A wide range of factors can influence where a company is based. For example, many companies choose their industrial location based on factors concerning production and business processes. These factors are in continuous evolution and make choosing a permanent industrial location a difficult and complex task.
Over time, and with the help of new technological advancements, companies have come to fully understand the concept of industrial location and have learnt to seize all opportunities offered by the global market to help broaden their international scope.
What does the term “industrial location” mean?
A company’s industrial location is essentially where it bases its production facilities. It is by no means an easy decision as the future and economic success of a company may depend on it.
In the past, companies tended to be based where the founder was born (i.e., the region or city) but this has become an outdated practice.
Thanks to technological developments, a company can now operate from anywhere, provided that the operating conditions are favourable.
The growth of the internet and e-commerce has played a key role in breaking down the traditional barriers to industrial location. Today, the localisation of websites for different target markets enables companies to sell their products all around the world, regardless of where they are based or when they were first founded.
The difference between choosing an industrial location and offshoring a business
Reshoring is a term used to describe the process of relocating a company’s headquarters to its original country, while offshoring refers to the process of moving industrial plants to a different country where conditions are more favourable.
Most large companies have started to move a significant part of their production to “satellite plants”, which communicate with the central company via modern IT means.
Originally, the word “offshoring” referred to the process of geographical relocation across borders. However, over time the term has developed negative connotations.
When a company relocates its production facilities to another country where conditions are more favourable (usually Eastern Europe or South-East Asia), it can cause poverty and unemployment in the country of origin, which can lead to serious societal problems.
Which factors influence industrial location?
As mentioned, industrial location can decide a company’s fate. Companies will either enjoy prosperous production because of where they’re based, or they will record a loss due to the additional costs involved in the process. But which factors influence a company’s decision to choose an industrial location?
Availability of raw materials
The availability and proximity of raw materials often influence industrial location decisions. The more a company manufactures a certain raw material, the more it depends on it. The faster and more efficiently a company can obtain said raw material, the lower the risk of running into production slowdowns or stoppages.
Presence of infrastructure
Communication routes and energy infrastructures are essential if an industry is to operate properly. For this reason, one of the discriminating factors for industrial location is the presence or potential to build or use infrastructure for transport and energy supply.
For example, in the past factories were built downstream from the mountains along the river, from which the energy needed to move machinery was obtained.
Today, thanks to technological advancements and the ease with which the main energy sources such as coal, oil and gas are transported, companies have more freedom to choose their location.
Access to a skilled or large workforce
All businesses need an adequate workforce. One of the basic principles of industrial location is to situate one’s headquarters where skilled labour can be easily obtained.
Companies also tend to relocate to where the tax burden per worker is lower.
Access to sales markets
Since reducing freight costs is crucial, basing a company close to or even within its target market is extremely convenient. To use a concrete example, if a product is specifically intended for the US market, or is mainly sold in the United States, it would be a clever decision to base the company in the USA. By doing so, the cost of transporting finished products from the factory to sales centres is minimised.
Advantages of a good industrial location
In conclusion, a good industrial location makes it possible to:
- simplify procurement processes (raw materials, energy, labour)
- reach target markets more quickly
It’s also worth remembering that countries interested in attracting business to consolidate their economies often offer tax breaks.
Thanks to this, a good industrial location can lead to:
- reduced production costs
- increased profit margins