Author: Bonnie Queen
It is well known that firms may choose a location for reasons including tax rates and the availability of a skilled workforce. There are other reasons beyond these commonly cited ones that are important to understand. In this article, we examine research a little more closely to help answer the question,
“Why Do Firms Choose to Locate Where They Do?”
1) To Attract Consumers
Firms may locate near other firms to attract consumers. When you go shopping for clothes, have you noticed how several stores seem to be very close to one another? It’s not just clothes — you can probably think of several examples including office supply stores, restaurants, and other retail stores.
In some ways, this clustering is a bit counterintuitive because when similar firms locate close together, consumers will compare prices and shop where they can get what they need for the lowest price. However, these firms are counting on the fact that locating closer together will give them a greater volume of consumers, and that more consumers will make up for having to charge lower prices.
2) Existing Industrial Structure
Firms may locate near other firms to be part of an existing industrial structure. When firms locate near one another, they can benefit from labor market risk pooling, knowledge spillovers, and technological developments in other industries.
Interestingly, previous research found that offering government grants did have some effect in attracting companies to specific geographic areas, but firms were less responsive to government grants in areas where there were fewer existing companies in their industry. As the number of firms in their industry increased, companies became more responsive to government subsidies.
3) Human Capital
There are many notable examples of firms locating near similar firms in industries like information technology, automobiles, and banking, but in other industries, this clustering is largely absent.
Firms that locate in isolation are likely to provide more training for their workers, since they will be able to capture more of the long-term benefits from their investment. There are some firms that can really benefit from this scenario — a specialized manufacturer, for example. Firms that locate near other firms are likely to provide less training for their workers, because they know their workers are able to move easily between firms and they might not be able to recover their investment.
These ideas demonstrate the need to look at less commonly cited factors to fully understand firm location decisions. LEAD will continue to use this and other research to help develop proactive strategies for business recruitment and retention in North Carolina.
For further reading:
Almazan, Andres, De Motta, Adolfo, and Titman, Sheridan. (2007). “Firm Location and the Creation and Utilization of Human Capital,” The Review of Economic Studies, 74 (4), 1305-1327.
Devereux, Michael, Griffith, Rachel, and Simpson, Helen. (2007). “Firm Location Decisions, Regional Grants and Agglomeration Externalities,” Journal of Public Economics, 91, 413-435.
Dudey, Marc. (1990). “Competition by Choice: The Effect of Consumer Search on Firm Location Decisions,” American Economic Review, 80 (5), 1092-1104.