Underlying dimensions of business location decisions

Transcription

1 business location decisions Fahri Karakaya University of Massachusetts Dartmouth, North Dartmouth, Massachusetts, USA University of North Carolina at Wilmington, Wilmington, North Carolina, USA Most previous studies dealing with business site selection decisions have been theoretical and mainly concerned with cost factors. There are many variables other than cost, some of which are qualitative and intangible in nature. This study attempts to provide empirical evidence on the importance of cost and other location-related variables. The 84 fastest-growing businesses in New England and New York were surveyed utilizing 27 variables associated with location decisions. Most of the 27 variables are industry-specific and their importance varies from industry to industry. Factor analysis, using principal component extraction method and varimax rotation showed that there are six underlying dimensions considered in business site selection decisions. Cities and towns can benefit from utilizing the findings of this type of research in attracting new businesses and preventing the existing businesses from leaving for other locations. MCB University Press [ISSN ] Introduction During the last two decades manufacturing and service companies in the USA have changed their locations for a variety of reasons. Companies in some of the states seem to have left for more attractive locations in other states. The extensive amount of investment in new locations indicate the significance of location decisions. Increasing foreign investment in the USA clearly shows that location can be a contributing factor to the competitiveness of any organization. Most of the literature on facilities location concentrates on the theoretical aspects and not many studies exist on the empirical aspects of location decisions. Czamanski (1981) refers to a growing dissatisfaction with the classical location theory. He asserts that operations researchers reduce complex location decisions to an algorithm form and solve these problems with existing algorithms. He expresses his concern that most location decisions should involve more than the cost factors. Schemenner (1979) supports this view and states that costs can be estimated through any quantitative analysis and should definitely consider the intangible and qualitative factors. He cites that the intangibles could be risks associated with the costs or demand estimates, business climate of locations, education of the labor force, attitudes of the workforce toward productivity, change, unionization, cultural attributes of the location, local and state government attitudes, commuting distances for workers and managers, and impact of other businesses in the area. In a survey of manufacturing companies which decided to build or expand plants in the south-eastern USA, Hekman (1982) found that the following factors were the five most important: 1 state and local industrial climate; 2 labor productivity; 3 transport; 4 land availability and room for expansion; and 5 cost of land and construction. In addition to these factors, other researchers point out the importance of social and cultural environment (Hack, 1984); unionism, building and energy costs, tax rates, and population density (Schemenner et al., 1987); and proximity to markets (Schemenner, 1982) as being the determining factors in location decisions. A comprehensive list of factors considered in location decisions and the studies are listed in Table I. In recent years, many nations, regions and municipalities have attempted to attract high technology firms to locate in their nations, regions or municipalities. In light of this, several researchers have focused their attention on the location decision of high technology industries (see De Noble and Galbraith, 1992; Galbraith, 1985, 1990; Galbraith and De Noble, 1988). In an exploratory study of Mexican and US electronic firms, De Noble and Galbraith (1992) suggest that high technology location behavior is related to the competitive strategy of a firm, the country of location, and to a certain extent, the form of ownership. Although the availability of a skilled and productive workforce was a major factor, firms competing with differentiation strategy looked for technical and ambiance advantages in a location, while firms competing with a cost strategy considered input factors more important. In another study, Galbraith (1990) focuses on the transfer of case manufacturing technology in high technology firms and points out the importance of the availability, as well as the transferability of qualified technical and managerial personnel. In an earlier study, Galbraith (1985) concluded that high technology firms operate on a different set of factors from traditional industries in making their location decision. He identified three salient components which are the keys to high technology location decisions: 1 the availability of professional and technical personnel; 2 the general ambiance and lifestyle of the area; and 3 the desire of the owner/ceo to live in the area. Similarly, a 1987 survey (see Galbraith and De Noble, 1988) suggested that higher technology firms emphasize the importance of ambiance [ 321 ]

