UNIT 3.1

Why do businesses locate where they do?

Why is Location important?

Location can affect business success or business failure. A business which locates successfully can achieve:

Higher Sales

Lower Costs

Rising Profits

Why must businesses carefully consider where to

locate?

May want to be near customers (old & new).

Try to locate where they will have no, or little, competition.

May want bigger/better premises.

May want smaller premises to cut costs. Redevelopment by local council may require business to move.

Expansion may require new premises (another branch) elsewhere in UK.

New product line might need completely different premises.

What Key Factors Influence Location?

The Type of Business

Location Criteria important/essential for this type of business

Costs & Benefits of a particular location to the business

TYPE OF BUSINESS - Different types of businesses are found in all parts of the country. The smaller a business organisation is, the less likely it is to locate outside its local area.

Sole Trader - Normally they locate in the owner’s local area eg, a newsagent, plumber and garage.

Partnership - tend to be located in the partners’ local area eg, lawyers, accountants and dentists.

Private Limited Company - tend to stay close to the area where started and may have been in business for many years eg, farms, hotels and garden centres.

Public Limited Company - Typically these are large Businesses with production or retail interests located nationally or even internationally eg, ICI, Safeway, Shell, Nestle, GEC, Ford.

LOCATION CRITERIAFACTOR DESCRIPTION

DISTANCE TO MARKET

Must be close to customers, for example - newsagent. Some must be close to raw materials to minimise transport costs, for example - Steel works

AVAILABILITY RAW

MATERIALS

Businesses want to locate near raw materials that are heavy and bulky to transport

AVAILABILITY OF LAND

Businesses have to consider cost of land and amount of space required

AVAILABILITY OF LABOUR

Does the local workforce have the correct skills required?

TRANSPORT COSTS &

COMMUNICATIONS

How much will it cost to transport raw materials to site or finished goods to market? Is there good access to motorways, train lines, airports which will make it easier to transport goods?

HELTH & SAFETY

Are there any environmental issues, for example - Nuclear/Chemical plant must be located away from local housing areas

REGIONAL FACTORS

Good local schools, leisure facilities will help keep staff motivated. Good local suppliers will also help cut costs

GOVERNMENT INCENTIVES

Are there any government incentives to a particular area?

COMPETITION Are there any similar businesses near by?

UTILITIES Does this area have the 4 standard utilities: gas, electricity, water, drainage?

COSTS & BENEFITS

Location costs might include:

Premises - cost of renting or purchasing

Rates - local council charges

Wages - different parts of the world have different wage rates

Transport costs - cost of bringing in raw materials and of delivering goods to customers

Location benefits might include:

Market - some areas contain more people and businesses than others

Wages - some areas have lower wage rates than others

Rates - some areas charge businesses lower rates

Premises - some areas have lower land prices and/or can provide land for future development

Transport costs - some areas offer access to faster or more convenient transport routes/services

Financial support - the local council or the government may offer companies special grants if they locate in a certain area of the country (often those which have high unemployment rates.)

Where does the money come from to Finance a Business?

• Land & Premises

• Vehicles

• Goods for resale

• Rent

• Heat & Light

• Machinery & Fittings

• Raw Materials

• Wages

• Rates

• Insurance

Businesses must pay for:

The 2 main ways a business can get the finance needed to get started, pay for running costs, pay off debts and allow growth are:

• Owner investment (Internal Source)

• Borrowing (External Source)

Operating as a sole trader or a partner is a risk. If the business fails the owners (sole trader and partners) can lose everything, including his/her personal possessions.

Sole traders and partnerships can often find it difficult to borrow money since they tend to be small in size.

Their main forms of borrowing are therefore:

•loans from friends and family;•business loans or overdrafts from banks;•mortgage on the business property •in the case of a partnership by taking on a new partner.

Since a private limited company has limited liability, if it fails, its owners at the worst only lose their original investment and not their personal possessions.

Private limited companies can also find it difficult to borrow money.

Like sole traders and partnerships their main form of borrowing is:

•loans from friends and family;•business loans or overdrafts from banks;•mortgage on the business property

Public limited companies (plc) - issue two types of shares:Ordinary shares which do not guarantee a dividend; Preference shares which have a guaranteed dividend.The money raised by issuing these types of shares is used to purchase assets (premises, machinery, vehicles, stock)

PLCs are normally large businesses and able to secure a loan more easily than other types of businesses.

Their main form of borrowing is:•A business loan or overdraft from the bank; •A mortgage on property;•Issuing debentures - long-term loans, fixed rate of interest and repayable usually 20-25 years after date of issue.

What are the main types of Internal & External Finance available to Businesses?

If funds are generated Internally the business does not have to pay interest or convince others this is a ‘safe bet’.

The main source of Internal Finance is profit. The amount of profit made depends on:• Level of Turnover (sales)

• Size of mark-up

• Efficiency in dealing with

CREDIT transactions

• Control of costsAn efficient business will ensure profits:

• help REDUCE dependence on external borrowing

• provide enough cash to ensure DEBTS repaid

Externally Generated Finance is available from a wide range of Financial Institutions, e.g., Commercial Banks, Building Societies and Insurance Companies.

