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The question is ‘where should a business locate?’ The answer is ‘wherever it is cheapest to do so.’
However, we should not think of this as wherever the rents of land and premises are cheapest, or the North of Scotland would be full of businesses. The word ‘cheapest’ refers to the full range of business costs that can be affected by location, and that, on closer inspection, turns out to be many of them. So to give a full answer to the original question requires a careful analysis of all the possible business costs that might be affected by location, of which ground rents are only one.
Physical Geography
This is location at its most basic, the actual make-up and appearance of the particular location. It is especially relevant to the primary sector. Farms have to be where land is reasonably fertile, and not prone to flooding or other natural disasters. Mines have to be where the mineral deposits are found, assuming they are cost-effective to be worked.
The problem, for example, with the UK coal industry is not that the UK has run out of coal (it hasn’t) but that the remaining coal is deep and in geologically fragmented seams. It is expensive (given current technology) to extract compared to eg Australia where God has put vast seams which are flat and even and very near the surface.
Some secondary sector businesses also have to be where nature dictates. Ports and ship building industries, for example, have to be where the water is both deep and sheltered. The difference between ‘bulk reducing’ and ‘bulk increasing’ industries is also relevant. The volume of material leaving a brewery is much less than the volume entering, so it makes sense to cut transport costs by putting the brewery near where barley is grown and water is available. On the other hand, a ready meal is a lot bulkier than the fresh ingredients so it makes sense to put the business near its customers for the same reason of transport costs. Having said that, modern transport costs are generally a lot less critical to the final price than used to be the case.
Tertiary sector businesses are described as more ‘footloose’ because they are less tied to particular locations. Of course, many need to be near their customers, such as a hairdressers. The internet has made some difference to some businesses. Egg, the online bank for example, has done away with the traditional need for a bank to be near its customers.
Many places are very obviously unsuitable for either business or for employees. Mountains, swamps, deserts and other difficult terrain accounts for very large areas of the world, but are totally unsuitable for business. Such terrain will also cause problems for transport infrastructure, and this is an essential aspect of business location. Putting roads and railways through mountains is very expensive; without good transport links very few businesses will locate in an area.
History
Many industries have a history which explains why businesses were located in a particular place, and this can sometimes explain why they are still located there. For example, manufacturing started in the North of England because of access to water power; the flatter country of the South didn’t produce enough ‘fall’ to drive a mill. This then stayed that way even after water was no longer used (as soon as steam became available) because the existing businesses just has to switch to steam and they were still in business. Meanwhile, a large pool of suitable workers had moved into the area, so the area always remained attractive to any manufacturing business. The location of the coal-fields made the same steps natural in the Midlands.
This "historical" force is the more powerful where labour needs to be skilled, such as the ‘Potteries’ which still is home to some ceramics businesses despite the fact that the clay is no longer used. Labour tends to be immobile and it is often easier for the business to move to where the labour is than wait for the labour to move to where the jobs are. The financial strength of the City can be explained in broadly similar ways, and so financial businesses continue to locate in and around the City despite the huge expense of office space and other business costs.
Economies of Concentration (or ‘External Economies of Scale’)
Once, for whatever reason, an area becomes specialised in a particular industry, there are many reasons why the industry should remain in that area. Suitably skilled labour is one reason. The availability of specialist suppliers to the industry is another. Shared costs, such as R&D, might be a third. So long as the area continues to be cost-effective to do business from, there is no reason to leave, unless the whole industry declines as with UK steel for example, and new businesses in the same industry continue to locate there long after the original justification has long disappeared. Not moving because there’s no particular reason is called ‘industrial inertia’.
Communications
Transport communications have already been mentioned as important. The building of any new transport infrastructure, such as the M25 or the Channel Tunnel, will immediately make a difference to the pattern of business location. Today, electronic communications make as much difference. One advantage of the City is that it carries the huge amount of cabling required by financial services businesses for their vast data traffic. Access to the internet with all its advantages is now vital for many businesses, and not all areas of the UK are equally well connected.
Markets & Suppliers
Most businesses would ideally like to be close to both suppliers and customers. This isn’t often possible, so a business has to choose which is the more important. A retail business has to be near its customers, because selling to customers is what retail businesses do. We should not, however, that there is a small but growing trend for some specialist retailers to manage perfectly well by using the internet irrespective of physical location. You may not even need to be in the same country. Any business where actual meeting is important, such as a solicitor, must remain near its customers. Other businesses particularly need to be near their suppliers, such as any business using very specialist equipment which may need regular servicing by the supplier.
Building Land
There is a shortage of suitable building land in many parts of the UK. This is partly because demand is unevenly split with too many businesses wanting to move into the South East and too few businesses wanting to move elsewhere in the UK. It is partly because very strict planning requirements limit where new businesses can be located. Many areas, for example, are designated ‘green belt’. ‘Brownfield’ sites mean where previous business has been located but has now gone. Without a lot of money, many of these sites are too ‘grotty’ to attract new businesses concerned about their image. Some are also heavily contaminated by previous industrial activity. They need very expensive clearing up over which there are usually arguments between the public and private sectors. Transport links may also be poor, especially if the site is in an urban area with limited free space for more roads.
Businesses also worry about space for expansion in the future. They will not want to move twice, but also don’t want to get locked into a site that will prove too small in the future. It is not always easy for this to be guaranteed, unless the business buys two adjacent sites and leaves one empty, which is expensive. Environmental concerns are also now more pressing than they used to be. This makes local authorities more cautious about planning permission. Local protest groups can be very powerful. Even if they fail to block a development they can insists on a public enquiry which enormously adds to the costs and delays of developing the site. In the meantime some businesses may have decided to go somewhere else. Most of you will be aware of exactly this issue over Stansted Airport where a number of people want, apparently to travel cheaply but deny the same privilege to others. And finally there is the cost of the land to buy or rent. These costs can be very high in some places eg the City where lots of businesses all want to be in the same place. There are also local business taxes (UBR ) to go on top of that.
Labour
We have already mentioned that labour is relatively immobile, and that this is a constraint on business location. This is less true of higher professional grades, many of who expect to move several times, even overseas, during their working life. On the other hand, moving is very disruptive to one’s personal life, especially if one has children in education. Many businesses no longer rely on a local work force but relocate their existing work force, or at least the more important members of it. This has to be done at the employer’s expense, which further adds to the costs. There is quite a large market in specialist supplies to businesses relocating their premises and their staff. Clearly, a very long-term view has to be taken to commit to this kind of change.
UK Government Influence
The whole area of business location is heavily influenced by government, both central and local. This is because there are important consequences affecting macroeconomic policy. For example, prosperous businesses pay more tax. Growing businesses create employment. There is a long-standing problem in the UK with regional disparities between the North and the South in terms of employment and earnings. The government has to keep passing money to the North to put a floor under the problems of relative poverty and lack of employment. On the other hand, the over-popularity of the South can cause problems of congestion, strain on local services, inflated house prices, and shortage of ‘open space’.
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