2 Table I Factors considered in facility location decisions Factors Studies Area s business climate Galbraith and De Noble (1988); Hekman (1992); Schemenner (1979) Education and training strengths of the area Galbraith and De Noble (1988); Hekman (1992); Schemenner (1979); Schemenner et al. (1987) Labor unionization Blair and Premus (1987); Fulton (1971); Schemenner (1979, 1982); Attitudes of local and state governments Galbraith and De Noble (1988); Schemenner (1979) State and local government incentives Blair and Premus (1987); De Noble and Galbraith (1992); Galbraith and De Noble (1988); ; Community attitude Schemenner (1982); Commuting distances Schemenner (1979); Schemenner et al. (1987) Other competitive industries in the area Schemenner (1979) Transportation costs Blair and Premus (1987); De Noble and Galbraith (1992); Fulton (1971); Hekman (1992) Availability of transportation facilities Blair and Premus (1987); De Noble and Galbraith (1992); Galbraith and De Noble (1988); Labor productivity and attitude toward productivity Fulton (1971); De Noble and Galbraith (1992); Galbraith and De Noble (1988); Hekman (1992); Schemenner (1979); Stonebraker (1994) Cost of labor De Noble and Galbraith (1992); Galbraith and De Noble (1988); Hack (1984); Hekman (1992); Schemenner (1982); Schemenner et al. (1987) Availability of labor Blair and Premus (1987); Galbraith and De Noble (1988); Availability of skilled labor Blair and Premus (1987); Fulton (1971); Galbraith and De Noble (1988); Hack (1984); Hekman (1992) Availability of unskilled labor Galbraith and De Noble (1988) Availability and transfer of qualified Galbraith (1985, 1990) technical and managerial personnel Galbraith and De Noble (1988) Land availability for building and expansion Galbraith and De Noble (1988); Hekman (1992); Schemenner (1982); Cost of land De Noble and Gailbraith (1992); Fulton (1971); Hekman (1992); Cost of construction Hekman (1992); Schemenner et al. (1987); Availability of markets Anonymous (1980) Proximity and access to markets Blair and Premus (1987); Galbraith (1985, 1990); Galbraith and De Noble (1988); Hack (1984); Hekman (1992); Schemenner (1982); Proximity to highways De Noble and Gailbraith (1992) Availability of utilities De Noble and Gailbraith (1992); Fulton (1971); Hekman (1992); (continued) [ 322 ]

3 Table I Factors Studies Cost of utilities Galbraith and De Noble (1988); Hekman (1992); Schemenner et al. (1987); Cost of living in the area Fulton (1971) Tax structure and rates Blair and Premus (1987; Fulton (1971); Galbraith and De Noble (1988); Schemenner (1982); Schemenner et al. (1987) Insurance considerations Fulton (1971) Financing opportunities Blair and Premus (1987); Fulton (1971); Schemenner (1982) Banking services Social and cultural climate Blair and Premus (1987); De Noble and Galbraith (1992); Fulton (1971); Galbraith (1985, 1990); Galbraith and De Noble (1988); Hack (1984); Hekman (1992) Quality of life in the area Blair and Premus (1987); Schemenner (1982) Residential housing Galbraith and De Noble (1988); Cost of municipal services Fulton (1971) Availability of services such as health, fire, De Noble and Galbraith (1992); police and recreational facilities Galbraith and De Noble (1988); Local and physical infrastructure Blair and Premus (1987) Population density Schemenner et al. (1987) Climate Schemenner et al. (1987); Proximity to suppliers/resources Galbraith (1985, 1990); Galbraith and De Noble (1988); Schemenner (1982) Access to raw materials Blair and Premus (1987); Karakaya and Stahl (1989) Access to distribution channels Karakaya and Stahl (1989) Cost advantages of incumbents Karakaya and Stahl (1989) Environmental regulations Schemenner et al. (1987); Availability of fresh water Galbraith and De Noble (1988) CEO/owner preference Galbraith (1985, 1990); Galbraith and De Noble (1988) and availability of labor and property in location decisions. Apart from the important factors affecting location decisions, Stonebraker and Leong (1994) stress that the decision to locate a facility should be consistent with the long-term strategic direction of the company. These researchers further indicate that the objectives in location decisions should be to provide a firm with a competitive advantage obtained by virtue of location, as also pointed out by Porter (1990). Ghosh and Craig (1984, 1986) also support this premise that a good location strategy should give a firm strategic advantage that competitors may find difficult to emulate. Similarly, Blair and Premus (1987) state that location decisions should be part of a larger corporate planning process. Chambers of commerce, economic development agencies, and several other state agencies actively solicit manufacturing and service businesses from other states and even other countries on the basis of several criteria. The increase in direct foreign investment in the USA also confirms the migration of businesses from one location to another. This study examines 84 businesses in the north-eastern USA in an attempt to identify which factors guide location decisions and provide empirical data on these factors that were significant to these businesses in locating their facilities in north-eastern USA. Sample and methodology Chief executive