Factors that influence the location of a firm

Business studies study module

Raw materials

The availability of raw materials is one of the factors that determine the locations of a firm. Firms should be located near the source of raw material when:

  1. The raw materials are heavy and bulky so as to avoid high transport as cost to the firm.
  2. The raw materials are perishable so as to ensure they get the firm in fresh.
  3. The competition for the raw materials is high should be located near their source so as to ensure that it gets all the raw materials it requires at all times.

Advantages of locating a firm near the source of raw materials

  1. Transport cost of raw materials in minimized
  2. Storage cost of raw materials will be minimized.
  3. It is easier for the firm to select the quality of raw materials required.
  4. Easier to get fresh raw materials and undamaged raw materials.
  5. Production process can run uninterrupted because of constant supply of raw materials thus continuous production.

Labour (human resources)

Labour is a basic factor of production. It can be skilled, unskilled or semi-skilled labour. It is important for firms ton be located in an area where there is large supply of labour so as to ensure adequate supply of this important factor. Location of the firms near the source of labour reduces the cost of transporting labour force to factories and also reduces time wasting in transporting labour from far.

The market

Reasons for locating near market

  • If the finished product is perishable, then the firm should be located near the market so as to ensure that it gets to the market in fresh state.
  • If the finished product is bulky, the firm should be located near the market so as to avoid high cost of transport to the market.
  • If the final product is fragile, the firm should be located near the market so as to avoid losses that may result from breakages as the product is transported to the market.
  • If there is high completion, the firm should be located near the market as this will make it easy to get to the customers fast.
  • Where a product is made as per customers’ specification, the firm should be located near the market.

Transport and communication

A firm should be located in an area that is well served means of transport. This ensures that both raw materials and finished products can be transported with ease.

A firm should be located in an area that is well served means of communication. This ensures that the firm is able to communicate with its customers and suppliers, and vice versa.

Poor developed transport and communication facilities may lead to:

  1. High transport cost especially where raw material or the finished products are bulky.
  2. Delays in receiving the raw materials and distributing the finished products.
  3. Where communication network is poor, business people will not able to give or get information in time.

Availability of power

Industries require electric power to operate. They should, therefore be located where electricity is readily available.

Security

Industries should be located in areas with adequate security .

Auxiliary services

Firms should be located where auxiliary services such as insurance, banking and warehousing are available.

Water

Many firms require water in one or more processes. Such firms should be located in an area where water is readily available.

Government policy

The government may formulate policies that may have implications on the location of the firms, especially with regard to physical planning. Such planning may be aimed at checking rural-urban migration, environmental degradation or for strategic concerns.

The government may therefore encourage the development of firms in some areas offering concessions to industrialists such as:

  1. Offering free land
  2. Reduction on taxes
  3. Offering subsidies
  4. Improvement of infrastructure
  5. Offering direct financial assistance



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