Location of the firm

Business studies study module

Location; is the site or place from which the business operations/firm would be established.

The management has to make appropriate decisions concerning the location of the firm since a good location would lead to success while a bad location would lead to failure of the business enterprise.

Factors determining the location of the firm

Raw materials

The availability of raw materials is one of the factors that determine the location of firms. Firms should be located near the source of raw materials when:

  • The raw materials are heavy and bulky so that costs of transporting them to far distances would be too high.
  • The raw materials are perishable

Advantages of locating firm near source of raw materials:

-Transport cost of raw materials is minimized

-production process can run uninterrupted because of constant supply of raw materials thus continuous production

-storage cost of the raw material will be minimized

-It is easier for the firm to select the quality of raw materials required.

-Easier to get fresh raw materials/undamaged raw materials

Labour (Human Resources)

This is divided into 3 categories; semi-skilled and unskilled labour

-Labour intensive firms must be located in areas where there is both abundant labour force and appropriate labour force.

-Firms requiring labour of any kind maybe located in the urban centres because in such areas labour is in plentiful supply

-Agricultural processing firms are found in the rural areas

-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.


A firm may be located near the market for its products to cut down on production costs.i.e to avoid the costs involved in transportation of the finished products.

Reasons locating near markets

-where the finished product is more bulky or more difficult than the raw materials, then the industry would be located near the market e.g. blocks and bricks used in building will be manufactured near the place where they are required than the source of raw materials because the finished product is more delicate to transport and is susceptible to damage.

-it reduces the cost of transporting the products to the market.

-To minimize the damage of the final product

-where the finished product is perishable or fragile, the industry should be located near the market to avoid breackages or spoilage. Examples are commodities like milk or bread which usually go bad very quickly and therefore need to be consumed immediately they are produced.

Transport and Communication

Efficient transport is the lifeline of modern businesses. Firms will choose those locations that have well-developed transport facilities such as roads, railway lines, seaports and airports because;

  1. They require constant supplies of raw materials
  2. They need to distribute/send out finished products to different destinations
  3. They need to be in contact with other business associates like suppliers, customers and competitors.

Poorly developed transport facilities may lead to:

-High transportation costs especially where raw materials or the finished products are bulky

-Delays in receiving the raw materials and distributing the finished products

-Where communication network is poor, business people will not be able to give or get information in time.

Power and Water Supply

Fuel and power are required to run machines and ensures smooth operations for the business.

Water is required for cleaning, cooling and even as a raw material. They are therefore strong factors in determining the location of a firm i.e. firms that require a lot of power and water need to be located where there is adequate supply of these factors.

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 by offering concessions to industrialists such as:

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

Other factors:

Proximity to source of credit: Some firms that need credit to finance their operations from time to time might require locating near a reliable source for such funds

Availability of security services: This is an important consideration when deciding where a firm will be located as this has implications in almost all factors of production. Firms will tend to avoid locations that do not have adequate security.

Social amenities: Some firms take into account various activities and institutions that will benefit their employees. Such will include hospitals, schools, social halls or studios.

Availability for ample room for expansion: Businesses will tend to prefer locations that can provide ample room for expansion in future. This will eliminate the need for relocation when the firm experiences expansion

Climate: This is an important factor for agro-based businesses (such as floriculture, horticulture, dairy farming e.t.c) which have to seek locations with suitable climatic conditions

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