Location decisions | IGCSE Class 10 Business Studies Notes

This note covers location decisions in business: the factors influencing where manufacturing and service businesses choose to locate (and later relocate), the factors a business weighs when choosing which country to operate in, the role of legal controls such as planning permission on location decisions, and how to recommend and justify a location for a given business scenario.

What is a location decision and why does it matter?

A location decision is the choice a business makes about where to site its premises, such as a factory, office, shop or warehouse. It is usually a long-term decision because moving premises is costly and disruptive, so a business tries to get it right the first time. A poor location can raise costs, reduce sales or make staff recruitment difficult, while a good location can give a business a lasting advantage over competitors.

Definition: Location decision. The choice made by a business about the physical site where it will carry out its operations, chosen by weighing up costs, revenue and other factors against alternative sites.

Location decisions are not only made when a business starts up. An existing business may also face a relocation decision if its current site no longer suits its needs, for example because it has outgrown its premises or because costs at the existing site have risen.

Definition: Relocation. The decision by an existing business to move some or all of its operations from its current site to a new site.

What factors influence the location of a manufacturing business?

Manufacturing businesses usually produce physical goods, often in bulk, so their location decisions tend to focus on the cost of inputs and the cost of moving goods. Important factors include the following.

• Cost of land and premises: industrial land away from city centres is usually cheaper than land near city centres, which matters for a factory that needs a large site.
• Proximity to raw materials: a business that uses heavy or bulky raw materials, such as a steel mill using iron ore, often locates close to the source of those materials to reduce transport costs.
• Proximity to the market: if the finished product is heavy, fragile or perishable, it may be cheaper to locate near customers rather than near raw materials.
• Labour costs and availability: a manufacturer that needs many workers will look for an area with an adequate supply of suitable labour at an acceptable wage.
• Transport links and infrastructure: good roads, railways, ports or airports reduce the cost and time of moving materials in and finished goods out.
• Energy and utility costs: a factory with high energy needs will consider the reliability and price of electricity, gas and water supply.
• Government grants and incentives: governments sometimes offer tax reliefs or cash grants to attract factories to areas of high unemployment.
• Planning permission: a site must usually be legally approved for industrial use before a factory can be built there.

Definition: Raw materials. The basic inputs, such as minerals, metals or agricultural produce, that are processed by a manufacturing business into finished or semi-finished goods.

What factors influence the location of a service business?

Service businesses, such as shops, restaurants, hairdressers and banks, often depend on passing customers rather than on moving heavy materials, so different factors tend to matter most.

• Footfall: the number of people passing a site is central for a retailer or café, because higher footfall usually means more potential customers.
• Proximity to customers: a service that customers visit regularly, such as a local supermarket, usually benefits from being close to where those customers live or work.
• Rent and cost of premises: high-footfall sites, such as a busy high street or shopping centre, usually charge much higher rent than quieter sites.
• Visibility and accessibility: a site that is easy to see and easy to reach, with nearby parking or public transport, tends to attract more customers.
• Location of competitors: some service businesses cluster together, such as several restaurants on one street, because this draws more customers to the area overall, while others prefer to avoid direct competitors nearby.
• Local demographics: the age, income and tastes of the local population affect whether a particular service will be in demand there.

Definition: Footfall. The number of people walking past or into a particular location in a given period, used as an indicator of potential customer numbers for a service business.

Why might a business decide to relocate?

A business that is already operating may choose to relocate for several reasons connected to the same factors that affect a first location decision.

1. Growth: the existing site may be too small to allow further expansion of output or sales.
2. Rising costs: rent, labour costs or taxes at the current site may have increased, making a cheaper site elsewhere more attractive.
3. Access to new markets: a business may move closer to a growing customer base, or to a region where demand is rising.
4. Changes in infrastructure: a new road, port or airport nearby can make a different site more efficient for transport.
5. Availability of incentives: a government grant or tax relief offered in another area may outweigh the cost of moving.
6. Changes in legal controls: new planning restrictions, environmental rules or local objections at the current site may force a business to consider moving.

