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Glossary – Terms related to the topic Location Analysis

An important question when choosing a business location refers to the availability and prices of building areas and properties. Requirements of companies regarding this location factor can be quite different. For manufacturing industries it is often important to have a high availability of land and low commercial land prices. These companies often consider sufficient expandability in their location analysis. In contrast, many start-ups in the creative industries prefer representative locations in city centres for their office space and observe consciously higher rental prices.

In general, prices for commercial property and office space are formed in accordance with the market economy principle of ‘supply and demand’. Therefore, prices in large cities are usually considerably higher than in rural areas. While the availability of industrial properties is often exhausted in large cities, municipalities aside these metropolises usually have a greater amount of commercial land available.

In contrast to soft location factors hard location factors constitute quantifiable data about a city or municipality which is reflected in the company’s expenses. Due to their measurability they can directly be involved into location analysis. Hard location factors are of great importance regarding inclusion or continuation of a company’s operating activity, as they determine the economic capacity and sustainability of business locations.
Hard location factors can be systematised according to procurement, sales and production-related factors. The most important hard location factors include:

Finally, the choice of the most essential location factors for a company depends on a variety of determinants, such as industry, intention of project, requirements and needs. Every company has to face this question individually and in advance. In any case, a business location should at least fulfil the essential criteria which are specifically relevant for a company. 

The hard location factor infrastructure can be assigned to the procurement and sales-related location factors. It often provides companies an important criterion for their location analysis. Municipalities spend a great amount of the available budget for maintenance and expansion of infrastructure and thereby for promoting their business location. Depending on a company's business activity the demands on transport infrastructure differ. Demands generally focus on following aspects:

  • Motorway access
  • Proximity to railway stations
  • Proximity to airports
  • Proximity to waterways

Transport infrastructure also affects other factors such as purchase and sales costs of goods or the ability to acquire labour from the environs. In addition to transport infrastructure the information and communication infrastructure nowadays is increasingly considered during location decisions. At this juncture the focus is basically on the level of broadband rollout, because fast internet connection gains more and more essential for economic transactions of companies. Thereby it is not about sending e-mails but about the use of internet-based technologies such as cloud computing. With an existing broadband coverage municipalities are able to increase the attractiveness of their business location particularly with regard to technology-oriented companies which finally means a locational advantage. 

For most site-seeking companies the location factor qualification of labour is an important part of their location decision. The company’s requirements as regards to the qualification of its employees may vary depending on the industry. Thus, for example, firms in high-tech industry generally have higher demand for skilled workers than labour-intensive industries whose staff often and for the most part consists of unskilled workers. Furthermore, in the context of location extension requirements on labour depend on the intended tasks for the location. While a new logistics centre is able to operate with a high proportion of low-skilled employees, a new research and development centre requires mostly highly-qualified personnel. As a measure of labour skills of a business location the percentage distribution of educational attainment is often used: academic education, vocational education and without education.

The qualification of labour is closely related to the location factor labour costs. Thus, the labour costs for highly-skilled workers are higher than for low-skilled workers.

The location factor labour costs includes all personnel costs that results from human effort, as by workers in a company, and belong to the production-related factors. In addition to salary costs this location factor also contains statutory and voluntary payments such as holiday pay, social insurance contribution etc. Labour costs in metropolitan areas are often higher than in outlying regions. The level of labour costs in the manufacturing sector often differs from the labour cost amount of the service sector. Therefore, the location factor labour costs is distinguished into these two sectors and reported separately.

The level of labour costs provides companies an important factor when choosing a suitable business location. It is often crucial in the scope of a location analysis.

The business tax is the primary source of revenue of municipalities. It is a tax raised only in Germany and doesn’t exist in any other country in a comparable form. The business tax is imposed by municipalities due to cost causation of local companies. Therefore, it is intended as a refunding for infrastructure and other burdens that arise from local companies. All business enterprises that are recorded by the income tax law are obligated to pay the tax. Freelancer and other non-commercial activities are exempt from business tax. The assessment basis is the business income of a company. Based on the business income the finance office determines the so-called base amount of business tax, which results from the multiplication of business income and the uniform tax rate of 3.5 percent. Depending on the company, exemptions, reductions or additions can be charged against the business income. The base amount of business tax is multiplied with the business tax rate, which is determined individually by each municipality. The result shows the business tax a company has to pay.
As part of their location policy municipalities can individually determine the business tax rate. In general, a low business tax rate can be seen as an advantage for a business location while a high rate is disadvantageous. For companies, especially large corporations, it is important to consider the business tax rate during location analysis, as it is one of the most dominant corporate taxes. The importance of business tax rate, for both municipalities in the context of economic development as well as companies during the location decision, can be illustrated by the following case:

In the course of a corporate tax reform in 2008 which brought a change of business tax along, the German company Deutsche Börse AG moved its headquarters and most of its employees from Frankfurt to the nearby Eschborn to save tax. At that time Frankfurt imposed a business tax rate of 460 percent while Eschborn imposed only 280 percent.

