Location of Factories as a Decision Making Process

1. Location of Factories as a Decision Making Process Anna Dachowska Vase Atanasoska Wirtschaftsuniversität Wien 29.04.2009

2. Contest • I. FIRMS AS INFORMATION PROCESSORS • concepts of behavioural location theory • - environment • - decision makers • - firm-environment relations • II. STAGES IN THE LOCATIONAL DECISION MAKING PROCESS • review of the literature which has analyzed locational choice in terms of decision making process • III. THE LOCATIONAL PREFERENCES OF FOREIGN FIRMS • the behavioural underpinnings of the locational preferences of small and large firms • the behavioural interpretation of industrial location policy

3. BEHAVIOURAL APPROACH • Factory location is expressed in terms of the preferences ofdecision makers. • Is more'realistic' than neoclassical theory, as in real world choices are based on limited and uncertain information. What rationalefor detailed analysis of industrial location are pointed by behaviouralists? • 1. The spatial margins of profitability are extremelywide so that factories can potentially invest in a large number of viable locations. • the decline in the importance of transportation andcommunication costs • the widespread investment in basis infrastructure • wide rangingpossibilities for locational adjustment • Decision-makers have legitimate choices that are not economicallypre-ordained and • only crudely limited by economic constraints. • 2. Sources of information for: • regional planning agencies seeking to attract industrial investment • firms seeking guidelines for their own decisions Location of Factories as a Decision Making Process Location of Factories as a Decision Making Process 3

4. LOCATION DECISIONS AND INFORMATION Locational choice: part of a strategic or long term investment decision which is complex,uncertain, inherently subjective Decisionmakers: - search for and evaluate information - have limited rationality - their personal abilities and perceptions shape judgments - they experience, ability to learn and mental maps influence locational choices Goal – to meet economically viable aspiration level Location of Factories as a Decision Making Process Location of Factories as a Decision Making Process 4

5. Characteristics of information: • - imperfect • limited • the value in the future is hard to predict • How do firms act? • set goals, identify criteria • accumulateinformation in a variety of ways • - consider a limited number of choices • make decisions in response to unexpected situations • make decisions within limited time frames • solve problems sequentially • chose the first solution which is satisfactory • rely on subjective judgments • base on limited rational, personalabilities and perceptions Location of Factories as a Decision Making Process Location of Factories as a Decision Making Process 5

6. MENTAL MAP A person's perception of the world is known as a mental map. A mental map is an individual's own internal map of their known world. It is strongly influencedby: - the place of living - cultural group - socio-economic status - mass media - education - age, experience • Conclusions: • - how decision makers view the world is spatially limited and biased • the mental maps of corporate decisionmakers influence location desicions • - location decisions ought to be understood in terms of information search • and learning strategies • the experience ofdecision makers is particularly important Location of Factories as a Decision Making Process Location of Factories as a Decision Making Process 6

7. FIRMS AS INFORMATION PROCESSORS flow of information the environment source of information the firm information processor objective environment - the total sum of information in the economy (global or regional) behavioural environment- the area wherethe firm receives and sends information and signals • operating locations and associatedcommunities • business connections with suppliers, consumers and governments, that depend on length, frequency and type of contact Location of Factories as a Decision Making Process Location of Factories as a Decision Making Process 7

8. Information flow behavioral environment information communication channels characteristics of decision makers decision structure policy of the company perception, coding and evaluation information firm • age, experience, education, • aspiration levels • - location, cultural • - group affiliation, • - socioeconomic status Location of Factories as a Decision Making Process Location of Factories as a Decision Making Process 8

9. Behavioural matrix • The locational choices made by firms reflect an interplaybetween factors influencing • the availability of information to firmsbehavioural environment • the ability to use information by firmscompetence of decision makers personal and group characteristics • Conclusions: • - Firms with high abilities and information levels can be expected to locate within spatial margins of profitability, closer to the optimum. • - Firms with poor abilities and information levels may beexpected to lie near the spatial margin of profitability, or even beyond it and fail. • - Due to uncertainty unexpected circumstancesunexpected outcomes can occur. Location of Factories as a Decision Making Process Location of Factories as a Decision Making Process 9

10. Behavioural environment in respect of size of the company • giant multinational firms: • geographically moreextensive • more bureaucratic - the coding, filtering and deliberation of information isconducted withintheframework of group decision making and subject to corporate rules,procedures and culture • - communication channels within the firm are problematical (explicit corporate policies is needed) • small firms: • information channels aretypically more highly personalized around one or two key decision makers • - informal contact is essential Location of Factories as a Decision Making Process Location of Factories as a Decision Making Process 10

