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The Business Location Decision

The factors thought to underpin a business’s location decision have changed in recent years, as our understanding has become more sophisticated.

The old model of business location held that cheap land, concessional rates and cheap labour were the key factors behind the decision to locate a business in a particular location, while the new model favours a quality environment, connectivity (electronic, worker transport and materials), and talented labour rather than cheap labour.

The old model was typified by the Industry Commission (the Commonwealth economic think tank that was a precursor to the current Productivity Commission) when it looked at issues relating to regional industry adjustment. Through an economic rationalist prism, the Commission set out its perceptions of the advantages and disadvantages of different parts of Australia. The Commission rated the following characteristics as most important:

Source: Impediments to Regional Industry Adjustment p 48

The new model was reflected in the McKinsey and Co study into regional Australia – Lead Local: Compete Local. McKinseys ranked location drivers in quite a different order:

 

* Identified as very important or important by survey respondents
when choosing a business location

Source: Lead Local Compete Global p 107

A glance at the two tables shows the transition from characteristics based on the traditional ‘factors of economic production’ (land, labour and capital) to characteristics reflecting a globalised service economy. The Industry Commission thought businesses valued cheap labour, cheap capital and risk reduction – typical ingredients of a business development strategy based on attracting manufacturing plants, known as ‘smokestack chasing’. Reviews of these policies in Australia and the US have shown that while they may bring in jobs in the short run, in the long run the community can bear a considerable ongoing cost in subsidising the retention of such businesses in their region. (See for, example, a speech made by Productivity Commission Chairman Gary Banks in November 2002, and the earlier Industry Commission inquiry in 1996. (Industry Commission 1996, States, Territory and Local Government Assistance to Industry, Report No. 55, AGPS, Canberra, October)).

The respondents to the McKinsey survey emphasised markets and market access, communications and transport links, and local support, lifestyle and workforce flexibility. These are the attributes of a well-situated and well-connected area, one better placed to grow in the 21st century. While this infrastructure costs money to deliver, unlike locational subsidies it is generally provided by a mix of public and private bodies, its maintenance does not fall disproportionately on the local community, and rather than being held in private hands, the infrastructure assets are available to benefit the whole community.

The Department of Transport and Regional Services recently published a review of international regional development literature, which puts the McKinsey thinking into a more up to date international context. The review included the work of leading global thinkers on economic development like Richard Florida, Robert Putnam, Jane Jacobs, Michael Porter and Robert Reich. The review found that:

In essence, regional business development policies must be long run, interdependent, region-specific policies that enable companies to innovate and respond to change. This infers that successful policies should:

While most of these inferences imply that metropolitan regions will continue to out-compete most of the non-metropolitan regions in all but resource based production and tourism, non-metropolitan regions can be supported by policies that:

Once again, the emphasis the international literature places on ‘software’, on creating the right human environment, is clear.

A key cause of this shift in what motivates a business to locate is the major shift favouring the growth in number and economic impact of small businesses, especially in the personal and business services sectors. It is emerging that the operators of many of these ‘new economy’ businesses are constantly balancing a range of priorities – from business growth and rapidly changing markets to family and personal well being. As such they are not always driven by the lowest input costs and the impact on the bottom line. Other values are equally important.

Even the Prime Minister has recognised the shift in the nature of business in Australia. In his July 11 speech to the Sydney Institute on workplace reform, John Howard highlighted the emergence of ‘the enterprise worker’. He characterised these people as:

... “Australians [who] do not fit neatly into categories based on age or geography, occupation or industry, income level or formal qualification. They are white collar and blue collar. They work each day in our factories, our small businesses, our great services companies, our farms and our mines. Some choose to be trade unionists, many do not. Most are traditional employees, while a growing number have embraced the independence and flexibility of working for themselves. This new breed of enterprise workers includes the knowledge workers who now make up roughly 40 per cent of our workforce. They include the providers of personalised services, reshaping our society with little more than initiative, a mobile phone and a computer. But they also include blue-collar workers in industries that only a few years ago were written off as part of the ‘old economy’."

We believe that it is these people – be they business owners, contractors or employees – that regional economic developers should position themselves to appeal to if their region is to create a climate of investment attraction.

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