Relocation is usually expensive and disruptive, so a business normally weighs the one-off cost of moving (such as new buildings, redundancy payments and lost production time) against the expected long-term benefits before deciding.

What factors affect the choice of country for international operations?

When a business is considering locating part of its operations in another country, for example by building a factory abroad, it has to weigh a wider set of factors than when choosing a site within its home country.

• Labour costs: wages for similar work can differ considerably between countries, and a business seeking to cut costs may locate production where labour is cheaper.
• Exchange rates: a favourable exchange rate can make the cost of setting up and operating in another country more or less attractive, and can affect the value of profits brought back home.
• Trade barriers and tariffs: a country that charges high import taxes on a business's product may be better served by producing inside that country rather than exporting to it.
• Trade blocs: locating inside a trade bloc can give a business tariff-free access to all the other member countries, widening its potential market.
• Political and economic stability: a stable government and economy reduce the risk that operations will be disrupted by conflict, sudden policy changes or currency collapse.
• Infrastructure: reliable roads, ports, electricity and communications are needed to run operations efficiently.
• Legal and tax systems: company law, employment law and the rate of corporation tax in a country affect the cost and risk of operating there.
• Language and culture: shared language or cultural similarity with the home country can make it easier to manage staff and adapt products for local customers.
• Government incentives: grants, tax holidays or subsidised land offered by a foreign government can attract businesses to locate there.
• Availability of skills: a country with a strong supply of appropriately trained workers suits a business that needs particular technical skills.

Definition: Tariff. A tax charged by a government on goods imported into its country, which raises the price of those goods for buyers in that country.

Definition: Trade bloc. A group of countries that agree to reduce or remove trade barriers, such as tariffs, between themselves.

What is the role of legal controls on location decisions?

A business cannot simply build or open premises wherever it chooses. National and local governments usually impose legal controls on where certain activities may take place, and a business must meet these before it can use a site.

• Planning permission: local authorities usually require a business to obtain formal approval before constructing a new building or changing the use of an existing one, so that new developments fit with local plans.
• Zoning: many areas are divided into zones for particular uses, such as residential, commercial or industrial, and a business may be refused permission to operate an activity, such as a noisy factory, in a zone set aside for housing.
• Environmental regulations: businesses that could pollute air, water or land, or that would significantly increase traffic or noise, may be required to carry out an environmental impact assessment and to meet pollution limits before a licence is granted.
• Building and health and safety regulations: construction must usually meet safety standards, for example on fire exits and structural strength, before premises can be occupied.

These controls mean that even a site that looks ideal on cost and market grounds may not be legally available to a business, or may only be available once conditions, such as limits on opening hours or on noise, are met. Legal controls therefore narrow down the choice of possible sites before other factors, such as cost or footfall, are even compared.

Definition: Planning permission. The formal legal approval, usually given by a local authority, that a business must obtain before it can build on a site or change how an existing building is used.

Definition: Zoning. The practice by which local or national authorities divide land into areas designated for particular uses, such as residential, commercial or industrial.

What are the advantages and disadvantages of locating near the market compared with locating near raw materials?

Many location decisions come down to a trade-off between being close to customers and being close to the materials a business needs.

Advantages of locating near the market

• Lower transport costs for delivering the finished product, which matters most when the product is heavy, bulky, fragile or perishable.
• Faster delivery to customers, which can improve customer satisfaction and allow quicker response to changes in demand.
• Easier market research and closer contact with customers, helping the business to spot changing tastes.

Limitations of locating near the market

• Raw materials still have to be transported to the site, which can be costly if materials are heavy or sourced far away.
• Land near large markets, usually cities, tends to be more expensive to buy or rent.
• Labour near city markets may be more expensive than in areas nearer to raw material sources.

A business whose finished product is lighter or cheaper to transport than its raw materials usually finds it more economical to locate near the raw materials instead, and to pay the (smaller) cost of transporting the finished product to market.

