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Business investment location decisions

There are a number of location issues businesses consider


The location decision process for a business with an investment project usually involves a calculus of different requirements and more specific issues for consideration. There is a general set of investment location evaluation issues. These tend to be considered by most business investors during the course of deciding on what might constitute the best location for their investment project. At the fundamental level, one constant requirement businesses consider is political and economic stability. This relates to the extent to which a location is stable at a country level. Businesses also look for open, coherent and transparent economic, industry and investment policies. In combination, these provide an operating environment in which the investor can make long-term planning and investment decisions. Beyond these, the following table sets out the common requirements and associated evaluation issues that businesses use to assess locations as viable locations. The requirements and issues are set out in broad order of importance. Typical business location requirements and issues
Location requirements Market Main location evaluation issues Size, nature and purchasing capacity of demand at the location and the surrounding economic hinterland the market. Openness to trade and investment. Existence of clusters of foreign investors or activity. Availability, quality and cost of communications and transport infrastructure (road, rail, port, air) - supports accessibility to market. Availability, quality, flexibility and cost of labour. Availability and quality of education and training facilities includes willingness of institutions to provide tailored education and training packages. Issues of productivity, turnover and militancy/industrial relations can be second order considerations. Availability, quality and cost of basic utilities (electricity, gas, water, waste management, etc.). Location, range, availability and quality of land and/or property. Property costs and contractual conditions. Nature, availability and quality of property catalyst projects. Availability, quality and cost of suppliers for critical resource inputs. Level of corporate taxation. Availability and nature of specific grants, low-interest loans, tax breaks or other offsets. Availability and quality of the physical and social facilities and their attractiveness - especially for expatriate staff and staff recruitment. Cost of living - including housing and schooling.

Communications and transportation Labour issues

Operating infrastructure Property

Supplier access Taxation and incentives

Environment and quality of life factors

Source: ILSA Consulting based on a combination of literature review, evaluations of investment location decisions, and previous case experience.

ILSA Consulting Limited 2006-2012

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The specific composition and weighting businesses attach to these location requirements and evaluation issues for potential investment projects vary, depending on a range of factors including: Experience of locating investment projects. Business type size structure, culture, experience etc. Industry/sector characteristics. Stage in the investment decision process.

Businesses follow a multi-stage Location decision process


The following diagram illustrates the typical decision process businesses go through in deciding on an investment location. It shows the process from the initial decision to invest to the long-listing of countries for consideration, through to the selection of the final location for the proposed investment. Typical investment location decision process
(Re)investment drivers Business strategy Global and sector trends Competitor moves Customer demand
Investment decision Business model Project characteristics Risk/return requirements

Decision/outcome point

Critical location issues considered


Perceptions and previous experiences Stability political, economic Market size, access Overall awareness/attractiveness/competitiveness

Business information needs

1 Country long-list (8-12 location options)

Key dimensions Availability Cost Quality Time

2 Country short-list (5-10 location options)

Market size, access (Foreign) investment track record at location Communications, labour, operating infrastructure quality/availability
Communications, labour, operating infrastructure availability/quality Taxation tax rates Suppliers availability

3 Short-list (3 location options)

4 In country location (3 location options)

Property availability/costs/quality Communications, labour availability/costs/quality Operating infrastructure availability/costs/quality Location IPI/government support
Incentives type/availability/benefit Property specific availability/costs/terms Environment and quality of life Project start and operation requirements Location IPI/government support

Location characteristics Market Communications and transportation Labour issues Operating infrastructure Property Supplier access Taxation and incentives Environment/quality of life

5 Final location decision (single location with site options)

6 Implementation (specific site within location)

Project start and operation requirements Property acquisition, (re)development Labour recruitment, training Location IPI/government support

Location compliance and legislative protection Entry Start-up Operations Exit

Source: ILSA Consulting based on a combination of literature review, evaluations of investment location decisions, and previous case experience.

The process highlights the role of different drivers in the (re)investment decision. Commercial requirements (a combination of strategy and risk, rate of return and profitability imperatives) drive businesses internal resource allocation decisions (i.e. the type and scale of investment and its location).

ILSA Consulting Limited 2006-2012

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At the start of the decision process businesses usually pre-select a long-list of no more than 8 to 12 location options. Often this reflects their previous location decisions and those of key competitors and suppliers. At each decision point, businesses consider a range of particular evaluation issues and associated issues. They gather information against these issues and assess location alternatives accordingly. The further a business is in its decision process, the more critical to the decision particular location issues become. Businesses disqualify locations that do not meet their evaluation issues. Each decision point effectively acts as a location filter so that for: The early stages of the decision process, businesses focus on assessing the relative attractiveness/competitiveness of a location in meeting their investment requirements. The later stages, particular sites capabilities in meeting investment requirements assume greater importance. The final stages, businesses concentrate more on understanding the compliance and legislative protection requirements and issues for the start-up, entry, operations and exit. The process also emphasises the critical role of information in reducing uncertainty and managing risk through the decision process itself.

Some implications for promoting locations


These location evaluation issues and associated decision process have important implications for locations in influencing business choice for potential investment projects. They suggest locations need to: Understand as much about the investment decision as the business making the decision. Support businesses investors through the whole location decision from beginning to end. Provide businesses with a clear value proposition about the host location, adapted and tailored to each stage in the process.

For further support please contact: Sean Duggan Director, ILSA Consulting Limited

: +44 757 657 4733 : sean@ilsa.co.uk : http://ilsa.co.uk/

ILSA Consulting Limited 2006-2012

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