Location economies – What is it, definition and concept

location economies occur when they are located in a given physical space companies or industries that are related and complement each other to benefit each other.

In other words, location economies allow a conglomerate of companies engaged in the same industry or business to locate in a selected space or region. Location in this specific region allows them to gain different benefits.

It may be that companies are located in a certain place because they are going to find cheaper the inputs they need to produce, that is, it serves as a supply center.

Other companies are located in a place because they consider it a center of consumption. This means that the place represents an important market for the demand for its goods and services. Likewise, other companies seek mixed benefits where they will obtain cheap supplies and be able to have access to a wide market where the commercialization of products is facilitated.

Of course, to determine the spatial location of these companies or industries, studies are carried out to achieve maximum benefits. The way in which resources are spatially distributed and the location of markets are especially taken into account. This, with the purpose of being able to find the optimal place or spatial point where it is convenient to locate the company.

Undoubtedly, the location may be in a specific country or region. This, analyzing factors such as the infrastructure of the place, the means of transport and communication, etc. Likewise, access to the resources that the company requires for its operation, including labor, is important.

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Importance of location economies

The benefits of location economies can be obtained by locating the company in an appropriate geographical area, country or in a certain locality. For that reason, deciding where to locate the business is a very important decision.

It will depend on this decision that the geographical factors where the company is located are as favorable as possible. In other words, these factors can favor or harm the present and future performance of the company. Therefore, it is a very important strategic decision, both for the economy of the region and for the company.

  • Benefits for the company: The most important benefit that companies obtain is the optimal location. This consists of obtaining the climatic, geographical and location conditions that are best suited to meet business objectives.
  • Benefits for the region or country: The region or country where these companies are located benefit from the regional or global development that is achieved. This is because these companies optimize the use of the region’s resources and make them more competitive places.

What factors are sought in location economies

The factors that location economies seek are:

  • Physical factors: Physical factors include proximity to raw materials and energy sources, as well as topographical, geographic, and climatic conditions. Likewise, the conditions of the transport and communication infrastructure are relevant.
  • Human factors: Within the human factors we find the skilled workforce and the areas of nearby markets that demand the products and services.
  • Legal factors: Legal factors include legal, fiscal, labor and social factors.
Location Economies 1
location economies
Factors of interest

Sectors that can reap the benefits of location economies

The sectors that can benefit from location economies are:

  • Primary: The primary sector includes all economic activities based on the rural economy.
  • Secondary: This includes economic activities that transform natural resources and turn them into products. They are located in urban spaces and are generally related to the food industry and other merchandise.
  • Tertiary: The tertiary sector of the economy produces services. For this, economic transformations are carried out that allow the marketing of intangible goods that are not part of agriculture or industry. It can include highly specialized services such as telecommunications, information and research technologies, etc. They are located in urban spaces where they are most offered and demanded.
Location Economies 2
location economies
Sectors that can be used

Profits

Among the main benefits of location economies we find:

  • Creation of specialized workforce that is generated through collective learning. This produces a highly qualified labor market.
  • Greater and better offer of services that helps to value local production in a superior way.
  • Companies establish close links of buying and selling activities. This is due to the fact that some offer factors of production and others the products. Therefore, it is a whole process of more efficient inputs and outputs.
  • There is a general reduction in production costs and transaction costs, which allows companies to become more competitive.
  • It increases the level of economic growth, both of the companies and of the regions where they are located.
  • There is an increase in income and profits, for companies, for the region and for the inhabitants of these geographical spaces.

As a conclusion, it can be said that location economies allow the strategic location of industries and companies. They seek to locate themselves in ideal geographic spaces where they find an adequate supply of raw materials, qualified labor and adequate geographic conditions. In the same way, in these spaces they find sufficiently large markets to which they focus the commercialization of their goods and services.

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