Main Types of External

finance

Shares: Ordinary & preference

Debentures

Mortgage

Loan

Hire Purchase

Factoring

OverdraftsLeasing

Trade Credit

Small business Loans Guarantee Scheme

Government Assistance

An Area May Suffer

From:

Poor Infrastructure

Urban Decay

Few Relevant Occupational Skills

Many Derelict Buildings – Industrial Closures eg Steel, Coal, Shipbuilding

High Unemployment

Since the Government is responsible for the wealth and prosperity of the entire country, it must attempt to encourage business to locate in

‘depressed’ areas as this provides new jobs to the local population.

Central Government Support

Assisted Areas:•High unemployment

•An inadequate infrastructure

•Low income per head

•A failing economic and social environment

The main central government policies which provide public funding to aid depressed areas include:

Regional Selective Assistance (RSA):•A minimum grant to persuade a business to undertake a new project to create or keep existing jobs

•Project Grants

•Training Grants

Enterprise Zones:•Quick planning permission

•Exempt from paying business rates

•10 year period

Regional Enterprise Grants: (small businesses)

•Investment Grant (£15,000 towards capital expenditure)

•Innovation Grant (£25,000 towards product development)

Central Government Support

Urban Development Corporations:•Managing and developing land by providing

•Buildings, Roads, Services

The main central government policies which provide public funding to aid depressed areas include:

Training and Enterprise Councils:•Responsible for the public funding of training and vocational education

Local Government Support

Grants for Starting up a Business or R&D

Free Rent and Rates

Business Advice

Loans with reduced interest charges

Job creation grants

Help with premises

Grants to relocate

The European Union

The Single Market

Businesses in the European Union are particularly concerned with 5 specific aspects:

Inward Investment from non-EU countries

The Social Charter

Regional Policy

Monetary Union

The European Union

Austria Belgium Czech Republic Cyprus Denmark Estonia Finland France

Countries in the EU:

Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta

Netherlands Poland Portugal Slovakia Slovenia Spain Sweden United Kingdom

The Single Market

• No limit to the quantity of goods or services sold – no quotas

• No Customs Duty to pay

• Free movement of workers and capital

• Lower costs of production

• Large choice of suppliers

• Large market for capital intensive businesses

• European wide protection of patents

• Increased competition encourages efficiency

• Collaboration between business is possible

Within the European Union there are over 360 million potential customers!

The Single Market

• Possible shortages of skilled labour in one location

• Bottlenecks occurring in production – increased demand

• Barrières de langue

• Distance Difficulties – especially transport

There are some disadvantages!

To allow people, goods and services

to move around freely within

the EEC (European Economic Community)

Inward Investment

The EU imposes common restrictions on all imports coming into Europe. A non-European manufacturer may find that the only way to sell into Europe is to locate a factory within the EU.

The EU’s single market has seen the growth of inward investment.

• Non-EU countries eg Japan and USA have set up within the EU

• This avoids external tariffs placed on Non-EU companies

• Most investment from capital intensive business – eg microelectronics

The Social Charter

• Minimum Wage

• Equal Pay

• Maximum 48 hour working week

• Improve living conditions – social benefits

• Improve Health & Safety

• Collective Bargaining

• Vocational Training

• Human Rights Protection

This has a cost consequence to business:

• Higher taxation to meet welfare targets; or

• Higher wage bills to meet the minimum wage

INDUSTRIAL RELATIONS

Regional Policy

• European Regional Development Fund (ERDF) – infrastructure and telecommunication projects

• European Social Fund (ESF) – improving training and solving labour supply difficulties

• European Agricultural Guidance and Guarantee Fund (EAGGF) – providing job opportunities in farming areas

• European Investment Bank (EIB) - offers loans at attractive rates to firms locating in depressed areas

These ‘structured funds’ have assisted with funding:

• The Edinburgh by-pass

• The Time Capsule

• Extensions to the rail network in Strathclyde

• Edinburgh Women’s Training Centre

FINANCIAL

ASSISTANCE

European Monetary Union

Benefits of this include:

• A saving on the costs of currency conversions

• Allowing a free movement of capital across Europe

• Easier to compare prices

• Creating stable prices and lower interest rates

• Give economically poor regions a better chance of catching up

Monetary Union is the use of the EURO throughout the EU.

HOW IMPORTANT IS GLOBALISATION IN DETERMINING WHERE BUSINESSES

LOCATE?

Globalisation is the term used to describe the way in which quicker transportation and faster communications have resulted in most areas of

the world becoming part of the one world market.

Globalisation of the market place is possible because of the following:

Developments In Communications Developments In Transportation

Decline In Barriers To Trade Developing Markets

The Pacific Economies The Global Market

Multi-nationals

Globalisation has created

A single world wide market place

which is dominated by

Multi-national businessesWho operate across national boundaries

through the use of

Containerisation

Inward Investment

Information Technology

Telecommunications