How do companies decide where to locate?

Business

December 15, 2012

How do companies decide where to locate?

By Dr. Scott Alsobrooks, PRCC The Picayune Item Picayune Item Sat Dec 15, 2012, 08:00 AM CST

PICAYUNE — As the economy improves and industries begin to invest in new facilities (or relocate existing facilities), it is interesting to look at the factors that influence the decision makers that decide where to spend the money and create the jobs. Site selection factors are aplenty. Luckily, “Area Development Online” conducts an annual survey of corporations to determine those top factors. Studying these factors can help local economic developers and policy makers decide where to invest a community's resources. The entire report and all statistics can be found at this link http://www.areadevelopment.com/AnnualReports/ Winter2012/26th-Corporate-Executive-RE-survey-results-287123.shtml?Page=1.

According to the “Area Development Online” research, 60% of the new facilities planned to be located, or relocated, will be manufacturing or distribution operations. About 80% of these new facilities will hire 100 workers or less, with construction costs to be less than $50 million. The location of these facilities offers up no surprises as more than 90 percent of the respondents rated highway access as the most important factor as to where to locate. Most products in this country are shipped via tractor trailer at some point in the product's life cycle. However, some facilities do find it necessary to locate on a rail line, water way or airport.

The second most important factor that sways decision makers is the cost of labor. This leads right into the third most important factor for this query which is the skill levels of the labor pool. Not only do these plants want to pay a rate that will lead to high profits, but these employers desire workers that have verifiable labor skills. Unfortunately, even during this historical period of high unemployment, the employers indicate that the skill level of the workforce is not at desired levels in the areas of basic skills. The survey respondents seek a workforce that has good basic reading and math skills.

The fourth factor for those seeking to locate a facility is the corporate tax rate of the state and/or local area. Taxes can prove to be quite an expense for those seeking to earn a profit on a product or service. Areas that charge high rates to businesses often drive some to relocate to other parts of the nation. Many business have exited states such as California due to the tax expenses forced on to corporations.

The next level of factors included occupancy or construction costs. This would include the costs associated with actually building, purchasing or renting a facility. However the sixth factor on this survey list, state and local incentives, often offset some costs such as low interest loans made available by states or municipalities sometimes through the issuance of bonds. As a note of warning, there have been occurrences when these loans have soured at the expense of the bondholder; which in turn damages the credit rating of the state or municipality.

The seventh factor that catches the attention of the decision makers is energy costs. The cost of electricity, natural gas and other energy sources can vary around the United States. For facilities that consume vast amounts of energy, this can be the issue that tips the scale. Some areas of the U.S. might not have the volume of natural gas necessary, forcing the location of the facility near a pipeline.

Some states and local areas offer tax exemptions, or reduced rates, for property taxes. This can prove to be especially important for facilities that are very large, as property taxes are usually assessed by the square foot of the facility. Areas that do offer these incentives, typically only do so for defined periods, thus allowing the tax collector to eventually draw taxes from the facility.

Location to the market served is the ninth factor. Some manufacturers prefer to be close to their customers. This offers up some definite competitive advantages during droughts, hurricanes and even warfare. Local and national media outlets have done many stories as of late telling the stories of shipping woes on the Mississippi River. The extreme drought prevents some ships and barges from even moving up and down the river. Those that can avoid this mode of moving materials owns a competitive advantage over those that have to use the mighty Mississippi for transportation.

Rounding out the top ten included the existence of organized labor. Companies indicate a desire to locate in right to work states and/or those with very low union presence. This could indicate why the southeastern United States has been very successful in gaining many automotive manufacturing facilities in recent years. In general, many southeastern states are right to work states and have low levels of organized labor compared to traditional automotive manufacturing areas such as the mid-western states.

Interestingly, community factors are not ranked together with the primary site selection factors. However, quality of life issues in communities are important to site selectors. Low crime rate was the most important, while public school rankings showed a large increase versus prior year survey rankings.

While I am a bit biased, it is my opinion that Pearl River County, as well as our neighboring counties have many, if not most, of these top ten factors working in favorably. Let's hope that as we rise from this recession that these factors help draw new jobs and prosperity to South Mississippi.

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