4caa2factors affecting location decision

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Am erican Journal of Sma ll Business, Volume III, Num ber 4, April, 1979

Economic And NoneconomicFactors Affecting PlantLocation Decisions

HENRY A. TOMBARI, California State UniversityABSTRACT

This paper describes two geographically separated studies concern-ing plant location decisions in the electronics industry. It was foundthat economic factors tend to outweigh noneconomic factors asimportant location decision variables for this industry. Differences inthe importance of factor ordering was found between the two studies.The implications of location analysis are discussed with regard todifferences in industries, geographical areas and local conditions.Overall, the study implies that the location decision is situational innature.

INTRODUCTIONHistorically, management decisions concerning plant locationhave principally been considered as economic in nature [2, pp. 18-21].The economic factors usually considered as most important in thelocation decision include: transportation costs, labor and supply costs,tax structures, material availability and costs, and market demand. Insummary, location decisions have been theoretically based on demand,market and revenue factors [6].A relatively recent in-depth review of the location literature arguesth at the salient research ha s tended to underscore some of the relevant

decisional factors [8, pp. 195-205]. These researche rs sta te t ha t some ofthe understressed factors include: management attitudes, local condi-tions, and situational factors such as number of plant locations,availability of capital, organizational structure, labor unions, govern-ment regulation, etc. The authors tend to indicate that in the futurelocation analysts will have to make decisions based on informationwhich is expanded beyond classical location theory. Such an evalua-tion, it is argued, should include noneconomic as well as economicfactors in the decision making process.This latter point was strongly supported and detailed in a study ofhow environmental and ecological matters will affect future plant


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American Journal of Sma ll Business, Volume III, Number 4, April, 1979

In a recent survey of 96 industrial firms, a California city [3] citedthe principle reasons for the firm's original decision to locate in thatmunicipality as: (in order of importance)(1) available facilities(2) supply of land(3) access to marketand unimportant as:(1) favorable wage rate(2) cost of materials(3) taxes(4) supply of trained labor(5) transportation costsHowever, some of these same industrial firms indicated that at thetime of the survey they may relocate due to:(1) high taxes(2) a feeling of uncertainty about future moves the city may makethat might adversely affect their business situation(3) unavailability of land for expansion(4) inadequate parkingBased on this empirical research and other cited studies, it appears

that factors other than purely economic variables influence thelocational decision. Thus, the general hypothesis of the presentresearch is that the most important factors in decisions concerningindustrial plant location are noneconomically oriented.METHOD

Sample and ProcedureData were collected from randomly selected industrial firms in twodifferent locations of the country. One location surveyed was in theeastern part of the U. S. while the other location survey was conductedin the far west. Such a procedure would permit an evaluation of thedegree of importance overall local conditions have on decisionafactors.All firms manufactured electronic products that required similarmaterials, facilities and production operations. Each firm had only oneplant and employed between 50 and 400 persons. All firms had movedto their present location within five years of the survey.Questionnaires were given to 43 firms in the eastern survey. It wasstressed that the questionnaire was confidential, anonymous and


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Am erican J ournal of Sma ll Business, Volume III, Num ber 4, April, 1979

demographic questions and seventeen decisional factors which thelocation literature considered important in location problems [5] [8].The test indicated that two demographic questions and two decisionalfactors were redundant or not clear. The resultant final questionnaireconsisted of four dem ograph ic questions a nd fifteen decision factors. Ofthese final fifteen factors, eight are considered economic and sevennoneconomic.The demographic questions consisted of: years onpresent site;number of employees; time in months required to select the site; andwas there a quantifiable analysis made to evaluate alternative sites.The fifteen decision factors are shown in Figures 1 and 2.The level of importance of each decision factor was scaled from oneto five, with five signifying a factor of extreme importance and onesignifying a factor being of no importance. Analysis of the data wasmade on the basis of means and standard deviations.

TABLE 1EAST COAST ELECTRONIC FIRMS

Location Decision Factor ^ M Z91so

2 eg 'S.2 J ca ow Q as1. Shipping and transportation costs2. Land availability for expansion3. Proximity to suppliers4. Access to markets5. Area identifies with yourindustry6. Supply of trained lahor7. Favorable wage rates8. Preservation of the environment9. Opportunity to employ minoritygroups10. Personal preference of topmanagement

11. Tax advantages12. Available facilities at lowinitial cost

EEEE

N EEEN EN EN EEE

19562102600

1817

211311211004

147

13

12017200056

021078300022

0100

13302222

000

4.813.403.734.951.542.643.901.001.004.813.643.86

.491.11

.94.21

.78.97.9500

.39

.71

.97

2971

121051414

286


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American Journal of Sma ll Business, Volume III, Number 4, April, 1979

