The Location of Factories as a Decision-Making Process

1. The Location of Factories as a Decision-Making Process By Nirveen Basra & Connie Guo

2. Behaviour Approach to Decision Making • Realistic vs. Neoclassic: looking at the “real world” • Satisficers: collect, code and evaluate info • Pred, Townroe &Stafford: behavioural understanding of location as strategy, long term investment, without capabilities of Homo Economicus • Different firms with and without restrictions • Optimization, maximization and minimization as theories • Key is that reality is Uncertain • Reality: personal judgment, perception, with various decision makers

3. Satisficer Real World Decision Maker Limited Time Bound Rationality Limited Evaluations Uses Decision Making Process:Goal setting, ID, Time Frames, Decision Making Structure Homo Economicus Economic Theory of Man Self Interested, Obtains Goals Efficiently Uses available Info: Opportunities &Constraints Experience * Is rational, avoids unproductive labour and makes judgments. Comparison

4. Firm-Environment Relations in Behavioural Landscape

5. Behaviour Theory • Firms consider choices, search & evaluate alternatives, choose solution that is “Satisfactory” • Problem: reflect more individual perception vs. objection reasoning • Culture, background, social status, experience, aspiration • Spatial Preference: connection with core regions • Toronto Example • Location decision needs to be based on info and strategy • Small and Big Firms: Personalized vs. Extensive

6. The Behavioural Matrix

7. Behaviour Matrix • Availability of Info vs. Ability to Use info • Based on environment and how to deal with situations • Optimum vs. Firm with Poor Abilities • Ability to locate closer to core, spatial margins • Bad luck outcome: Unexpected Changes

8. Uncertainty • Impact on Behaviour • Better or Worse Scenarios • Imperfect Competition • Future is not predicted

9. Knowledge Gaps Knowledge Gap (Beg) What is Needed to Know Learned Knowledge from Experience • True Uncertainty • Assumptions about the future • Changes: government, tech, regional stability • Failure/Success: technology (R&D) and Marketing (Research, consumer behaviour analysis)

10. Learning • Smart Decisions from Past Experience: location conditions • Decision Makers: range of group/personal choice • Failures: Many due to Managerial Inexperience Ex. Apple Strudel Store: apple supply, labour forces, proximity to market, transportation costs, marketing, research local tastes, predict future sales in region, who makes decisions?

11. Stages in Locational Decision Making Based on the Decision Process

12. Decision Making Process • Location (Investment) involves choices: • Plant size, # of employees, finance, managers, marketing, engineering, construction • Behaviour: Soft (Intangible) is more EMPHASIZED than Hard (Tangible) • Nishioka & Krumme: disaggregation of process • ID of stimuli, evaluate, make decision, post location assessment and learning • Relation to geography, selection of communities, regions, countries

13. Decision Stimulus/Trigger • Satisficer firms are open learning systems and their market relation with other firms is governed by information exchange • Decision situations-problems to by solved • Caused by: “Stresses” any influence which comes from the internal/external environment that interferes with satisfaction of basic needs

14. Location Decision as an Alternative • Expand • Pros • Keep Management togethor • Achieve Economies of Scale with expansion • Capacity can be more quickly added • Overhead costs are more effectively spread • Cons • Increase problems to do with material handling, congestion and complexity of production control • Lack of Space and labour problems at plants support the idea of new plant locations • Expansion and New Site location are not mutuallly exlusive!

15. Location Search Process • Spatial Biases/Mental Maps influence location decisions especially for small firms who are restricted geographically choose places within close proximity • Search Process of New-Sites • Conducted/closely monitored by owner-managers, senior executives, or managers • Involves time and cost • Rees and Townroe suggest a time usually between 6 months to half a year • Consider more than one region • Ex// Krumme- Volkswagen plants • Identify more Sites than regions • Ex// Townroe sample branch plants

16. Location Evaluation • Locational Choice-several decisions made at different geographical scales (countries, regions, towns, communities and sites) • Scales vary along with the importance of location factors • Principle Factors governing Selection: • Region • Government regional policy • Labour relations-Cost, supply and training • Markets and strategic communications • Access to services, local amenities • Site • Physical Characteristics of land • Tenure Conditions • Is it a city? • Availability of services • Land Prices • Stafford study: found labour to imply different concerns at different scales • Labour productivity imp at all scale • Labour availability and wages more influential at regional/local scales

17. Methods of Locational Evaluation • Large firms-engage in formal, systematic analysis over small firms • More likely to be conducted at community/site scales over regional or international scales • MNC’s take a more international approach • Locational requirements • Weight ranking schemes-measure “soft factors” • Kepner and Tregoe: • Identify “musts”/ “min requirements” • Identify “wants”-desirable location features • Assign them weights of importance • Sites are give scores • Ex// pulp mills in BC use this process

18. Investment Decisions and Post-Locational Assessments • North America/ Britain have a history or making decisions in economic upswings-NOT RATIONAL! • Pulp Mills • Start-Ups and how the mill performs soon after measures adequacy of decision • Problems experienced serve as a learning process • Smoothness of start-up evaluates effectiveness of planning process

19. Location Preference of Foreign Firms • MNC’s responsibility of information monitoring and assesment • MNC’s typically have prior experience, resources, and financial ability • Mobility of Capital • “The World is our Oyster Hypothesis”-largest MNC’s are already global and familiar with all cultures and territories • Communication is virtually spatially costless • Promote homogenization/standardization of tastes and production and cultural differences will decline • Assumes no restrictions of national Boundaries • “Power of Geography” Thesis-nations are influential forms of organizing territory • Local culture will resist universalizing tendencies

20. Foreign Branch Plant Locations-6 Theories 1. Foreign firms favour established core regions of ‘host’ countries • Centres of communication and tranportation • Personal contacts with host countries decision makers • Highest market potential • Well-known reduces uncertainty • Easier to get investment proposals 2. Foreign firms invest in peripheral areas over core areas • Signals are offered to attract companies such as incentives and information packages

21. Foreign Branch Plant Locations-6 Theories 3. Firms prefer to concentrate in particular regions of the country • Pioneering firms, latecomers can reduce costs and percieved risks of locating in unfamiliar places • Ex// Japanese auto assemblars located in a central corridor in the 80’s/90’s where existing auto production plants were already in place • Ex// Japanese assemblars now will avoid these areas for smaller regions to develop unique relations and avoid unionized workers 4. National Culture is important in understanding the location preferences of foreign firms • Corporate motivations are also differend

22. Foreign Branch Plant Locations-6 Theories 5. Firms may exercise the equivalent of personal preference in choosing locations • Distinct corporate cultures shape strategies • Ex// MacMilan Bloedell insisted on pulp mill locations being on tidewater • Ex// Michelan known for being secretive-plants would therefore be in small, isolated communities 6. Firms change locational preferences after initial entry into a country • Growing awareness of location possibilities as branch plants seek out local suppliers and markets

23. Industrial Location-Behavioural Landscape • Industrial Location incentives can change locational preferences in two ways: • Incentives serve as signals to firms to encourage them to at leas consider designated regions • Given that decision making process is timely and costly-industrial location policies offer compensation for any additional learning costs or uncertainties firms incur by looking at unfamiliar regions Ex// subsidies and tax breaks -agencies are proactive in getting information to investors and follow-up services -this increases economically rational behaviour -increase chances of attracting short-term opportunists

24. Conclusion • Imperfect information and bounded rationality modify the decision-making capabilities of Homo-Economicus • Neoclassical cost and revenue surfaces are similarly modified with information and mental maps • Interests of the economy are reflected in the goals of individual firms