officers, site selection specialists and consultants from 84 firms were surveyed. A list of the fastest growing businesses was obtained from Lotus computer database. Sales growth of 30 percent over a five-year period was utilized as the criterion in selecting the business firms to be included in the sampling frame. The rationale for this is the fact that growing businesses are likely to expand their operations to other locations. The survey also asked whether the businesses had any intention of relocating or starting operations in other locations and if they had relocated during the last five years. In addition to the growing businesses, the sampling frame also included business site selection consultants and several trade officers of foreign consulates and state agencies dealing with economic development and business site selection. A total of 598 questionnaires were mailed to potential [ 323 ]

4 [ 324 ] respondents in all of the New England states and New York. A reminder postcard followed two weeks after the original mailing. A total of 101 responses were received, 84 of which were fully usable. Given the fact that the target respondents were chief executive officers or high level management personnel, the obtained number of responses is considered adequate. The responding companies came from manufacturing (n = 31) (e.g. electronics, biotechnology), banking (n = 13), insurance (n = 8), and retailing (n = 5) industries. In addition, 13 business site selection consultants and 12 trade officers from foreign consulates and other state agencies were also surveyed. A total of 42 percent of the companies responding to the survey were large firms with the number of employees well above 1,000. Twenty-one percent employed between 500 and 1,000 people, while 37 percent had fewer than 500 employees. These percentages were approximately the same when compared with the size of the firms in the sampling frame. The 27 variables which are thought to influence business selection decisions were measured on a four-point scale ranging from not important (coded as 0) to extremely important (3). The questionnaire was developed with the co-operation of a chief executive officer, president of a chamber of commerce, and officers from an economic development center. Results In order to determine the most important variable in business site selection decision, descriptive statistics were performed for each variable (Table II). Based on the mean scores of the variables, the most important element in influencing business site selection decision is the availability of skilled labor (mean = 1.94, which corresponds to very important). Since many of the responding companies were high-tech businesses, requiring skilled labor is not unusual. The second most important factor was transportation facilities, followed by state tax rate, state regulatory environment, real estate tax rate, proximity to major highways/seaports, and major US airports. Table II shows the importance of each factor in descending order of importance and is self explanatory. Availability of unskilled labor (mean = 0.49) is the least important factor, followed by availability of industrial parks, recreational facilities and presence of distributors. Table II Importance of factors in influencing business site selection decisions mean ratings Business location variables Mean rating Availability of skilled labor 1.94 * Transportation facilities 1.84 State tax rate 1.83 State regulatory environment 1.83 Real estate tax 1.80 Proximity to major highways/seaports 1.79 Proximity to major US airports 1.75 Cost of utilities 1.60 Construction prices 1.56 Availability of local airport 1.54 Land prices 1.50 Local investment incentives 1.43 Availability of suppliers (e.g. vendors) 1.34 Educational level of residents 1.30 Availability of existing building(s) for business 1.29 Cost of housing 1.25 Availability of medical services 1.23 Availability of colleges/universities 1.19 Availability of capital financing 1.17 Presence of competing business 1.16 Availability of low cost labor 1.12 Availability of industrially zoned land 1.11 Availability of fresh water 1.05 Presence of distributors 0.89 Availability of recreational facilities 0.88 Availability of industrial park(s) 0.72 Availability of unskilled labor 0.49 Notes: * The factors were measured on a four-point scale: 0 = not important; 1 = important; 2 = very important; 3 = extremely important Underlying factors considered in business site selection decisions Using principal component extraction method and varimax rotation, the 27 variables utilized in this study were factor analyzed to identify the underlying dimensions of business site selection decisions. Factor analysis resulted in the discovery of six factors that underlie business location decisions (Table III). The six-factor solution produced an interpretable factor structure with the six factors collectively accounting for 65.3 percent of the variance in the data. The first factor is labeled as cost and has two components: 1 start-up cost; and 2 cost of running a business. The cost factor consists of construction price, land prices, cost of utilities, real estate tax rate, and state tax rate. This factor accounts for 27.7 percent of the variance.