How should a business recommend and justify an appropriate location?

Exam questions often give a short scenario and ask a candidate to recommend one location out of two or more alternatives, and to justify the choice using the data and factors given. A sound answer usually follows a clear process.

1. Identify the factors that matter most for this particular type of business, for example footfall for a shop or proximity to a port for a heavy manufacturer.
2. Use any figures given, such as rent, wages or forecast customer numbers, to compare the sites numerically where possible.
3. Weigh the quantitative evidence against qualitative factors, such as legal restrictions, image or staff availability.
4. State a clear recommendation, naming the preferred site or country.
5. Justify the recommendation by referring back to the specific evidence and factors from the scenario, rather than giving general reasons alone.

A recommendation that is not clearly justified with evidence from the scenario usually earns few marks, even if the final choice is reasonable, because the skill being tested is the ability to apply location factors to a given situation rather than simply to list them.

Worked example 1. A bakery is deciding between a high street unit with rent of $2,000 per month and footfall of about 5,000 people per day, and an out-of-town unit with rent of $800 per month and footfall of about 500 people per day. The bakery relies on passing trade for most of its sales.

Answer: The high street unit costs $1,200 more in rent each month, but it has ten times the footfall of the out-of-town unit. Because the bakery depends on passing customers rather than on customers who travel specially, the far higher footfall is likely to generate enough extra sales to outweigh the extra rent. The bakery should choose the high street unit.

Worked example 2. A furniture manufacturer is choosing between Country A, where labour costs $3 per hour and which is inside a trade bloc giving tariff-free access to a market of 500 million consumers, and Country B, where labour costs $1.50 per hour but exports to the manufacturer's main market face a 15% import tariff.

Answer: Country B has lower labour costs, but the 15% tariff on exports to the main market would raise the price of every unit sold there, which could offset the labour saving, especially for a high-volume product. Country A's tariff-free access to a market of 500 million consumers removes this extra cost on every sale. The manufacturer should choose Country A, because the market access benefit is likely to outweigh the higher labour cost.

Worked example 3. A cement manufacturer uses large quantities of heavy limestone as its main raw material and produces a bulky, heavy finished product. It is deciding between a site next to the limestone quarry and a site in the nearest large town, 60 kilometres away.

Answer: Both the raw material and the finished product are heavy and bulky, so transport costs are important either way. Because the limestone has to be moved before it is processed, locating next to the quarry avoids moving the heavier, unprocessed raw material over distance, and only the finished cement then has to be transported to customers. The manufacturer should locate at the quarry site.

Worked example 4. A business wants to build a new factory on a plot of land that is currently zoned for residential use. Local residents have objected, citing noise and traffic concerns, and the local council has not yet granted planning permission.

Answer: Without planning permission, the business cannot legally build on this site for industrial use, regardless of how suitable the site looks on cost grounds. The business should apply formally for a change of zoning and for planning permission, address the residents' concerns, for example by proposing noise limits and restricted delivery hours, and should identify an alternative site zoned for industrial use in case permission is refused.

Going beyond the syllabus

Some businesses go further than simply choosing between existing countries and instead practise offshoring, moving part of their operations, such as manufacturing or customer service call centres, to another country mainly to reduce costs. A related practice is building on a completely new, undeveloped site, called a greenfield site, rather than reusing a previously developed site, called a brownfield site, which may be cheaper to redevelop but can carry extra costs such as clearing old structures or contaminated land. These terms can help explain why two businesses facing similar location factors still choose different types of site.

Definition: Greenfield site. A plot of undeveloped land, often on the edge of a town, used for new building rather than reusing an existing developed site.

