Business Location Decisions Research Articles

Business Location Decisions in the Medical Device Industry

Medical device firms, like firms in the high-technology sector, often include business functions characteristic of both the industrial economy and the knowledge economy. Thus, it is not immediately clear which kinds of locational attributes (i.e., traditional cost-based factors or those concerned with attracting and retaining knowledge workers) are most influential in the site selection process. This study draws on survey data from 48 medical device firms in Massachusetts, a state with one of the largest clusters in the industry, to examine the relative importance of various factors and conditions in the location decision. A second objective is to consider the extent to which the rating of a given location factor varies depending on whether the firm maintains manufacturing facilities in the state. The implications of the findings for both location theory and economic development efforts are discussed.

PATTERNS OF ESTABLISHMENT ENTRY AND STATE-LEVEL ANTITRUST

A large literature examines patterns of firm entry and relocation in response to local demand and cost parameters. Economists have studied tax incentives and local business conditions as drivers of business location decisions as well. In this article, we extend this analysis to consider the extent to which firms view state-level antitrust activity in the United States as an indicator of an adverse business environment, which in turn reduces that state's rate of establishment entry. We find some evidence of this effect, especially for larger firms and for more controversial types of antitrust enforcement.

Alternative Measures of State UI Systems

Comparisons among state unemployment insurance (UI) systems can be misleading. Frequently quoted indicators of benefit generosity, tax cost, and adherence to the experience-rating principle are influenced by the relative economic conditions of states. Such comparisons thereby obscure underlying structural differences in state UI systems. A business considering alternative states in which to locate a production facility should be cautious when interpreting UI information in an economic developer's marketing pitch. This paper offers alternative indicators based on how representative firms, with a well specified unemployment experience, would fare in different states. The authors use a micro-simulation approach to model the experiences of representative workers and firms to compare 28 states and contrast the results with those obtained from more conventional indicators. In closing, the authors consider whether a business location decision would be influenced differently by the alternative measures of state UI systems.

Solving the Many Problems with Inner City Jobs

Inner-city business development is often proposed as a solution to inner-city poverty. However, research evidence suggests that creating new jobs in the inner city is unlikely by itself to significantly increase the employment or earnings of the inner city poor. Public subsidies for inner city business development may be justified by greater environmental, congestion, and fiscal benefits of inner city vs. suburban business location decisions. The research evidence suggests that some boost in inner city business development may be provided by a combination of economic development incentives with enhanced public services. A different set of policies must be used to increase the earnings of the inner city poor. These employment solutions to inner city poverty should include two components: (1) creating more effective labor market intermediaries to make it easier for inner-city residents to find good jobs and for employers throughout the metropolitan area to find good inner city workers; (2) enhancing the job skills of the inner-city poor, particularly their "soft skills", by training programs that have closer ties to employers and incorporate subsidized employment experience. Given the magnitude of the poverty problem, any realistic policy to significantly reduce inner-city poverty through enhanced earnings will require tens of billions of dollars of annual government spending.

Do Freeway Traffic Management Strategies Exacerbate Urban Sprawl?

The impact of highway capacity expansion on urban land use has been studied extensively. With the shift of transportation investment priorities from major capacity expansion projects to operational improvements, it has become increasingly important to understand the impact of transportation control measures such as traffic management and pricing on location choices. This paper explores the impact of traffic management strategies on land use patterns using the example of ramp metering. A regression-based transportation model is employed to capture changes in accessibility due to ramp metering on a highway network. A land use change indicator model then estimates how employment and residential density distributions shift in response to changing accessibility in several stylized urban areas with various initial land use patterns (e.g., monocentric and polycentric cities). Ramp metering is shown to improve accessibility in a nonuniform fashion. The resulting land use changes depend on the existing land use conditions. In monocentric cities, ramp metering exacerbates urban sprawl by encouraging residents to live further away from their workplaces, which produces avoidable excess travel. In polycentric cities with both nondominant central business districts and secondary employment centers, ramp metering actually encourages residents to relocate to areas near existing employment centers and therefore serves as an antisprawl measure. The weakest impact of ramp metering on land use is observed when an urban area has a perfect job-housing balance. Other interesting findings suggest that by making downtown areas more accessible, ramp metering may help revitalize declining city centers in congested cities and that business location decisions are not significantly affected by ramp metering.