5 Table III Varimax-rotated principal component loadings Factor 5 Factor 6 Factor 1 Factor 2 Factor 3 Factor 4 Business Existing Cost Living Location Resources environment buildings Construction price Land prices Cost of utilities Real estate tax rate State tax rate Availability of colleges/universities Education of residents Recreational facilities Cost of housing Availability of industrially zoned land Proximity to major US airports Proximity to major US highways/seaports Local airport Availability of skilled labor Availability of medical services Availability of unskilled labor Industrial park Fresh water Low cost labor Local investment incentives State regulatory environment Availability of suppliers Competing business Distributors Capital financing Transportation facilities Availability of existing buildings Percentage of variation explained Figure 1 Importance of six location decision factors compared Cost Living Accessibility Resources Business Env. Existing bldgs. [ 325 ]

6 The second factor may be labeled as quality of life or standard of living and accounts for 11.3 percent of the variance. Availability of college/universities, education of residents, availability of recreational facilities, cost of housing, and availability of industrially zoned land make up this factor. The third factor appears to be accessibility via highways and airways. Proximity to major US airports, highways, and availability of local airport make up this factor. The percentage of variance accounted by this factor is 8.9. Although, availability of skilled labor and medical services belong to this factor in the varimax rotated solution, they are not realistic and can be eliminated from the analysis. Availability of unskilled labor, fresh water, industrial park, low cost labor, local investment incentives, and state regulatory environment all together could be labeled as the available resources factor. This fourth factor accounts for 7.1 percent of the variance. The fifth factor includes availability of suppliers, presence of competing businesses, availability of distributors, capital financing, and transportation facilities. These variables combined together can be considered as the current business environment dimension and accounts for 5.4 percent of the variance. Finally, the sixth factor is made of a single variable. Availability of existing buildings appears to be an underlying, independent, dimension. Interestingly, this factor was not rated as one of the most important in influencing business site selection decision (mean = 1.29 which corresponds to little higher than important) and accounts for only 4.9 percent of the variance. An attempt was also made to distinguish among the six factors identified in terms of their importance. The most important factor appears to be cost with a mean rating of 1.66 followed by the accessibility factor Table IV Importance of factors influencing location decisions analyzed by industry Retail Factors Manufacturing Banking Insurance Consultants business F-statistic Availability of low cost labor ** Availability of skilled labor * Availability of unskilled labor Availability of colleges/universities ** Availability of industrial park(s) Availability of industrially zoned land ** Educational level of residents * Land prices * Construction prices Cost of housing * Availability of existing building(s) for business Local investment incentives ** Availability of transportation facilities Availability of recreational facilities ** Availability of local airport ** Proximity to major highways/seaports Proximity to major US airports ** Availability of medical services ** Real estate tax rate State tax rate State regulatory environment ** Availability of capital financing Presence of competing business ** Availability of suppliers (e.g. vendors) Presence of distributors Cost of utilities Availability of fresh water Notes: the factors were measured on a four-point scale: 0 = not important; 1 = important; 2 = very important; 3 = extremely important; ** = p < 0.01 and * = p < 0.05 [ 326 ]

7 with a mean rating of However, when the two unrelated variables, local investment incentives and state regulatory environment, are disregarded in considering the importance of factors, the accessibility factor has a mean rating of 1.69, which makes it the most important. Figure 1 shows the importance of each factor as perceived by the responding firms. Analysis by industry As indicated earlier, the responses came from five industries, hi-tech manufacturing (i.e. electronics and biotechnology), banking, insurance, retail businesses, and consultants. Table IV shows the importance of factors by industry and whether the differences observed are statistically significant. The tests of differences in the importance of location variables in site selection among five industries were accomplished using analysis of variance (ANOVA). As Table IV shows, for the manufacturing firms in the survey, availability of skilled labor is the most important