesses may also consider infrastructure. An Amazon distribution centre may need to be located near to a motorway to allow quick delivery of products to consumers. Many technology businesses will need access to high speed internet.
| Customer Services (retail/restaurant/gym) | Manufacturing Business |
| Proximity of customers | Availability of labour |
| Proximity of competitors | Legal Regulations |
| Cost of rent | Infrastructure (road, rail and sea access) |
| Transport links for customer access | Availability of raw materials or components |
| Cost of land | |
| Availability of government incentives |
Customer service industries like coffee shops or restaurants need to locate in an area that their customers can easily access, and in a place where they like to meet and relax, like the city centre or on the beachfront.
However, they must also consider the competition and the potential for attracting new customers. These popular locations may already have competitors offering similar products.
Businesses will also need to consider availability and cost of labour. Labour intensive manufacturers like clothing companies may need to locate where enough low cost workers live close by. Highly skilled services like lawyers or computer programmers may need to locate where there are many highly skilled workers available like Shanghai or San Francisco.
Governments may give incentives like grants or a reduction in tax to locate businesses in certain areas.
| ⭐⭐⭐Top Tip ⭐⭐⭐ When deciding on the most important factor for a business decision on location look for clues in the case study to guide your answer. |
If a manufacturing business is in a highly competitive market based on price the cost of rent and availability of employees with low labour costs may be most important.
For a service sector business like a sushi restaurant high rental costs may not be so important if the area is popular with high income consumers and there is a high demand for Japanese food.
Role of legal controls on location decisions
Governments may pass laws which restrict where a business can locate.
Factories may not be allowed to locate close to where many people live because of noise pollution. Natural areas of a country may be protected from any business development.
Legal controls are particularly important for businesses deciding where to relocate. If a country has tough controls on how much a factory can pollute, a business may decide to locate in a country with a “lighter touch”, so avoid paying the high costs of reducing pollution.
A business may also decide to relocate in a country with a lower minimum wage and less controls on employment, so a business can reduce labour costs.
Factors influencing relocation
In addition to less legal controls reducing costs in other countries, businesses may wish to relocate because of the incentive’s governments offer to Multinational Corporations. Since starting in 1980, thousands of international businesses have been attracted to relocate in the Shenzen Special Economic Zone, because of low taxes and free trade with no tariffs or quotas
Businesses may relocate to avoid trade barriers or tariffs, Toyota chose to move production for the Indonesian market inside Indonesia so consumers would not be forced to pay the high import tariffs for their cars.
For international manufacturing businesses with high transportation costs, it is more cost-effective to locate factories close to consumer markets. Coca-cola has built a network of factories in most of the 197 countries it operates in worldwide.
For businesses with high labour costs, it is much more cost effective to locate in regions with lower wages. Most clothing manufacturing has now moved from Western countries to South East Asia because of the huge reduction in production costs due to lower worker wages.
As globalisation increases both competition and the choice of possible location options, businesses need to prioritise the most important factors for reducing costs and gaining competitive advantage when making a location decision.