Glossary

• Location decision: the choice a business makes about where to site its premises or operations.
• Relocation: the decision by an existing business to move its operations to a new site.
• Footfall: the number of people passing or entering a particular location in a given period.
• Raw materials: the basic inputs processed by a manufacturing business into finished goods.
• Planning permission: formal legal approval needed before building on a site or changing its use.
• Zoning: dividing land into areas designated for particular uses, such as residential or industrial.
• Tariff: a tax charged on goods imported into a country.
• Trade bloc: a group of countries that reduce or remove trade barriers between themselves.
• Exchange rate: the price of one country's currency expressed in terms of another currency.
• Political stability: the extent to which a country's government and institutions remain settled and predictable.
• Infrastructure: the basic physical systems, such as roads, ports and power supply, that support business activity.
• Government incentive: a grant, tax relief or other benefit offered by a government to attract business investment.
• Greenfield site: a plot of undeveloped land used for new building.
• Brownfield site: a previously developed site reused for a new building.
• Offshoring: moving part of a business's operations to another country, usually to reduce costs.

Common errors and misconceptions

• Misconception: all businesses should locate near their raw materials. Correct: this only applies where the raw material is heavier or more costly to transport than the finished product; otherwise locating near the market may be cheaper.
• Misconception: footfall matters equally to manufacturing and service businesses. Correct: footfall is mainly important for service businesses and retailers that depend on passing customers, not for factories.
• Misconception: a business can locate anywhere it can afford. Correct: legal controls such as zoning and planning permission can rule out an otherwise suitable site.
• Misconception: low labour costs abroad always make a country the best location. Correct: tariffs, exchange rates, political stability and infrastructure must also be weighed against the cost saving.
• Misconception: relocation is simply about finding a cheaper site. Correct: relocation decisions also weigh growth, market access, infrastructure and the one-off cost and disruption of moving.
• Misconception: a trade bloc only matters to very large multinational businesses. Correct: any business exporting to member countries can benefit from reduced or removed tariffs inside the bloc.
• Misconception: planning permission is only needed for new buildings. Correct: it is also usually needed to change the use of an existing building, for example from residential to commercial.

Exam-style questions with model answers

Q1. State one factor, other than cost, that a retail business should consider when choosing a shop location. [2 marks]

1. Footfall (the number of people passing or likely to pass the site), since higher footfall usually means more potential customers for a shop that relies on passing trade.

Q2. A factory wants to expand its site from 2,000 square metres to 5,000 square metres but has no room to expand on its current urban plot. Explain two reasons why relocation might be a better option than staying on the current site. [4 marks]

1. The current site cannot physically provide the extra 3,000 square metres needed, so the business cannot achieve the planned growth in output without moving to a larger site elsewhere.
2. A new, larger site chosen elsewhere could also be selected to improve other factors at the same time, such as better transport links or lower rent per square metre than the cramped urban site, making relocation more efficient than attempting a costly and disruptive extension on the existing cramped plot.

Q3. Country P has strong political stability, good infrastructure and labour costing $6 per hour. Country Q has weaker political stability, poor infrastructure and labour costing $2 per hour. Explain why a manufacturer might still choose Country P over Country Q. [4 marks]

1. Political instability in Country Q raises the risk of disruption to production, such as strikes, unrest or sudden policy changes, which could interrupt supply and damage the manufacturer's reputation with customers.
2. Poor infrastructure in Country Q, such as unreliable roads, ports or electricity, could raise the real cost of operating there even though wages are lower, by causing delays, breakdowns or extra transport costs that offset the $4 per hour labour saving.

Q4. A business wants to build a new warehouse on a plot of land that is currently zoned for residential use only. Recommend and justify what the business should do next. [6 marks]

1. The business cannot legally build the warehouse on this site while it remains zoned residential, because this would breach local planning and zoning controls.
2. The business should apply to the local authority for a change of zoning and for planning permission before any building work begins.
3. As part of this application, the business should address likely objections from local residents, for example about noise, traffic or the appearance of the building, by proposing measures such as limited delivery hours or landscaping.
4. The business should, at the same time, identify at least one alternative site that is already zoned for industrial or commercial use, so that it is not left without options if permission is refused.
5. The recommendation is therefore to seek formal rezoning and planning permission while keeping an alternative site in reserve, because this manages the legal risk without halting the expansion plan altogether.