TA BLE 2W E S T C O A S T E L E C T R O N I C F I R M S

8 2Location Decision Factor o

1. Shipping and transportation costs E2. Land availability for expansion E3. Proximity to suppliers E4. Access to markets E5. Area identifies with yourindustry NE6. Supply of trained lahor E7. Favorable wage rates E8. Preservation of the environment NE9. Opportunity to employ minoritygroups NE

10. Personal preference of topmanagement NE11 . Tax advantages E12. Available facilities at lowinitial cost E13. Local crime rate NE14. Union activity NE15. Community's attitude towardbusiness NE

0 3 10 9 12 2.25 1.03 82 15 11 0 4 3.34 1.05 31 4 13 12 2 2.69 .88 64 9 10 6 3 3.16 1.15 40 0 3 11 18 1.53 .66 111 5 9 11 6 2.50 1.00 70 3 6 8 15 1.91 1.01 100 0 0 0 32 1.00 0 140 0 0 0 32 1.00

131 8 7 0 3.442 22 6 2.036 140 001

1 46 14

6 0 3.635 26 1.226 21 1.53

0 14.96 2.81 9.99 1.48 13.83 11

2 2.84 .91 5Importance LevelFINDINGS

The findings of the survey are presented in Tables 1 and 2. Table 1shows the results of the eastern survey and Table 2, the results of thewest coast survey. As is shown in Table 1, east coast firms in thisparticular industry tend to consider the economic factor of "Access toMarket" as their primary location decisional variable. The east coastfirms ranked the economic factors as follows: 1, tied for 2, 5, 6, 7, 8, 9and 10. Thenoneconomic factors are ranked as tied for 2, 4, 11, 12, 13and two tied for 14. Overall the findings of the east coast survey wouldtend to suggest that the economic location decisional factors are most


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Am .erican Journal of Sma ll Business, Volum e III, Num ber 4, April, 1979

impor tan t fac tors concern ing indus t r ia l p lan t loca t ion a renoneconomically oriented.In addition, the findings of the west coast survey of the electronicindustry tend to generally conform with the east coast findings ofpreferance of economic factors over noneconomic factors as the mostimportant location decisional variable. However, the west coast firmsselected the economic factor "Available Facilities at Low Initial Cost"as their primary decisional factor versus the east coast proclivitytoward the factor concerned with the market. The west coast findings,show n in Table 2, ran ked the economic factors as follows: 1, 3, 4, 6, 7, 8,9, and 10. The noneconomic location decisional factors were ranked as :2, 5, 11, 12, 13 and two tied for 14. Hence, the west coast findings, likethe east coast, tend to not support the hypothesis that the mostimpor tan t fac tors concern ing indus t r ia l p lan t loca t ion a renoneconomically oriented.

Even though the two sets of findings do not support the generalhypothesis, a comparison of the findings indicates a wide divergencebetween the sets of findings in the ranking of the economic decisionalfactors. However, there appears to be an overall closeness in theranking of the noneconomic location factors. A comparison of thefactor rankings is presented in Table 3.Examination of Table 3 shows that facilities and land factorsappe ar to be relatively far more im porta nt in th e west th an in the east.However, market factors and transportation costs appear moresignificant for the electronics indus try on the eas t coast. With rega rd tolabor, the east coast firms tend to consider wage rates as moreimportant than the supply of trained labor, whereas the west coastfirms reverse th at order of importance . The other two economic locationfactors, concerning proximity to suppliers and tax advantages, areranked about the same in both findings.The noneconomic factors that dealt with top management personalpreferences and community attitudes ranked equally high in bothstudies. However, the other five noneconomic factors tend to be seen asrelatively unimportant in the electronic industry location decision onboth the east and west coast. In fact, it appears that there is almostcomplete agreement on the relative order of noneconomic factors.In addition, when a study of stan da rd deviations is ma de in Tables1 a nd 2, it shows tha t in general the east coast firms a re in much closeragreement with their ordering of the economic factors than are thewest coast firms. Moreover, such evidence suggests that with regard toeconomic factors, local conditions may have an affect on the location


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Am erican Journal of Sma ll Business, Volume III, Num ber 4, April, 1979

important factors, the noneconomic factors are considered uniformlyunimportant by all the electronics firms on both coasts.TABLE 3

C O M P A R I S O N O F T H E R A N K I N G S O F E A S T C O A S TA N D W E S T C O A S T E L E C T R O N I C S I N D U S T R YL O C A T I O N A L D E C I S I O N A L F A C T O R SType of Factor(E) Econo mic East Coa st West Co astLocation De cision Factor (NE) Non econom ic Rank Rank

1. Shipping and transportation costs2. Land availability for expansion3. Proximity to suppliers4. Access to markets5. Area identifies with yourindustry6. Supply of trained labor7. Favorable wage rates8. Preservation of the environment9. Opportunity to employ minoritygroups10. Personal preference of topmanagement11. Tax advantages12. Available faeilities at lowinitial cost13. Local crime rate14. Union activity15. Community's attitude towardbusiness

EEEEN EEEN EN EN EEEN EN E

N E

2971121051414

28613114

836411710141429113115

DISCUSSIONThe findings of the present study suggest that for the electronicindustry economic factors are more important than noneconomicfactors in the location decision. However, the findings tend to supportthe notion that certain noneconomic factors, such as top management'spersonal preference an d comm unity a ttitudes , hav e some impo rtance inrelation to economic factors.In fact, it was somewhat surprising that management's personalpreference was so uniformly supported as an important location factor.