factor influencing business site selection decisions, followed by state regulatory environment and transportation. Since almost all of the responding manufacturers were high-technology firms, these findings were expected. Availability of skilled labor is also the most important factor in influencing business site selection decisions in banking and insurance industries. Interestingly, proximity of a prospective business location to major US airports is the most important factor to consultants, followed by availability of a local airport. Land prices and construction cost are the two most important factors for retail businesses when selecting business locations. ANOVA tests show that 14 of the 27 variables differ statistically among the five industries (p < 0.01 and p < 0.05). A post-hoc test, Duncan s multiple range test, was also performed on each location variable. This test showed that 20 variables differed at least once between two industries (Table V). For example, the availability of low-cost labor is more important in retail business and the Table V Importance of factors influencing location decisions analyzed by industry, using Duncan s multiple range tests Manufacturing Banking Insurance Retail Factors (31) (13) (8) Consultants business Availability of low cost labor , 2, 3, 5 4 Availability of skilled labor , 2, 3 Availability of unskilled labor 4, , 2, 3 Availability of colleges/universities Availability of industrial park(s) 4 1 Availability of industrially zoned land 2, 4, 5 1 4, 5 1, 3 1, 3 Educational level of residents , 2, 3, 4 Land prices , 3, 4 Construction prices 5 5 1, 4 Cost of housing 5 5 1, 2 Availability of existing building(s) for business Local investment incentives 4, , 2, 3 Availability of transport facilities 3 3 1, 2 Availability of recreational facilities 1, 2, 3, 4 1 1, 4 1, 3 Availability of local airport 1, 2, 3, Proximity to major highways/seaports Proximity to major US airports 1, , 5 1, 2, 3, 4 Availability of medical services , 2, 3, 4 Real estate tax rate State tax rate 4 3 State regulatory environment 4, 5 5 4, 5 1, 3 1, 2, 3 Availability of capital financing 5 5 1, 4 Presence of competing business 2, 5 1, 3, 4, 5 1, 2, 5 2, 5 1, 2, 3, 4 Availability of suppliers (e.g. vendors) Presence of distributors Cost of utilities 4 1, 4, 5 4 Availability of fresh water [ 327 ]

8 insurance industry, compared to manufacturing, banking industries and business site selection consultants. Similarly, availability of skill labor is more important for insurance and banking industries and manufacturing firms, compared to retail businesses. The numbers in Table V are the assigned numbers to industries and indicate the industries that differ in the importance of location variables using Duncan s multiple range test. For example, there is a difference in the importance of the availability of low-cost labor between manufacturing, banking, insurance firms and consultants. Similarly, there is also statistically significant difference in the importance of the same variable between retail business firms and consultants. The other variables that are statistically significant can be interpreted similarly. Analysis by company size Factors which influence business location decisions also were analyzed by the size of the firms that participated in the study. Table VI presents the results on the basis of each factor s rating by company size. Based on statistical analysis (ANOVA and Duncan s multiple range tests), the importance of only three factors differ significantly among the large, medium and smaller companies. Availability of low-cost labor is more important for large firms (firms with employees 1,000 or more) than for smaller firms (firms with employees fewer than 500 employees). Availability of skilled labor is more important to medium-size firms (firms with employees from 500 to 999) than large firms. The third factor which differs significantly is the proximity to major US airports. This factor is more important to small firms compared to large firms. One should be cautious, however, in interpreting the results in this section since the consulting firms make decisions for other firms, but report their own size in the survey. Table VI Importance of factors influencing location decisions analyzed by company size Fewer than Between 500 and 1,000 or more Factors 500 employees 999 employees employees Availability of low cost labor * Availability of skilled labor * Availability of unskilled labor Availability of colleges/universities Availability of industrial park(s) Availability of industrially zoned land Educational level of residents Land prices Construction prices Cost of housing Availability of existing building(s) for business Local investment incentives Availability of transportation facilities Availability of recreational facilities Availability of local airport Proximity to major highways/seaports Proximity to major US airports * Availability of medical services Real estate tax rate State tax rate State regulatory environment Availability of capital financing Presence of competing business Availability of suppliers (e.g. vendors) Presence of distributors Cost of utilities Availability of fresh water Notes: the factors were measured on a three-point scale: 0 = not important; 1 = important; 2 = very important; 3 = extremely important; * importance of factors differs statistically [ 328 ]

