Localization of Firms: What is it? Advantages and Disadvantages

Localization of firms means the concentration of similar firms in one particular area or region. Firms in the same industry locate their operations in one area to share resources, access a research center, and/or access labor and markets. For instance, IT companies are conglomerated in one location within the Silicon Valley, California. The factors which encourage localization of firms include:

  • A well-developed infrastructure in an area attracts firms into that area.
  • Availability of large population which may provide both labor and market.
  • Interdependence among various firms in areas such as training of personnel.
  • Government policy requiring firms to be located in a certain area.
  • Availability of raw materials in certain areas.

Advantages of Localization of Firms

  • Location of firms encourages establishment of support business enterprises e.g. many firms are located in one region, institutions e.g. banks, insurance, companies and distributors are likely to set up businesses in the area to offer services required.
  • Another advantage of of localization of firms is that it encourages creation of a pool of labor force. This is because when industries are concentrated in one area, people tend to migrate to that region in search of employment. This enables firms to meet their labor force requirements.
  • Localized firms are likely to attract others which use the finished goods of the established firms as raw materials thereby creating a market for localized firms.
  • Localized firms also have the advantage of being able to easily dispose off their waste by either selling them to other firms for recycling or by jointly undertaking waste disposal projects.
  • Concentration of firms in one area encourages creation of employment opportunities in the region. This advantage of localization of firms is more common in areas where firms engage in labor intensive business activities.
  • Concentration of firms in one area encourages development of the necessary infrastructure e.g. water systems, roads, communication network, health and education facilities in the region.

Disadvantages of Localization of Firms

  • Concentration of firms in one region may have negative impact on environment in the region e.g. emissions from factories may cause both air and water pollution.
  • Localization of firms may lead to regional imbalance in development e.g. areas of industrial concentration tend to enjoy provision of social amenities e.g. roads, schools, hospitals etc.
  • Concentration of firms in one region contributes to rural-urban migration. Such movements are undesirable because they may cause open unemployment in town while in rural areas they may cause labor deficiency.
  • Increased population in areas of industrial concentration may spark off a series of problems e.g. congestion, increased rate of crime, immorality, spread of diseases e.g. HIV/AIDS and housing problem.
  • Localization of firms may be undesirable because terrorism activities or war can destroy country’s industrial base. The disadvantage of crime and terrorism is experienced as a result of many people being concentrated in one area.
  • A fall in demand of products produced by localized firms would result into a widespread unemployment in the affected area.

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