What factors influence the decision regarding location of production facilities in international business?

Answer 1

• Labor. Labor is often and increasingly the most important factor of production. Other things equal, firms want productivity, in other words, labor output per dollar. Productivity can decrease if certain types of labor are in short supply, which increases the costs by requiring either more pay to acquire the labor that is available, the recruiting of labor from other areas, or the use of the less productive labor that is available locally.

• Land. Demand for land depends on the type of firm. Manufacturing firms need more space and tend to prefer suburban locations where land is relatively less expensive and less difficult to develop. Warehousing and distribution firms need to locate close to interstate highways.

• Local Infrastructure. An important role of government is to increase economic capacity by improving quality and efficiency of infrastructure and facilities, such as roads, bridges, water and sewer systems, airport and cargo facilities, energy systems, and telecommunications.

• Access to Markets. Though part of infrastructure, transportation merits special attention. Firms need to move their product, either goods or services, to the market, and they rely on access to different modes of transportation to do this. While transportation has become relatively inexpensive compared to other inputs, and transportation costs have become a less important location factor, access to transportation is still critical. That long-run trend, however, could shift because of decreasing funds to highway construction, increasing congestion, and increasing energy prices.

• Materials. Firms producing goods, and even firms producing services, need various materials to develop products that they can sell. Some firms need Natural Resources: a manufacturing sector like lumber needs trees. Or, farther down the line, firms may need intermediate materials: for example, dimensioned lumber.@@@@@

• Entrepreneurship. This input to production may be thought of as good management, or even more broadly as a spirit of innovation, optimism, and ambition that distinguishes one firm from another even though most of their other factor inputs may be quite similar.

The supply, cost, and quality of any of these factors obviously depend on market factors: on conditions of supply and demand locally, nationally, and even globally.

But they also depend on public policy. In general, public policy can affect them through:

• Regulation. Regulations protect the health and safety of a

community, and help maintain the quality of life. However, simplified bureaucracies and straightforward regulations can help firms react quickly in a competitive marketplace.@@@@@

• Taxes. Firms tend to seek locations where they can optimize their after-tax profits. But tax rates are not a primary location factor, they matter only after corporations have made decisions on labor, transportation, raw materials, and capital costs. Within a region, production factors are likely to be similar, so differences in tax levels across communities are more important in the location decision than are differences in tax levels between regions.

• Financial incentives. Governments offer firms incentives to