The Employment and Fiscal Effects of Michigan's Mega Tax Credit Program

This paper estimates that Michigan's MEGA tax credit program to attract and retain businesses has large employment and fiscal benefits. MEGA provides discretionary tax credits to businesses, with the tax credit tied to the personal income taxes paid by employees on the new or retained jobs. We estimate the economic effects of MEGA using the Upjohn Institute's REMI model, and the research literature on how business location decisions respond to taxes. We estimate the fiscal effects of MEGA based on the research literature on how government spending and revenue respond to state personal income and population. The estimates suggest a lower bound to MEGA's effectiveness of being decisive in a little over 8 percent of the MEGA projects. Even with this modest success rate, MEGA is estimated to have fiscal benefits that offset about two-thirds of its gross fiscal costs. The net fiscal costs per job created of MEGA average less than $4,000 per job-year, which is less than the labor market benefits of job creation.

Unbundling R&D and Manufacturing: Postindustrial Myth or Economic Reality?

AbstractUnderstanding determinants of business location decisions is important from the point of view of economic policy. While the determinants of manufacturing and R&D location have been extensively covered in the literature, in this article we examine a largely neglected question: Under what conditions do manufacturing and R&D have to be physically colocated, that is, when is unbundling the two impossible? In a sample of 241 Finnish industrial firms, we find that unbundling R&D and manufacturing is possible for some companies but indeed a postindustrial myth of sorts for many others. The need for colocation correlates with knowledge intensity of activities: product complexity, process complexity, and industry rate of change, but interestingly enough, not with the size of the firm's R&D budget.

Industrial Location in Developing Countries

Despite a diminishing role in industrial countries, the manufacturing sector continues to be an engine of economic growth in most developing countries. This article surveys the evidence on the determinants of industry location in developing countries. It also employs micro data for India and Indonesia to illustrate recent spatial dynamics of manufacturing relocation within urban agglomerations. Both theory and empirical evidence suggest that agglomeration benefits, market access, and infrastructure endowments in large cities outweigh the costs of congestion, higher wages, and land prices. Despite this evidence, many countries have tried to encourage industrial firms to locate in secondary cities or other lagging areas. Cross-country evidence suggests that fiscal incentives to do so rarely succeed. They appear to influence business location decisions among comparable locations, but the result may be a negative-sum game between regions and inefficiently low tax rates, which prevent public goods from being funded at sufficiently high levels. Relocation tends to be within and between agglomerations rather than from large cities to smaller cities or lagging regions. Rather than provide subsidies and tax breaks, policymakers should focus on streamlining laws and regulations to make the business environment more attractive.

Public-sector financial incentives for business relocation and effectiveness measures based on company profile and geographic zone

Do public financial incentives still influence business location and relocation decisions? Examined herein will be empirical evidence drawn from three regional policies in three regions of France. This study will propose various location modeling types, both older and more contemporary cost-minimization models. We will also be proposing an empirical test to determine the effectiveness of public financial incentives for location and relocation decisions on the basis of profiles from 301 companies set up in three French regions. Our results underscore that in this case, subsidies do not trigger the dynamic of self-sustaining territorial construction. This finding proves less detrimental for core and intermediate regions than that for outlying region (like the Limousin). These results could lend confirmation to the premise that innovative companies should prefer the advantages associated with technology-based externalities, which for the most part embody tacit knowledge, in comparison with the positive perception of subsidy awards. The simple financial public location incentives from the past should be challenged anew.

