Factors Affecting the Location of a Firm

The location of the firm refers to the selection of a place where the proposed firm would be established. This selection of location is one of the problems facing management and as such an appropriate decision has to be made. This is so because a good location would lead to success while bad location would lead to failure of business enterprise.

The factors influencing location of firms include:

  • Raw materials: Raw materials is an important factor to consider when choosing the location of a firm, especially when raw materials are heavy and bulky such that costs of transporting them to far distances would be too high e.g. nature of raw materials determines/influences the location of a firm and this explains why sugar mills and textile industries are located in those areas where sugar cane and raw cotton are produced. Firms that use perishable raw materials ought to be located near the source of raw materials e.g. tea factories are located near the farms.
  • Market: a firm may be located near a market for its products to avoid costs involved in transportation of finished products, e.g. brick-making firms may be located near market because bricks are bulky and it would be very expensive to transport them. A firm that deals in perishable/fragile products needs to be located near market to avoid breakages/spoilage as those commodities are transported for long distances to market E.g. bread and milk usually go bad very quickly and therefore need to be consumed immediately they are produced. Glass breaks very easily and therefore their transportation need to be avoided as much as possible.
  • Human resources (labor): can be classified into either skilled, semiskilled or unskilled labour. Labour intensive firms must be located in areas where there is not only abundant labor force but also an appropriate one.eg in Kenya, firms requiring labor of any kind may be located in urban centers because in such areas labor is in plentiful supply.
  • Transport and communication: firms require constant supplies of raw materials, often in large quantities from different sources, and finished goods have to be distribute to various destinations. Therefore, good transport network is another very important locational factor to be considered when establishing firms. When communication network is poor, business people will not be able to give or get information in time.
  • Power and water supply: power is needed for running the industrial machines while water is required for cleaning, cooling and even as a raw material. Firms that require a lot of power and water need to be located where there is adequate supply of these factors.eg webuye paper mills is located near source of water because paper mills require a lot of clean water.
  • Government policies: government can encourage development of firms by offering special concessions to industries such as;
    • Offering free or cheap land.
    • Reduction of taxes
    • Offering subsidies
    • Offering direct financial assistance
    • Improvement of infrastructure.

Some of the reasons why government can influence location of industries could be to populate its empty lands, provide jobs in areas of persistent employment in order to reduce imbalance in regional development.

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