11. THE UNCERTAINTY OF LOCATION DECISIONS • Uncertainty: • is inseparable to strategic decision making andhas an important impact on behaviour and the outcomes of behaviour • means that investments can fail before they generate a return or earn a profit or pay back the investment • - raisesthe possibility of unexpected outcomes • Roots of uncertainty: • - imperfect learning and information • the future cannot be known precisely • Results of uncertainty: • investments can fail before they generate a return or earn aprofit or pay back the investment Location of Factories as a Decision Making Process Location of Factories as a Decision Making Process 11

12. Knowledgegap - the difference betweenwhat a decision maker knows at the beginning comparedto what the decision maker needs to knowand can be learnt during the decision makingprocess in order to make aninformed decision - the extent of knowledge gaps depends on how different a new decision problem is from previous decisions encountered by the firm - uncertainty in case arises due to a failure to close knowledge gaps • Reasons: • - no ability to define the knowledge gap precisely • - a lack of resources • - a willingness to accept uncertainty • - incompetence Location of Factories as a Decision Making Process Location of Factories as a Decision Making Process 12

13. True uncertainty - decisions to commit resources must make assumptions about economic conditions in the future - several years may elapse from the decision about an investment to finally constructed and operating plant • The viability of new projects is affected by: • - changes in technology • - government policy • - regional stability • Result: • - firms making investment decisions incur significant costs whichare certain while potential revenues await an uncertain future Location of Factories as a Decision Making Process Location of Factories as a Decision Making Process 13

14. LEARNING AND DECISION MAKING EXPERIENCE • Whyability of learning and the past experience of decision makers is so important? • more experienced, betterinformed decision makers make more economically viable location choices and are lesslikely to make mistakes • - investing in unfamiliar geographic region, where do not exist any similar factories, from which it is possible to learn or copy, is more likely to fail • What about pioneering firms? • the flow of information is still essential – industry magazines, industrial association are used to extend knowledge about technology,marketing, supply systems, work organization and any problems connecting with a new location • Why most of the firms are not willing to locate new factories? • uncertainty is to big • - implementation of complex operating systems is a hard task Location of Factories as a Decision Making Process Location of Factories as a Decision Making Process 14

15. STAGES IN THE LOCATIONAL DECISION MAKING PROCESS New site location or investing at existing sites? For firms the question of “locational choice is an integrated part of of an investment decision-making process. Investment decision-making for new mills can be relatively lengthy, complicated process. Location of Factories as a Decision Making Process

16. Assessment of location factors Locational assessments : • are one particular perspective on wider investment planning processes; Assessment of location factors: • “soft factors”-intangible (more important), “hard factors”-tangible Townroe, Stafford, Ress, Nishioka and Krumme argue that: a proper understanding of the relative importance of location factors needs to recognize the integration of location factors within the overall investment decision-making process Location of Factories as a Decision Making Process

17. Disaggregation of decision making process • Disaggregation of decision making process into distinct processes – separate the whole process into small parts • Disaggregation based on geographic scale – selection of country, region, community, site and building . Location of Factories as a Decision Making Process

18. Location of Factories as a Decision Making Process

19. Decision making processes • The investment decision -making process comprises sets of interwoven search and evaluation processes occurring at different scales and with different objectives in mind pertaining, for example, to location, scale and technology. • Modeling the decision-making process in terms of stimuli-search-evaluation-choice is only simplification of real processes. Location of Factories as a Decision Making Process

20. The decision stimulus or trigger Why the trigger is needed ? • Firms according to Behavioral Theory are “satisfiers”, they exist and act as open systems exchanging inputs, outputs and information with their environment. • If they are satisfied with their relations with environment there is no reason for change. • Any disturbance creates “new decision situations” or problems to be solved. Location of Factories as a Decision Making Process

21. Dicken’s definition of ‘stresses’ “ Any influence whether it arises from the internal environment (within the firm) or external environment which interferes with the satisfaction of basic needs” • Internal sources of stress - changes in corporate philosophy following the arrival of a new manager - acquisition by a new owner - growing dissatisfaction with internal plant configuration - labour relations • External sources of stress - actions taken orthreatened by customers, rivals or governments, - termination of a building lease, urbanrenewal schemes - unexpected occurrences like fires and earthquakes - shifts in government monetary policysuch as a currency devaluation. Main problem with ‘stresses’: Time gap between identification of the problem or opportunity and responding by decision makers. Location of Factories as a Decision Making Process

22. The location decision as an alternative • The same market goal can be accomplished on different ways. • New site investment or expansion at existing sites? Schemenner’s survey: On -site expansion is better because of: • The ability to keep management together; • The ability to achieve economies of scale; • Capacity could be more quickly added to existing plants; • Overhead costs could be more effectively spread by expanding existing plants. But there is also some negative aspects: Materials handling, abnormal accumulation, production control etc. New site investment is preferred by firms when there is : • Lack of space • Different kinds of labour problems • Problems of existing locations Location of Factories as a Decision Making Process

