Why do businesses locate where they do? UNIT 3.1 Why do businesses locate where they do? 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? Expansion may require new premises (another branch) elsewhere in UK. New product line might need completely different premises. May want smaller premises to cut costs. May want to be near customers (old & new). Why must businesses carefully consider where to locate? Redevelopment by local council may require business to move. Try to locate where they will have no, or little, competition. May want bigger/better premises. Unit 3.1 - Why do Businesses Locate where they do?

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 Unit 3.1 - Why do Businesses Locate where they do?

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. Unit 3.1 - Why do Businesses Locate where they do?

LOCATION CRITERIA DESCRIPTION FACTOR 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? Unit 3.1 - Why do Businesses Locate where they do?

Location costs might include: 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 Unit 3.1 - Why do Businesses Locate where they do?

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.) Unit 3.1 - Why do Businesses Locate where they do?

Where does the money come from to Finance a Business? Businesses must pay for: Land & Premises Vehicles Goods for resale Rent Heat & Light Machinery & Fittings Raw Materials Wages Rates Insurance Unit 3.1 - Why do Businesses Locate where they do?

Owner investment (Internal Source) 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) Unit 3.1 - Why do Businesses Locate where they do?

Operating as a sole trader or a partner is a risk 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: Efficiency in dealing with CREDIT transactions Control of costs Level of Turnover (sales) Size of mark-up An efficient business will ensure profits: help REDUCE dependence on external borrowing provide enough cash to ensure DEBTS repaid Unit 3.1 - Why do Businesses Locate where they do?

Main Types of External finance Externally Generated Finance is available from a wide range of Financial Institutions, e.g., Commercial Banks, Building Societies and Insurance Companies. Shares: Ordinary & preference Leasing Overdrafts Main Types of External finance Debentures Hire Purchase Factoring Loan Mortgage Small business Loans Guarantee Scheme Trade Credit Unit 3.1 - Why do Businesses Locate where they do?

Government Assistance Many Derelict Buildings – Industrial Closures eg Steel, Coal, Shipbuilding High Unemployment An Area May Suffer From: Urban Decay Few Relevant Occupational Skills Poor Infrastructure 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. Unit 3.1 - Why do Businesses Locate where they do?

Central Government Support The main central government policies which provide public funding to aid depressed areas include: Assisted Areas: High unemployment An inadequate infrastructure Low income per head A failing economic and social environment 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) Unit 3.1 - Why do Businesses Locate where they do?

Central Government Support Local Government Support The main central government policies which provide public funding to aid depressed areas include: Urban Development Corporations: Managing and developing land by providing Buildings, Roads, Services 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 Unit 3.1 - Why do Businesses Locate where they do?

The European Union Businesses in the European Union are particularly concerned with 5 specific aspects: The Single Market Monetary Union Inward Investment from non-EU countries The Social Charter Regional Policy Unit 3.1 - Why do Businesses Locate where they do?

The European Union Countries in the EU: Austria Belgium Czech Republic Cyprus Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta Netherlands Poland Portugal Slovakia Slovenia Spain Sweden United Kingdom Unit 3.1 - Why do Businesses Locate where they do?

The Single Market Within the European Union there are over 360 million potential customers! 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 Unit 3.1 - Why do Businesses Locate where they do?

The Single Market To allow people, goods and services to move around freely within the EEC (European Economic Community) There are some disadvantages! Possible shortages of skilled labour in one location Bottlenecks occurring in production – increased demand Barrières de langue Distance Difficulties – especially transport Unit 3.1 - Why do Businesses Locate where they do?

Inward Investment The EU’s single market has seen the growth of 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. 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 Unit 3.1 - Why do Businesses Locate where they do?

The Social Charter This has a cost consequence to business: Higher taxation to meet welfare targets; or Higher wage bills to meet the minimum wage Minimum Wage Equal Pay Maximum 48 hour working week Improve living conditions – social benefits Improve Health & Safety Collective Bargaining Vocational Training Human Rights Protection INDUSTRIAL RELATIONS Unit 3.1 - Why do Businesses Locate where they do?

Regional Policy 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 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 Unit 3.1 - Why do Businesses Locate where they do?

European Monetary Union Monetary Union is the use of the EURO throughout the EU. 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 Unit 3.1 - Why do Businesses Locate where they do?

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

A single world wide market place Multi-national businesses Globalisation has created A single world wide market place which is dominated by Multi-national businesses Who operate across national boundaries through the use of Containerisation Inward Investment Information Technology Telecommunications