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The importance of transport in business location decisions-scoping study.

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The importance of transport in business' location decisions - Executive summary Introduction Understanding the role of transport in decisions made by businesses on where to locate or relocate is a crucial element in our ability to assess the impact of our transport system on people's lives. The purpose of this study is to review the current level evidence of the issues considered by businesses in choosing where they locate / relocate and in particular, the significance and importance to which transport is a factor within that decision-making process. This is a complex subject area. There are many types of businesses - each with their individual transport needs and considerations - and the task of unpacking and isolating the influence of transport is a complicated and difficult process. As such, there is very little significant consensus concerning the overall effects of transport on business location and wider economic development and it is recognised that considerations need to be made almost entirely on a case-by-case basis. Naturally, this is reflects the differing needs and demands relating to different firms the various characteristics different locations provide. The review itself breaks these issues down into a number of areas - the impact of technology; by business type; firm characteristics, labour supply; spatial scale, and; growth / displacement. This summary, highlights a number of generic considerations the review has identified, inherent when thinking about the role of transport on businesses. Changes in the Business Environment Firstly, the environment within which different businesses operate is complex and ever changing. Advances in ICT provision has altered this context in a number of significant ways which have an impact on the way the world - and transport - is viewed and utilised. ICT has allowed us to develop new ways of working and communicating instantaneously with a large number of people, spread across a range of physical locations and distances, and provided us with the potential flexibility to work wherever and whenever we want. This is a complex interrelationship with better communication potentially reducing the need for travel, but on the other hand reinforcing or possibly expanding travel demand as new markets and localities are opened. This is still a relatively nascent area of study and not surprisingly, there is little hard evidence - nor consensus - over the potential impacts that ICT has on travel demand. This study therefore, attempts to synthesise research into the influence of transport provision in this complex and dynamic process. A Necessary, but not a Sufficient Condition Compiled from business surveys, important factors commonly cited as important in considering a location include:  the quality and scope of physical and business infrastructures;  factor cost and supply, especially labour;  market demand and links to international markets;  institutional infrastructure and networks;  a 'culture' supporting 'civicness' and entrepreneurship;  indigenous company growth;  agglomeration economies;  technological development;  as well as more social factors such as climate, lifestyle, image and crime rates. Although some of these have an element of transport within these, none directly relate to transport per se. As a general rule, studies suggest that transport is only an important factor, once the decision to set up in an area has been taken. This is thought to be attributable to a number of factors:  The review notes that - within certain parameters, such as, access to airports or major motorway interchanges where absolutely necessary - levels of transport provision are generally seen as ubiquitous within developed countries and as such transport is seen as a necessary, but not a sufficient condition for influencing business location.  Transportation costs are typically found to be only a very small proportion of firms' total costs - usually less than 5%. As such, any improvements to the transport infrastructure is likely to yield small cost savings and gains to firms.  The decision to move may be prompted by transport difficulties and inaccessibility. However, it is argued that the transactions cost to any change in transport may be too high to enable the firm to respond fully to a change in transport costs. Therefore the review notes that businesses are likely to change operations in discrete steps, and it is only when certain cost thresholds are reached that it becomes efficient to the firm to revise its number or location of depots. It should be noted therefore that although influential, transport costs are not the primary business location driver on an international and national scale. An interesting conclusion to be drawn from the review is that on the one hand, transport being such a small proportion of a firm's costs implies that minor changes in provision and function of the infrastructure is likely to have little impact on businesses. Improvements in transport provision therefore are only likely to have a limited impact since firms are only making savings on a small proportion of cost. However, this assumes firms have perfect information on their costs. The review identified that current and expected levels of services provided by transport infrastructure (e.g. the quality, reliability, time, the width of the supplier/customer market and financial costs of journeys using it etc.) are a crucial component in the actual location decisions themselves. To this end, perceptions of improved travel time were considered an important factor in considering business investment. It is important to note however that research has historically tended to focus on the provision of new transport - opening up new markets and opportunities for businesses - rather than improving existing provision and this latter issue requires further investigation. Transport as Part of a Package Where transport is of obvious importance, is where improvements in the transport system opens up new, previously untapped areas and markets. However, as noted above, improvements in the transport system in itself would not usually be thought sufficient to stimulate (re)location. It is important therefore that investment is considered as part of a wider package in support of other factors or initiatives supporting other economic or social regeneration factors and spatial policies. The review notes that large-scale transport infrastructure policies are likely to be successful in supporting latent growth in under-developed