23. Locational search processes • Mental maps of decision-makers are important influences on locational search processes. • The importance of the distinction between small and large firms. • Small firms, whose behavioral environments are restricted geographically, and new firms choose locations which are close to existing plants or where the owners live. Location of Factories as a Decision Making Process

24. Preferences of foreign firms • Locational decision making involves elements of judgment and processes of search and evaluation are conducted or supervised by owner-managers or senior executives and managers. • Locational search and evaluation involves time and costs which can be significant -learning costs -additional costs • There is evidence that when firms expand interregionally they frequently contemplate more than one region. • Firms identify and assess more sites than regions. Location of Factories as a Decision Making Process

25. Locational evaluation • The relative importance of location factors varies depending on scale. • For firms locational choice potentially implies several decision made at different geographic scale (choices about countries, regions, towns, communities and sites). Townroe's survey Firms were asked to identify location factors at four scales: -region -town -site -building The principal location factors at national scale are: - government regional policy - labour relations - markets - strategic communications Location of Factories as a Decision Making Process

26. Important location factors at regional scale : - labour (cost, supply, training) - access to services - local government services • Amenities • Distinctive groupings of location factors associate with the choice of site or building : - the location within the city - the physical characteristics of land - the availability of services - land prices Location of Factories as a Decision Making Process

27. Stafford’s survey about locational factors • Location factors varying in overall importance in according to national, sub national and regional scales. • Labour productivity is important at all scales while labour availability and wages rates become more influential at regional and local scales. • Importance of personal contacts at regional and local scale. • For some firms and some situations location is given at particular scales. e.g. new firmsopposite-MNCs Location of Factories as a Decision Making Process

28. Methods of locational evaluation • The methods used by firms to compare locations vary considerably. • Large firms are more likely to engage in some kind of formal, systematic analyses of locational alternatives than are small firms. • Formal, systematic analysis of locational alternatives are more likely to be conducted at community/site scales of analyses than at regional or international scale. • The firms conduct comparative cost analysis of tangible location factors and weight ranking schemes which allow incorporation of tangible as well as intangible factors. • Because of intangible nature of location factors, location evaluation can not be measured mechanically . • Firms establishlocational requirements before search and evaluation processes. • Weight ranking schemes- allow firms to measure intangible location factors at any particular scale. Location of Factories as a Decision Making Process

29. Kepner and Tregoe's method of site evaluation • “Sets of must “or minimum requirements and • “sets of wants “or desirable location features and • “ limits” should be identified by decision-makers. This method of locational analysis was used only at community and site scales in regions where firms were already established. Location of Factories as a Decision Making Process

30. Investment decision and post-locational assessment • Whether or not a project will be given a go ahead, and a precise timing of any go-ahead decision depends upon an investment analysis. • From the performance of new start up plants can be seen the quality of decision-making process. • The performance of new factories, good and bad become incorporated in firm experience and provide exemplars for others to observe and from which to learn. Location of Factories as a Decision Making Process

31. THE LOCATIONAL PREFERENCES OF FOREIGN FIRMS New and small firm -behavioral environments are strongly localized -decision-makers have limited capacity for geographic search, evaluation and accepting the uncertainty of moving beyond regions of familiarity MNC -have geographically extensive behavioral environments -participate in labyrinth of formal and informal information networks -mobility of capital -branch plant locations in foreign countries -have prior experience, more resources -theability to afford specialized, locational consultants Location of Factories as a Decision Making Process

32. The main hypothesis for the locational preferences of foreign firms • Foreign firms favour established core regions of “host” countries; • Foreign firms are more likely to invest in peripheral areas than core areas, especially when incentives are offered in the former; • Foreign firms prefer to concentrate in particular regions of the country; • The national culture is important in understanding the location preferences of foreign firms; • Foreign firms, as with other firms,may exercise the equivalent of personal preference in choosing location; • Foreign firms change locational preferences following initial entry into a country. Location of Factories as a Decision Making Process

33. Industrial locationa policy in a behavioral landscape • Is the industrial location incentives effective? and • Do they change the location preferences of entrepreneurs in favour of designated regions ? • In the behavioral landscape, industrial location incentives can serve to change locational preferences in two main ways : - serve as a signals to firms; - serve as a compensation for additional learning costs and uncertainties Incentives : subsides, tax breaks, infrastructure, information packages etc. Location of Factories as a Decision Making Process

34. Thank You For Your Attention Location of Factories as a Decision Making Process