The Importance of Local Corporate Taxes in Business Location Decisions: Evidence from French Micro Data

Determinants of businesses locations are known to be multiple. Locations of partners and competitors are crucial, as well as the territory's local characteristics. To consider the importance of local taxes we build a Poisson model to explain the number of business creations observed in a given municipality. First results suggest that there are unobserved factors driving firm creation that are positively correlated with the level of local taxes. To deal with this potential source of endogeneity, we present an approach close to Regression Discontinuity Design. We find that, everything else being equal, higher local taxes actually tend to deter firms from setting up in a given zone but the effect is weak.

Testimony of Peter D. Enrich on Cuno and Competitiveness: Where to Draw the Line Before the Subcommittee on International Trade of the Committee on Finance United States Senate

In response to legal challenges to the constitutionality of many state tax incentives designed to influence business location decisions, federal legislation has been proposed that is designed to shelter a wide range of such incentives from Commerce Clause scrutiny. In this testimony, offered before the Senate Finance Committee's Subcommittee on International Trade, I present two reasons why Congress should approach the proposed legislation with great caution: First, the accelerating proliferation of state and local business tax incentives that are conditioned on business location and that discriminate in favor of in-state activity is contrary to the national interest and should not be encouraged by federal legislation. Second, the approach taken by the proposed legislation - which seeks to authorize certain location-based incentives, such as investment tax credits, while not authorizing other similar incentives of kinds previously invalidated by the courts - is doomed to failure, because the line it attempts to draw is arbitrary and insubstantial.

Influence of Transportation Access on Individual Firm Location Decisions

Several studies of transportation and economic development impact have recognized the extent to which transportation investments may improve access to markets and, by doing so, influence firms' location decisions. A study specified and empirically tested a firm-level model that captures the relationship between the propensity of a particular firm to relocate from its current business location as a function of local and regional accessibility, agglomeration economies, firm-specific characteristics, business-specific activity attributes, attitudes toward regional considerations, and factors that influenced the initial business location decision. The geographic area of analysis considers a four-county region in Maryland. The econometric analysis establishes significant association between transportation supply and firm-level relocation decisions in the study area and underscores the role of other firm and area-of-influence attributes in this process. The findings suggest a positive association between access...

Influence of Transportation Access on Individual Firm Location Decisions

Several studies of transportation and economic development impact have recognized the extent to which transportation investments may improve access to markets and, by doing so, influence firms’ location decisions. A study specified and empirically tested a firm-level model that captures the relationship between the propensity of a particular firm to relocate from its current business location as a function of local and regional accessibility, agglomeration economies, firm-specific characteristics, business-specific activity attributes, attitudes toward regional considerations, and factors that influenced the initial business location decision. The geographic area of analysis considers a four-county region in Maryland. The econometric analysis establishes significant association between transportation supply and firm-level relocation decisions in the study area and underscores the role of other firm and area-of-influence attributes in this process. The findings suggest a positive association between access to primary highway facilities and the level of economic activity. The results also confirm expectations that roads with higher functional form and capacity are likely to be more influential in the location and relocation decisions of businesses. The described model estimates could provide a basis for predicting the potential impact of local economic development policies in firm retention strategies.

Business Location and Success: The Case of Internet Café Business in Indonesia

This research aims to examine the relationship between business location decision and business success. The case is Internet café business in Indonesia. This research is addressed to answer these main questions: (1) what factors do underlie location decision for an Internet café business?; and (2) does location decision determine success of Internet café business? A field research is conducted to answer these questions.Factor analysis applied to 17 location factors reveals five underlying dimensions of business location decision. They are centrality, business environment, business venue, cost, and labor. Based on responses from 93 Internet cafés in three locations (i.e. Yogyakarta, Surabaya, and Lombok), the author finds that favorable location of business is positively related to business success. More specifically, a regression analysis reveals that availability of utilities, proximity to schools/universities and security affect business success in a positive direction, while proximity to highways, being in commercial center affect in a negative direction. The independent variables explain 23 percent of total variance.