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Am erican Journal of Small Business, Volum .e III, Num ber 4, April, 1979

Along these same lines the concept that community attitudestoward business acts as an important noneconomic decisional factordoes not appear surprising. It seems logical that as a noneconomicinfluence community attitudes toward business would be important tothe decision maker. Moreover, the decision maker would attempt toga in this type of informa tion to decrease his level of un cer tainty . It ha sbeen argued that the decision maker tends to seek certainty [7]. Thus,the importance of this noneconomic factor is intuitively appealing.Further, the importance of this noneconomic factor is supported by theBerkeley, Califomia study which indicates that some firms mayrelocate due to the feeling of uncertainty about moves the city maymake that might adversely affect their business situation [3].

The concept that economic oriented goals act as primary decisionalforces has been held as the most important type of factors in businessm anagem en t decisions [4, pp. 110-117]. Th us, the present resea rchoverall tends to support this concept. Moreover, the present studywould suggest that in general social factors are still considered to beheld in a relatively low level of importance when it comes to makingdecisions that will affect the firm's major goals, such as profit, marketshare, and growth, which could be affected by the firm's location.However, such a finding of the relative u nim portance of five of theseven noneconom ic factors in the location of electronics firms does no tfully support the notion that these same noneconomic factors wouldbecome important for other industries. The chemical industry, forexample, may well have to consider the ecological factor as one of itsmost im portan t location variab les. In fact, Dow Chem ical Com pany inselecting a site for a large chemical complex in Califomia found thatthe ecological and governm ent regulation factor wa s more imp ortan t inits final location decision th an all the other economic and noneconomicfactors [1, pp . 8-12]. Th us, the imp ortance of noneconom ic factors, a swell as economic factors, may vary between industries as well aslocalities.This latter observation is tentatively supported by the evidenceshown in the present study. The data presented in Table 3 suggeststhat electronic firms located in the eastern part of the country appearto be more concerned with market and transport cost problems thanthose firms located in the west. Those in the west seem to be moreconcerned w ith real estate factors. Perh ap s their difference in economicfactor importance can be explained by the competition betweencommercial and noncommercial functions in Califomia for the use ofsuitable real estate [9, pp. 84-96].


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Am erican Journal of Small Business, Volum e III, Num ber 4, April, 1979

CONCLUSIONSOverall, the results of the study would tentatively suggest thatlocation decisions are situational in nature. That is, that the locationdecision should be analyzed with regard to industry, environmentalrequirements, local attitudes concerning business, top management'spersonal preferences, and the classical economic factors concerningmarkets and costs based upon the geographical section of the countryin which the firm is to evaluate alternative locations.Additional research is required, however, before making definitive

statements concerning the level of importance of either the economicand noneconomic factors for any industry or section of the nation. Forinstance, investigation of local conditions is needed to corroborate thatcommunity attitudes toward business have great importance in afirm's location decision. Likewise, an investigation of the interactionbetween industry's ecological impact and the localities attitudes andregulations are needed to support the notion that each industry andlocale has its own ecological constraints. These investigations shouldthen be carried out for each economic and noneconomic factor thatcould affect the location decision.REFERENCES

1. Anderson, E. V., "Dow Halted by Califomia Regulatory Tangle", Chemical andEngineering News, 22: 8-12, April 25, 1977.2. Carrier, R. E. and W. R. Schriver, Plant Location Analysis, Memphis, Tenn.:Memphis State U niversity, Bureau of Business and Economic Research, 1969, pp .18-21.3. Berkeley's Economy and Proposals for Economic Planning, Berkeley, Ca.:Comprehensive Planning Department, August, 1976.4. England, G. E., "Organizational Goals and Expected Behavior of AmericanManagers", Academy of Management Journal, 10: 107-117, Summer, 1967.5. Fulton, M., "New Factors in Plant Location", Harvard Business Review, 49: 4-16,166, 168, MayJune, 1971.6. Greenhut, M. L., The T heory of the Firm in Econom ic Space, New York: Meredith,1970.7. Miller, D. W. and M. K. Starr, The Structure of Human Decisions, Englewood CliffsN. J.: Prentice-Hall, Inc., 1967.8. Nishioka, H . and G. Krumme, "Location Conditions, Factors and Decisions: AnEvaluation of Selected Location Surveys", Land Economics, 49: 195-205, May, 19739. Robertson, W., "The Greening of the Irvine Co.", Fortune, 95: 84-96, December, 1976


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4caa2factors affecting location decision

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