Tangible Locational Factors
Tangible locational factors are mostly "hard" criteria which can often be quantified. The relevant locational factors are the following:
Location in relation to markets for purchases and sales
The main criterion a company will use when evaluating a possible location for an investment or an expansion is the location. Firms want to be close to their customers and their suppliers in order to minimize transport cost. Accordingly, proximity is a key criterion.
Geographical location is a criterion which can hardly be influenced by a given region or city. However, it can be compensated by favorable factors with respect to other criteria. It is not rare to observe that geographically attractive locations squander this advantage by failing to create favorable overall conditions for private sector activitiy. It is also not rare to observe that what would first appear as an unfavorable location manages to compensate its geographical disadvantage by creating other favorable factors; in Europe, examples such as Ireland and Scotland come to mind.
Transport infrastructure (roads, rail, water, air)
Regarding the transport infrastructure, the main message seems to be obvious: The better your infrastructure, the more favorable your location. However, things are not as simple as this. Creating and maintaining a physical infrastructure is a costly exercise, and there is thus a trade-off – to build a good infrastructure a place needs a lot of money, and to have a lot of money means to have high taxes, which again reduce the locational attractiveness.
A second important point is that having an infrastructure is one point, but having an efficient infrastructure is something quite different. Congested roads are of little help. Congested, slow and costly ports and airports are no locational attractions, either. Managing the infrastructure in a way which creates a locational advantage is a big challenge, and it requires constant benchmarking with competing locations to find necessities and options for improvement.
A third important point is the observation that, in particular in more advanced developing countries and in industrialized countries, infrastructure is ever less a distinctive feature. Economic promotion officials in such regions tend to underestimate this aspect. In order to assess not only the quality, but also the relevance of the infrastructure as a competitive advantage it is crucial to analyze the own location vis-à-vis neighboring ones.
Communication infrastructure
As electronic data interchange between companies and e-commerce between companies as well as between companies and consumers become increasingly important, the relevance of the communication infrastructure in increasing. Long gone are the days when the availability of phone lines as such was sufficient; locations where this is still a difficult challenge are at a massive disadvantage. Competitive locations display today a variety of, mostly privately-owned, providers of value-added communication services.
Labor (cost, quantity, quality)
The relative cost of labor is a crucial criterion when evaluating the relative attractiveness of a given location. What is crucial here is not the cost as such, but the relative cost in two respects.
First, there is the issue of labor productivity. It is not rare to find locations where wages are close to zero, but where the skills, the trainability and the discipline of workers are so low that the relative cost is still to high to be competitive. Thus, apart from analyzing wage levels it is crucial to analyze productivity levels as well. For a location, this means that it may create a strong locational advantage by providing an alert, skilled and trainable workforce.
Second, there is the issue of availability of workers. This is particularly relevant for external investors. For them, average wage levels are irrelevant. When they set up a new factory and need to attract workers, they have to pay more than the average wage, especially in those fields where skilled people are scarce and may have to be lured away from other companies.
Availability and cost of real estate
The availability of real estate can be either a very relevant or a very irrelevant criterion. In weak, unattractive locations real estate is easily availabe, but this does not create any advantage. In highly dynamic, attractive locations, real estate is usually scarce and expensive. In such places, unavailability of real estate may create severe limits to growth. It is a key task of public sector to anticipate and manage this issue.
In more mature industrial locations, what often becomes an issue is conversion of abandoned industrial estates, which are often contaminated. Cleaning up such estates is often a very expensive undertaking. It is not rare that the former owner is incapable of covering this expenditure, for instance if is was a company which has gone bankrupt. The public sector will often find itself in a position where it must cover the cost of rehabilitation of estates. Experience from industrialized countries shows that it can make sense to create a dedicated utility for this purpose, which accumulates experience and thus reduces learning cost. Such utilities may also be linked with dedicated, possibly revolving funds to finance the acquisition of old estates, cover the cost of rehabilitation and sell the estate.
Environmental regulation
Extensive research has shown that environmental regulation has hardly any effect on transborder investment. The hypothesis that companies are relocating polluting industries from densely regulated industrialized countries to other locations has never been verified.
However, environmental regulation becomes a crucial criterion when it comes to micro-decisions, i.e. the choice between neighboring locations. It is not rare to find that regulations vary from one city to the next.
A key issue in this context is the management of environmental regulations. What is creating obstacles to investment is not necessarily the existence of environmental regulation but rather the level of red tape and predictability in their application. When permit requirements are complex and intransparent, and permit periods are unpredictable, and even the outcome of a permit process is unpredictable, then a company will tend to choose a more efficient location.
Energy and environmental costs
There is a whole set of energy- and environmental-related costs, including the cost of water. Companies have high, and often extremely high requirements in terms of energy and water inputs. Their price may become a crucial point in the evaluation of alternative locations.
Moreover, companies tend to have a certain set of non-product output, i.e. solid waste, waste water, and gaseous emissions. The cost of waste disposal and wastewater treatment may also establish an important differential between locations.
Local taxes and subsidies
Local taxes often vary between cities, and cities often try to attract or keep companies by offering them special tax treatment. This issue is closely related to the overall issue of subsidies and incentives
Instruments to strengthen tangible factors
Real estate information systems
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