regions, but is likely to be ineffective in stimulating new growth. Related to this issue is that transport is important in business relocation only when the decision to move has already been taken. New transport infrastructure may influence business location, but this can often involve displacing business from one area to another. This can be beneficial if redistribution from congested to stagnant areas; however, evidence suggests that transport investment will tend to displace business activity towards congested areas. The Logistics Sector A further factor which may explain a firm's degree of responsiveness to transport is the recent expansion in the logistics market. The increased speed and complexity of distribution networks has meant a significant increase in the number of firms outsourcing many of their transport functions to specialist firms in recent years. As such, direct transport considerations have become less important and become more secondary as specialist logistics companies take on the role. As logistics firms develop their distribution networks to incorporate practices such as Just In Time delivery, an issue of increasing importance is the reliability of the transport network. A number of studies noted that it was not the amount of time taken that was important to logistics firms, but being able to deliver when scheduled. For example, it was suggested that whether a delivery takes 8 hours or 5 hours is relatively unimportant. The key consideration, is that the delivery firm can rely on the journey taking 8 hours, so that it can be factored into the timing of the logistics chain. It is argued that this is an area of increasing significance and importance although the impact and demands of the changing logistics industry is an area not currently well understood. Differences in Needs by Spatial Scale It is noted that ICT and the expansion of firms allows them to have a wider geographical focus and become more dispersed as different elements of firms' business can be outsourced or relocated. The review notes that the globalisation of the business environment, means that it is increasingly important to consider the national transport system as a whole, and its connectivity with the rest of the world. It is recognised however that the importance of transport on an area or country's international competitiveness is an area where little is understood. Within this context, transport networks are becoming broader and the importance of being near transport hubs - be they air, sea, road or rail - is crucial. A key conclusion to be drawn therefore is that the reliability and connectivity of the transport system is of concern. Studies note that good air connectivity is vital to businesses operating on an international scale, and for the development of 'world cities' as business locations. It is suggested that air transport per se is not a necessary condition, but what is important are: the extent to which that area is plugged directly in to other major international hubs - availability and efficiency of routes (direct, hubbed); costs and the level of competition in global transport market, and; perceived and actual interchange efficiencies. This is a key consideration in the level of foreign investment into an area and is most important for firms with international trading or contacts such as, high-tech firms, financial services and pharmaceutical firms. It is perhaps unsurprising that air transport has a greater influence on the location of foreign investors and business services, whereas it is the road transport has a larger influence on domestic investment. The evidence suggests however that transport becomes an increasingly important factor for businesses as the geographical scale is reduced from supranational down to local. Recent trends indicate a general movement of businesses locating away from large cities to urban fringes. This is in part at least facilitated by the development of technology, allowing the decentralisation and spread of firms, or their component parts over a wider geographical area, opening up choice of location. It is noted that heavy industries are likely to incur the highest transport costs and are likely to be the most location dependent. However, there is growing evidence on the location dependency of light manufacture and service firms - particularly with regard to road and air access. It is recognised that high-technology manufacturing and service businesses often 'cluster' together. In this context however, transport is a secondary consideration to face-to-face networking, and that this - coupled with the preference for a type of location - that is a key locational factor. This 'clustering' effect is compounded by allowing firms to take advantage of location specific factors which drew the firm there in the first place - such as labour source, the cost of premises. The review notes however, that the exact effect and importance of transport to these firms is inconclusive. At a local level, again there is limited consensus, with research highlighting that schemes can increase the attractiveness of city centre locations, whereas others show that the development potential is limited. In particular, it is noted that - for example - the impact of traffic reduction measures such as bus priority measures, charging, limiting parking and the effects of by-passes on location decisions, is not yet widely understood. Regardless, transport policies aimed at moving business into cities are most effective if combined with other policies. Ideally, it is argued, transport planning should be integrated within land-use planning and regeneration policies, if it is to be effective in meeting objectives. Accessibility Labour supply is often cited as the most important single factor in business location and that the ability of employee / customer access is perhaps the key transport consideration. Transport investment has an obvious role to play in reducing travel time and increasing the labour pool from which firms can draw. Transport can be used as a tool to boost labour supply, through increasing workplace accessibility and therefore labour market size. However, it is noted that there is little literature considering evidence of the reverse effect: means of encouraging businesses to locate in accessible areas to allow wider labour market participation and reduce travel demand. Studies note however, that higher-skilled workforces are prepared - or are more able - to be more mobile and tend to 'follow' firms to areas where they are established. This paper represents a brief summary of the key issues emerging from the review of literature on the importance of transport in business location decisions.
