Factors Affecting Location of Firms

Numerous variables influence the location of individual firms as well as industries, which are aggregations of firms. The locational decision of a firm is important and complicated, and successful companies spend considerable time and effort in choosing the optimal location. Investments in inappropriate locations can be disastrous. Thus, a firm's decision-making process is a rational, if imperfect, one and is subject to the iron laws of market competition. Although personal considerations such as climate or the owner's residential preferences may occasionally be important for the margins, firms cannot choose arbitrarily or they will be forced out of business by their more rational competitors. The major factors of production that shape firms’ locations include labor, land, capital, and managerial and technical skills. (Others, such as transport ...