Other than land tax, which is subjected to slight variations due to its nature, the business tax is a volatile source of finance for municipalities. Depending on business fluctuations companies generate different incomes, which are ultimately reflected in the municipal revenues from business tax.

Land tax is levied on the ownership of land and its building, and is charged by the municipality in which the property is located. Basis for the assessment of land tax is

  • the land’s standard value (depending on the land type, age and the facilities in each building), which is determined by the finance office,
  • the land tax rate, which compiles for instance with population, new building/old building and federal state,
  • and the individual collection rate of the single municipalities.

Despite having the same standard values and land tax rates in different municipalities the level of land tax differs because of the individual collection rates of municipalities. A general distinction is land tax A (agrarian) for land of agriculture and forestry, and land tax B (construction) for developed or developable land and buildings.
In the context of a location analysis the importance of the criterion land tax B depends on the entrepreneurial project and intentions. Especially for large-scale production and storage facilities, the location factor land tax is crucial. For municipalities the land tax collection rate is an instrument to promote economic development. While urban areas often quote high collection rates, municipalities in rural areas often allure start-ups and other companies with comparably low collection rates.

The land tax earnings are reliable sources of income for municipalities, since the standard value of land changes only slightly. In contrast to business tax it is not submitted to business fluctuations.

The location factor local industry gaining its importance in the context of location analysis especially with regard to the geographical proximity to suppliers and customers. In some industries, proximity to suppliers constitutes a crucial criterion for the choice of location. Particularly in the field of automotive and mechanical engineering subcontractors often settle down near to manufacturing companies (OEM – Original Equipment Manufacturer) – not least because of the requirements of the OEM. The concept of just-in-time delivery, for instance, is based on the proximity between suppliers and manufacturing companies, as geographical proximity significantly reduces the risk of delayed delivery. In addition, the local industries are also important for the location choice of subcontractors. Whether a potential subcontractor is recognized in the market, often depends on a strategic proximity to potential customers.

Location analysis is typically executed when setting up a business, in the context of location expansions or relocations. It is the attempt to identify the most appropriate business location for the planned project based on individual corporate requirements. Due to the high complexity and long-term impact, location decisions are not only one of the most important but also one of the most difficult business challenges. Therefore, a careful location analysis is of crucial importance.

The realisation of a location analysis is generally operated by the use of so-called scoring models. Traditional approaches of scoring models can be distinguished between profile method and utility analysis. The profile method starts with a listing of relevant location factors for the intended project. Then, profiles are created for each potential business locations assessing identified location factors in terms of their characteristics. The location with the highest total score results as the most appropriate one. In addition to the assessment, the utility analysis includes a weighting of location factors in terms of their importance for the company. Assessment and weighting then are summarised in so-called part-worth utilities. The business location with the highest part-worth utility is the most appropriate site.

These traditional approaches of location analysis involve a major drawback. The selection of potential business locations is mostly based on experience or selective analyses. A consideration of all potential business locations does not apply. Besides, provider of location analysis software programs create their analysis usually only for locations that are demanded by the client. The problem is that companies usually don’t know for which location they should buy an expensive location analysis. In fact, the difficulty and actual effort of a location analysis rely on the consolidation of data and the comparison of location factors across different business locations. At this point the location analysis of My Business Location comes into play. This location analysis provides the possibility to filter, sort and compare registered business locations according to your most relevant location factors, leading to the most appropriate business location for your individual project.

Location factors are the totality of all relevant characteristics of a business location, which may influence the location decision of companies. The different characteristics of location factors lead to different location qualities, which in turn affects the attractiveness of a location. Though there are significant differences in the assessment of each location factor’s importance depending on the company (industry and segment-specific differences).
 
There is a distinction of hard location factors and soft location factors. Hard location factors are quantifiable and can be included directly in the location analysis. In contrast, soft location factors relate to non-measurable aspects such as the economic climate or quality of life. As a part of their economic development municipalities, regions and other institutions are keen to positively influence their own location factors to generate employment growth, more tax revenue earnings and attractiveness of their business location by the settlement of companies.

The quality or rather attractiveness of business locations affect companies’ location choice. The higher the quality of a location, the more attractive it is for businesses. The perceived location quality varies depending on the individual perspective, as it is highly dependent on the requirements of each company. Therefore, a general measurement of a location’s quality is not possible.

