Location

Commentary by William Alan Reinsch

Published July 15, 2024

My first formal encounter with economics was as an undergraduate taking basic macro and micro courses. They fascinated me because they tried to explain why we do what we do and what it all means. In short, the classes were a lesson in how things work. Later, I took a course in location economics, which looked at why we go where we go and how we make decisions about that. It turns out, like much of what I write about, that it's complicated.

These days, we are getting lessons in location economics via the reshoring, friendshoring, nearshoring, choose-your-adjective-shoring debate. As companies reevaluate their supply chains seeking to identify points of vulnerability and develop work-arounds for them-in other words, de-risking-location is a key element. Some companies want to move all or parts of their supply chains, usually out of China. Others want to find or create redundant sources of supply somewhere else while also remaining where they are. A few decide to return to the United States. All these decisions involve finding new places or rebuilding old places. So, it is useful to study what companies think about when they make these decisions.

For some companies there are clear priorities. If you are in a natural resource business-mining or oil and gas, for example-you invest where the resources are. Similarly, if you are in a downstream industry that uses natural resources-like critical minerals-you pay attention to where the resources are and consider whether it makes more sense to locate a factory near them or ship them to a factory somewhere else, with the associated costs and risks. If you make things with significant labor costs, you look for locations with abundant, cheap labor. If you are a retailer or service provider, you are usually interested in the size of the local and regional market because your business is based on attracting customers.

At the same time, there are also some universal considerations. When I led the National Foreign Trade Council, we had a session on this issue, and one of the speakers, from a large multinational company, told us his company had a list of 18 factors it considers when deciding where to locate. He declined to provide the list, but the ones at the top emerged in the discussion. The big three are rule of law, policy stability, and a dispute resolution system that is objective, transparent, and efficient. The common element there is certainty. Companies like to locate in countries where decisionmaking is orderly, predictable, and subject to legal requirements; where policies are likely to last for a long time (recognizing that a change in government will produce tweaks); and where they know they have recourse in the event of inevitable commercial disputes.

Slightly below those factors are others that are obvious-the availability of a trained and educated workforce; favorable tax and regulatory policies; and governments that want them there, will work with them to find appropriate locations, and will help them meet local and provincial legal requirements.

Below those considerations are specific priorities that sound small but are often critical to a location decision. I recently met with a representative of another large multinational company, and we discussed its expansion plans in the United States. It turned out that two big issues for them were traffic and childcare, neither of which would have occurred to me. One of their existing facilities is located in an area with limited roads, which means daily traffic jams when a shift changes. In addition, with round-the-clock shifts, ensuring the availability of childcare is essential to attracting and keeping workers. Both criteria led the company to look at locations with good transportation infrastructure and a sufficiently large workforce to meet the needs both of the plant and of the workers' families.

Other criteria are increasingly climate related. Water availability is a big issue for industries like semiconductor manufacturing that use enormous amounts of it in the production process. Areas prone to drought or suffering aquifer depletion are not good choices. Another issue is weather. Areas prone to tornados, hurricanes, or floods, which are growing in number, will increasingly be avoided. Power availability is also an issue, particularly as the digital economy grows and requires more electric power. Locations with inadequate or uncertain power supplies will find themselves being passed over.

It should be clear from this list that while the decisions are made by companies, governments-local, provincial, and national-have a role to play. Directly, they can put their thumbs on the scale via carrots, such as incentives to locate in their area, or sticks, such as prohibitions on certain exports or investments to certain destinations. Their indirect role, however, is more powerful because they can create, or not create, the hospitable climate companies want. Infrastructure issues like roads and adequate power supplies are government responsibilities, as are hurricane and flood protection, to the extent that is possible, and providing adequate education and workforce training.

So, it's complicated. Every location has advantages and disadvantages, strengths and weaknesses. Companies are on the front line making these decisions, but regular dialogue with governments so they can make clear what their needs are and learn about what is coming will help them make better decisions.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

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