Five factors you should consider before choosing the business location

This is one of the first strategic decisions taken by entrepreneurs and is irreversible  in the early-stage of a business. A suitable location can help a business in several ways: First, A tax-friendly location helps to re-invest a higher profit margin into the business rather than giving it away to the government. Second, proximity to knowledge sources can help to explore novel ideas as well as finding capable human resource. Lastly, a carefully-chosen location can reduce the logistics and transportation costs of raw materials, products, etc. Now, keeping these points in mind where should you locate your business to take advantage of all or most of these aspects?

One obvious and standard answer is to choose a country (or state) that is tax-friendly and advanced enough to provide you with the infrastructure needed to scale-up. A country like Switzerland or perhaps Ireland have these characteristics in Europe. In the US, Delaware seems to be the right candidate. But are these the most important factors to think of? And, more importantly, can you freely decide where your business can be incorporated? We believe the answer to both questions is “No”.

Our answer,  in line with this article, is that it should be the region (or country) where the business is located, as this will save you some fees and complexities. This in fact, helps to spread the message and grow the business in very early stages as you mostly rely on your community to talk about your idea and vision. But where exactly in the region?

There are several indications. First, locating in an urban area according to a research paper by Figueiredo et al. shows that locations near urban centers help to learn about novel business opportunities as you are more likely to meet other fellow entrepreneurs and exchange knowledge and opinions. In addition, when you are locating your business in the urban area, you are more likely to be closer to your customers as an important stakeholder of your business. Thus, it would be easier to learn from them and incorporate their opinion into your product. But what about high costs of urban centers especially for entrepreneurs with little money?

Here is the catch. It is important to have a “location”, doesn’t really matter small or big, in urban centers. So even a small office or a desk can be fine as long as you can meet and have small group meetings. Of course it depends on geographical locations and cities but renting a small office should be fine. You can always rent your warehouse outside the town where it is cheaper.

Another important aspect of location is advanced by Baptista and Mendonça. They suggest due to knowledge transfer and learning factor that happens whenever a firm shares knowledge with other bodies performing research and development such as other firms, universities and government institutions, proximity to knowledge sources is important. They assert that “If information about new technologies, goods and processes, flows locally more easily than over great distances, than establishing direct contact with entities that can produce knowledge which is valuable for a firm’s activity should be one of the main driving forces leading to the geographic concentration of both production and innovative activities.” In fact, concentrated areas like urban centers and incubators help entrepreneurs to exchange their ideas in a “market for ideas” where they regularly meet investors, customers and other entrepreneurs and receive feedback on their fledgling ventures.

In sum, there are five factors that reflect the goodness of a location:tax, local communities, set-up costs, urban centers and proximity to knowledge sources like universities. It would be impossible to excel in all these factors though . So it is up to you to decide what factors are crucial for your business. The key message of this article is before you automatically decide on locating the business close to where you live, think again about the dynamics of the above-mentioned factors.

Do you disagree? We love to hear your comments!

About pourya

I am an entrepreneurship postdoctoral research fellow at Tilburg University in the Netherlands. My vision is to fill the gap between entrepreneurship research and practice with this website. Research and practice are two separate islands when it comes particularly to entrepreneurship. There are hundreds of papers/articles written every month but we hardly see their contribution to real life entrepreneurship.

1 comment on “Five factors you should consider before choosing the business location

  1. Pingback: Why startups fail? Investing the role of market problems – Idea to Start

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