A location selection or location decision is made by a company after a previously conducted location analysis with regard to the new establishment of a company, a corporate expansion or corporate relocation. In terms of a company’s economic success, choosing an appropriate business location is essential and contemporaneously a major challenge. Within the economical development of a company and due to its long-term impact the location decision becomes a particularly important role. A professional location decision is based on a sophisticated analysis that takes all relevant locational requirements into account. The location analysis of My Business Location provides an intelligent search system platform where appropriate business locations can be found.

Procurement-related location factors belong to hard location factors and are also called input-related factors. They include factors that are associated with all necessary procurements regarding the output preparation such as:

Production-related location factors belong to the category of hard factors and include aspects that influence the production process of the performed services. They contain for example:

The proximity to public and private research organisations can be an important criterion for business locations, for instance, when companies look for cooperation regarding their own research and development. The establishment of universities, scientific institutions and researching companies contribute to the image of a business location. Thereby the direction of research can concentrate on specific areas and subjects and thus promote the settlement of certain economic sectors (e.g. Heidelberg as a scientific centre for medicine).

In the context of location analysis the location factor retail purchasing power is a sales-related criterion. Retail purchasing power describes the income per person that is available for arbitrary consumption in retail. It results from the regular income, loans and other earnings less all expenses for rents, mortgage interest, insurance, automotive, travelling and further services. The location factor retail purchasing power thus reflects the potential of demands of a region or municipality for retail and postal shopping. Therefore it represents a substantial factor for these sectors when choosing a business location (e.g. opening a new store). In addition, the range of goods for different regions is often based on the respective retail purchasing power.

Retail purchasing power is regularly elevated by GfK GeoMarketing on a local level. On My Business Location the value for retail purchasing power is stated in euro per person and year.

Sales-related location factors belong to hard location factors and are also known as output-related factors. They cover relevant factors in terms of selling the created output and thus increase the sales potential of a company. Especially in the context of location extensions in retail (e.g. branches) factors such as the existing potential purchasing power, the number of sales contacts (e.g. city centre locations) or the competitive situation are used. Also for component supplier of certain industries which practice just-in-time control (e.g. automotive industry), sales orientation is an important location factor. The physical proximity to customers reduces the risk of a delay in delivery. Examples of sales-related location factors are:

Soft location factors are ineligible for measuring and can be evaluated only subjectively. Hence, they don’t occur in the cost account of a company. Anyhow, they are of great importance within location decisions as they complement a business location’s hard location factors with further important aspects. On the one hand, soft location factors are based on people’s general perception of their life and work and mainly relate to the well-being and quality of life. They can have a significant impact on the hard location factor labour by influencing the recruitment of skilled workers positively or negatively. On the other hand, soft location factors also refer to the cooperation of a company with the business location’s public authorities.

Soft location factors are divided into two types:

Business-related factors that are especially important for a company's competitiveness, such as:

  • Image of the location
  • Education offers
  • Economic climate (processing time of public authorities, political orientation of regions, countries, etc.)
  • Competence of business associations (quality of offered services, etc.)
  • Existing industry contacts of the location
  • Innovative environment (networking and exchange of information between companies and educational institutions)

Personal factors that are important for the employees’ quality of life, such as:

  • Cultural and recreational offers
  • Leisure opportunities
  • Quality of habitation and living environment
  • Quality of educational and training institutions
  • Environmental friendliness
  • Represented values of society and social arrangement

In Germany subsidies for start-ups and investments occur at regional, national and EU level. Municipalities are not allowed to promote the industrial economy by monetary subsidies due to EU law which intends to work against potential distortions of competition. Exceptions must be approved by the EU and are usually granted to rural and structurally weak regions. Prosperous regions are generally excluded from these exemptions. Meanwhile, there are a number of subsidies offered by the federal states, the federation and the EU. They are collected in the Subsidies Database of the Federal Ministry of Economy and Energy. Depending on the respective purpose, relevant subsidies can be identified in the database.

As part of the promotion of economic development municipalities often offer qualified and individual counselling interviews for entrepreneurs and investors, whereat usually use is made of subsidies of the EU, federal state and federation. Depending on the economic region and thereby also municipality, companies can make demands on certain subsidies.

The unemployment rate puts the registered unemployed in relation to employee and shows the part of the population without employment. It can be understood as the relative under-utilisation of the labour supply. As a general rule: The stronger the economic situation of a business location the lower the unemployment rate.
The location factor unemployment rate refers to the labour market of a business location. Depending on the point of view it can be assigned to production or sales-related location factors. On the one hand a high unemployment rate can be an indication of insufficient skilled workers on the job market. On the other hand a high unemployment rate indicates a low purchasing power of the population. In addition, there is a correlation between the unemployment rate and the labour costs: The higher the unemployment rate the smaller usually the labour costs. As all location factors the unemployment rate should be interpreted in the context of a location analysis while taking other factors into account.