Location of businesses – Part 1

HELLO, FRIENDS. Our task this week involves the location of businesses. According to the syllabus, at the end of the lesson, candidates should be able to outline the factors that determine the location of a business. A business is any entity that is set up to produce and/or sell, with the aim of making a profit. Common businesses are either classified as firms or industries.

A firm is a single, independently administered business unit, while an industry is made up of a number of firms producing broadly similar item or items that are connected with each other. They are often recognised by their names, e.g. banana industry and tourist industry.

One of the most important decisions an entrepreneur has to make when setting up a business is where to locate it. To consider location of a business means to decide on its site. The factors which influence the setting up of a business can be considered under two broad headings: The ECONOMIC influences, i.e. those factors which directly affect average costs of production; and the NON-ECONOMIC influences, i.e., those factors which do not directly affect average costs of production. This week, we will discuss the economic influences then, next week, the non-economic influences.

ECONOMIC INFLUENCES ON LOCATION 1. NEARNESS TO THE SOURCE OF RAW MATERIALS

This is especially important if the raw materials are heavy or bulky and, therefore, expensive to transport. For example, bauxite firms are located close to where bauxite is mined in order to save on transportation costs. Where raw materials have to be imported, closeness to the port where the raw materials enter the country may influence the choice of site.

2. NEARNESS TO MARKET

The finished products may be bulky, heavy, fragile or perishable. In such instances, it might suit the business to be close to its market or its potential customers, as it can be quite costly to transport such goods over long distances. For example, eggs are very fragile and much damage could result from transporting them over many miles. Despite refrigerated transport, fruits and vegetables are highly perishable and should not take a long time to get to the market. Closeness to markets in this case will minimise spoilage.

3. NEARNESS TO THE SOURCE OF POWER AND WATER

If the power or water required is only available in a particular area, then efforts will be made to cut costs by locating close to that source. For example, after the Industrial Revolution in England, the main source of power was coal, which was heavy and costly to transport. Many industries that relied on coal for power were located near to the coalfields. This influence on the location has become less important in recent times as many businesses rely on electricity and water, which is readily available and can be transported at affordable costs.

4. NEARNESS TO SUITABLE LABOUR

Labour is reluctant to travel long distances, so businesses tend to locate where the labour they require exits. Availability of suitable labour in the area of location is influenced by the degree of social amenities that exist in the area, such as housing and medical facilities. If sufficient suitable labour is not available in the area of location, it can be very expensive to transport the labour to where the business is located. Highly technological industries are sited where highly skilled labour is available.

5. LAND

Land in cities and towns is expensive to rent or buy. Therefore, the business has to weigh the importance of being located in these areas with the cost of land. If it is not very important to be in the town or city, then the business can locate further out, where the cost of land to rent or buy is cheaper, thus cutting down on the average cost of production.

6. ACCESS TO TRANSPORT

Most businesses concentrate near to major highways to have easy access to raw materials and markets. In the case of industries that export, closeness to rail, sea and air transport are important factors in the low cost of production.

7. INFRASTRUCTURE

Businesses require roads that are in good condition, efficient telephone services, and reliable supplies of electricity and water. Where these are lacking, the result is loss of production and increased costs.

8. LINKAGE INDUSTRIES

Whether the linkages are backward or forward, a business may choose to locate near to other businesses on which they depend in order to save on transportation costs. For example, suppliers of drilling equipment will locate near oilfields or gas fields.

That’s it for now, students. Next week, we will discuss the non-economic influences on the location of businesses; and there will be a question on the topic of the location of businesses for you to work on.

So, take care, and see you next week.