Tax Policy, Location Choices, and Market Structure

Abstract A structural model of entry and fiscal policy is presented. It shows that taxation of variable production costs can increase product prices, lower competition, and reduce the availability of new products in small markets. The model’s test is based on a unique nationwide fiscal experiment. We study the effects of the 1869 Stamped Paper Tax Reform Act on the market for daily newspapers in the Netherlands. The econometric analysis uses data on when and where the newspapers existed and were introduced together with demographic census data from 1859 and 1869. The results confirm the model’s predictions and show how taxation affects strategic business location decisions.

Tax Policy, Location Choices, and Market Structure

A structural model of entry and fiscal policy is presented. It shows that taxation of variable production costs can increase product prices, lower competition, and reduce the availability of new products in small markets. The model's test is based on a unique nationwide fiscal experiment. We study the effects of the 1869 stamped paper tax reform act on the market for daily newspapers in the Netherlands. The econometric analysis uses data on when and where the newspapers existed and were introduced together with demographic census data from 1859 and 1869. The results confirm the model's predictions and show how taxation affects strategic business location decisions.

Bidding for Business: New Evidence on the Effect of Locally Offered Economic Development Incentives in a Metropolitan Area

The use of local economic development incentives within a metropolitan area has undergone less analysis than incentives that attempt to alter interregional business location decisions. This is unfortunate because other factors that influence where business resides are constant across cities in a metropolitan area, and a properly used incentive is more likely to alter a business location decision. To comment on these issues, the authors use a simultaneous equation model to conduct regression analyses of panel data from 112 cities in the Detroit metropolitan area. They find that only certain forms of local incentives, at certain times, exert the expected positive influence on the local value of commercial and manufacturing property. The findings are tied to issues related to the redistribution of economic activity from the core to the periphery in U.S. metropolitan areas, and the authors conclude with policy suggestions on the future use of local incentives.

The Effects of Tax Increment Financing on Economic Development

Local governments attempt to influence business location decisions and economic development through use of the property tax. Tax increment financing (TIF) earmarks property tax revenues that result from growth in assessed valuation. The TIF revenues are to be used for economic development projects but may also be diverted for other purposes. Using data for the Chicago metropolitan area that includes information on property value growth before and after TIF adoption, we find evidence that cities that adopt TIF grow more slowly than those that do not. We test for and reject sample selection bias as an explanation of this finding.

The Role of Quality of Life in Business (Re)Location Decisions

Key decision-makers from 174 businesses that had relocated, expanded, or been launched in Colorado within the most recent 5-year period were surveyed to identify the role of quality-of-life (QOL) elements in their decision. A comprehensive set of elements considered by businesses in location decisions was developed, and their relative importance was assessed by the sample. Five domains of elements were derived. The set of QOL elements consistently ranked in importance behind labor and cost issues and daily living concerns. QOL was most important to companies that moved into Colorado from outside the state, had fewer than eight employees, were relatively footloose, employed a high proportion of professionals, who perceived ability to attract and retain professional personnel as being a primary concern, and whose ultimate decision-maker relocated with the company.

Underlying dimensions of business location decisions

Most previous studies dealing with business site selection decisions have been theoretical and mainly concerned with cost factors. There are many variables other than cost, some of which are qualitative and intangible in nature. This study attempts to provide empirical evidence on the importance of cost and other location‐related variables. The 84 fastest‐growing businesses in New England and New York were surveyed utilizing 27 variables associated with location decisions. Most of the 27 variables are industry‐specific and their importance varies from industry to industry. Factor analysis, using principal component extraction method and varimax rotation showed that there are six underlying dimensions considered in business site selection decisions. Cities and towns can benefit from utilizing the findings of this type of research in attracting new businesses and preventing the existing businesses from leaving for other locations.