Chapter 24: Factors affecting location

Location of industry
The location of a business is considered when it starts-up or when its present location is unsatisfactory. The business's objectives as well as the conditions of the environment change, so the business may need to look for a new location once in a while.

There are many factors that affect the location of businesses, and these factors are different for each business sector. We'll take a look at them below.

Factors affecting the location of a manufacturing business

Production methods and location decisions

  • Small
    scale: transport and location of suppliers are less important.
  • Large
    scale: transport and location of suppliers are more important.

  • Need to be near to transport perishable goods.
  • Need to be near to cut transportation expenses.
Raw materials/components

  • Need to be near to transport perishable goods.
  • Need to be near to cut transportation expenses.
External economies of scale

  • How good nearby businesses are.
    • For maintenance of equipments.
    • For training workers, etc…
Availability of labour

  • Wages of the labourers.
  • How skilled they are.
Government influence

  • Grants/subsidies.
  • Restrictions on dumping, etc…
Transport and communication

  • To be able to transport product easily.

  • Need a reliable source of power to operate effectively.
Water supply

  • A lot of water is needed in the production process (e.g. cooling, cleaning)
  • Cost of water.
Personal preferences of the owners

  • May locate in areas that:
    • They come from.
    • They like.
    • Pleasant weather, etc…

  • E.g. to reduce heating costs in a warmer climate.
  • Some climates are required to produce certain items.

Factors affecting the location of a retailing business


  • Do shoppers go there?
  • What kind of shoppers go there?
Nearby shops

  • Competitors.
  • Mass market.
  • Gap in the market.
Customer parking available/nearby

  • Convenience for the customer.
Availability of suitable vacant premises]

  • Goods sites (e.g. in shopping centres) are in short supply.

  • The more popular the site, the more expensive.
Access for delivery vehicles

  • For delivering goods.

  • If the area is insecure
    • Goods will be stolen.
    • Insurance will be reluctant to insure the shop.

  • Laws restricting the trade of goods in certain areas.

Factors that influence a business to relocate either at home or abroad

  • The present site is not large enough for expansion.
    • If a business simply prefers to expand elsewhere, the factors affecting location will have to be considered.
  • Raw materials run out.
    • One alternative is to import raw materials from elsewhere.
    • Important for mining industries.
  • Difficulties with the labour force
    • Wages are too high.
    • Need skilled labour.
  • Rents/taxes rising.
  • New markets open up overseas.
    • Cuts transport costs.
    • Bypass trade barriers.
  • Government grants
    • To attract businesses to locate in development areas.
    • To attract foreign investment.
  • To bypass trade barriers
    • Tariffs
    • Quotas

Factors affecting the location of a service sector business


  • Whether customers require:
    • Direct contact.
      • Is it convenient for customers to go the business?
      • Will the service arrive at customers' houses in time?
    • No direct contact needed.
      • Mail
      • Internet
Personal preference of owners

  • Near their homes.

  • Technology allows businesses to locate in cheaper sites.
    • Telephone.
    • Internet.
    • Transport.
  • No need to be near customers.
Availability of labour

  • Need to locate to sites where skilled labourers live.
    • Labourers may relocate to be near the business.

  • Important for tourism.
Near to other businesses

  • Businesses that supply or repair machinery to others need to be near them to respond quickly.
  • Post office/banks need to be in busy areas for the convenience of customers. That is, being near malls, shops, etc…

  • If the business does not need direct contact with the customer, then it could locate in cheaper areas.

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