Q5. State one legal control that might restrict where a business can locate. [2 marks]

1. Planning permission (or zoning), which a business must obtain from the relevant authority before it can build on or change the use of a site.

Q6. A café is deciding between a site on a busy high street with rent of $3,000 per month and a quieter side street with rent of $1,200 per month. Explain two factors, beyond rent, that the café should consider before deciding. [4 marks]

1. Footfall: the high street site is likely to have far more passing customers than the quieter side street, which matters greatly for a café relying on casual, passing trade rather than appointments.
2. Visibility and accessibility: a high street site is usually easier for new customers to notice and reach, while a side street site may need extra spending on signage or deliver less passing trade regardless of the lower rent.

Q7. A clothing manufacturer currently produces in its home country, where labour costs $8 per hour. It is considering Country X, where labour costs $2 per hour but imports into the manufacturer's main market face a 20% tariff, and Country Y, which is inside the same trade bloc as the main market, with labour costing $4 per hour and no tariff. Recommend and justify which option the manufacturer should choose. [6 marks]

1. Staying in the home country avoids tariffs and transport risk entirely but means paying the highest labour cost of the three options, at $8 per hour.
2. Country X offers the lowest labour cost at $2 per hour, but the 20% tariff on every unit sold in the main market would add a significant extra cost on top of production, which could outweigh the labour saving, especially for a high-volume product sold mainly in that market.
3. Country Y offers a labour cost of $4 per hour, which is lower than the home country, combined with tariff-free access to the main market because it is inside the same trade bloc, avoiding the extra cost that would apply under Country X.
4. Weighing both labour cost and tariff together, Country Y combines a worthwhile labour saving with no tariff penalty, giving the most favourable combined cost of the three options for a manufacturer selling mainly into that market.
5. The manufacturer should choose Country Y, because it balances a meaningful reduction in labour cost against the home country with the removal of the tariff cost that would apply in Country X.

Key takeaways

• A location decision is usually a long-term choice, so businesses weigh several factors together rather than cost alone.
• Manufacturing businesses tend to focus on the cost of land, raw materials, labour and transport links.
• Service businesses tend to focus on footfall, proximity to customers and visibility, since most services are consumed where provided.
• Relocation is driven by growth, rising costs, new markets, infrastructure changes, incentives or new legal restrictions.
• Choosing a country for international operations adds factors such as exchange rates, tariffs, trade blocs and political stability.
• Legal controls such as planning permission and zoning can rule out an otherwise attractive site before cost is even compared.
• A strong recommendation names a clear choice and justifies it using the specific evidence given in the scenario.
• Locating near the market suits products that are heavy or perishable to deliver; locating near raw materials suits businesses using heavier or bulkier inputs.

Test yourself

What is a location decision?

The choice a business makes about where to site its premises or operations, usually made for the long term because moving later is costly.

Name two factors that particularly influence where a manufacturing business locates.

Proximity to raw materials and transport links are two examples; cost of land and labour availability are also valid answers.

Why does footfall matter more to a service business than to a factory?

Service businesses, such as shops and cafés, usually depend on passing customers for sales, while factories sell to other businesses rather than passing members of the public.

Give two reasons a business might relocate.

Growth beyond the current site's capacity and rising costs, such as rent or labour, at the existing site are two valid reasons.

What is a trade bloc and why might it affect a country location decision?

A trade bloc is a group of countries that reduce or remove trade barriers between themselves; locating inside one can give tariff-free access to all member countries.

What is the difference between planning permission and zoning?

Planning permission is formal approval needed to build or change the use of a specific site; zoning is the designation of whole areas for particular uses, such as residential or industrial.

Why might legal controls override an otherwise ideal site?

Even a site with low cost and good footfall cannot legally be used if it lacks planning permission or is zoned for a different use, so legal approval must be secured first.