9 Discussion and conclusions As presented earlier in Table I, the most important factors in influencing business site selection decisions are as follows: 1 Availability of skilled labor. 2 Transportation facilities. 3 State tax rates. 4 State regulatory environment. 5 Real estate tax rate. 6 Proximity to major highways/seaports. 7 Proximity to major US airports. 8 Cost of utilities. 9 Construction prices. 10 Availability of local airport. This study further showed that there are some underlying dimensions examined in business site selection decisions. The six factors identified through factor analysis are clearly the important dimensions considered by business executives when evaluating the locations for business. Therefore, cities and towns attempting to attract new businesses into their areas need to consider the factors that are important to companies planning to relocate or open up new branches. It is, of course, equally important to prevent the existing businesses from leaving their present locations for more attractive ones. Most of the factors identified in this study are also highly likely to be important for the existing businesses to keep their present locations. For example, many companies have relocated to the south because of high energy costs and labor costs. Limitations and future research The factors discussed in this study are important for the firms surveyed in New England and New York. Since many corporations have headquarters in New York, Boston and other New England cities, one may extrapolate the results to the USA. There is a chance, however, that the results may vary in other parts of the country. Furthermore, it is possible to include variables other than the 27 location selection variables that were analyzed in this study. Therefore, future studies could include additional variables, especially those that are related to specific market areas. Our study, however, does show six underlying dimensions that are important to business executives when choosing business locations. References Anonymous (1980), Building and site selection, Inc. Magazine. Blair, J.P. and Premus, R. (1987), Major factors in industrial location: a review, Economic Development Quarterly, Vol. 1 No. 1, pp Czamanski, D.Z. (1981), Some considerations concerning industrial location decisions, European Journal of Operations Research, Vol. 6, pp De Noble, A.F. and Galbraith, C.S. (1992), Competitive strategy and high technology regional/site location decisions: a crosscountry study of Mexican and US electronic component firms, The Journal of High Technology Management Research, Vol. 3 No. 1, pp Fulton, M. (1971), New factors in plant location, Harvard Business Review, Vol. 49, May-June, pp Galbraith, C.S. (1985), High technology location and development: the case of Orange County, California Management Review, Fall, pp Galbraith, C.S. (1990), Transferring core manufacturing technologies in high technology firms, California Management Review, Summer, pp Galbraith, C. and De Noble, A.F. (1988), Location decisions by high technology firms: a comparison of firm size, industry type and institutional form, Entrepreneurship Theory and Practice, Vol. 13, Winter, pp Ghosh, A. and Craig, C.S. (1984), A locationallocation model for facility planning in a competitive environment, Geographic Analysis, Vol. 16 No. 1, pp Ghosh, A. and Craig, C.S. (1986), An approach to determining optimal locations for new services, Journal of Marketing Research, Vol. 23, November, pp Hack, G.D. (1984), The plant location decision making process, Industrial Development, Vol. 153, September/October, pp Hekman, J.S. (1982), Survey of location decisions in the south, Economic Review, June, pp Hekman, J.S. (1992), What are businesses looking for?, Federal Reserve Bank of Atlanta Economic Review, Vol. 67, June, pp Karakaya, F. and Stahl, M.J. (1989), Barriers to entry and market entry decisions in consumer and industrial markets, Journal of Marketing, Vol. 53, April, pp Porter, M. (1990), The Competitive Advantage of Nations, The Free Press, New York, NY. Schemenner, R.W. (1979), Look beyond the obvious in plant location, Harvard Business Review, Vol. 57, January-February, pp Schemenner, R.W. (1982), Making Business Location Decisions, Prentice-Hall, Inc., Englewood Cliffs, NJ. Schemenner, R.W., Huber, J. and Cook, R. (1987), Geographic differences and the location of new manufacturing facilities, Journal of Urban Economics, Vol. 21, January, pp Stonebraker, P.W. and Leong, G.K. (1994), Operations Strategy, Focusing Competitive Excellence, Allyn and Bacon, Inc., Needham Heights, MA. [ 329 ]