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The Importance of Transport in Business' Location
Decisions
Contents
1. Introduction ................................................................................................................3
2. Some Trends in Business Location ...........................................................................7
2.1 Introduction........................................................................................................................ 7
2.2 International Trends........................................................................................................... 7
2.3 UK Regional Trends ........................................................................................................ 10
2.4 Intra-Regional Trends...................................................................................................... 12
2.5 Size of Business............................................................................................................... 13
2.6 Conclusions...................................................................................................................... 15
3. The Drivers of Business Location ...........................................................................17
3.1 Introduction...................................................................................................................... 18
3.2 Theoretical underpinning................................................................................................. 19
3.3 Empirical Evidence.......................................................................................................... 24
3.4 Conclusions and Some Questions Arising....................................................................... 28
4. The Role of Transport in Business Location .........................................................30
4.1 Changes in Business Organisation and Technology ........................................................ 30
4.2 Influence of Transport Varies by Firm Characteristics.................................................... 39
4.3 Labour Supply, Travel to Work and Social Inclusion......................................................46
4.4 Influence of Transport Varies by Spatial Scale................................................................ 54
4.5 Growth versus Displacement ...........................................................................................65
4.6 The Role of Transport: Conclusion.................................................................................. 70
5. Land Use, Location and Transport ........................................................................71
5.1 Linking Transport and Planning Policies......................................................................... 72
5.2 The Impact of Planning Decisions on Business Competitiveness ................................... 74
5.3 Conclusions...................................................................................................................... 76
6. Methodological Issues and Appraisal.....................................................................77
6.1 Modelling of Transport.................................................................................................... 77
6.2 Transport Investment Appraisal....................................................................................... 86
6.3 Some Methodological Issues ........................................................................................... 87
6.4 Conclusions...................................................................................................................... 88
The Importance of Transport in Business' Location Decisions
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7. Key Messages and Gaps in the Evidence ...............................................................90
7.1 Introduction...................................................................................................................... 90
7.2 Key Evidence, Policy Questions and Gaps...................................................................... 91
Annex 1: Methods Used in Literature Review.........................................................106
Approach to Review ............................................................................................................106
Secondary Research............................................................................................................. 106
Primary Research .................................................................................................................109
Acknowledgements.............................................................................................................. 113
Annex 2: References...................................................................................................114
The Importance of Transport in Business' Location Decisions
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1. Introduction
The Department for Transport (DfT) has highlighted a need to better understand the role of transport
in business' location decisions in order to inform future research, decision-making and policy
formation. While there exists a wealth of material on this subject, there is a clear need to organise and
contextualise this material in a way that can provide clearer guidance to policy makers regarding the
key issues, the importance of these relative to other determinants of business location, and the
influence of DfT policy instruments. As a result the DfT commissioned the Transport Research
Institute and Employment Research Institute at Napier University, Edinburgh to undertake this study.
Remit
The purpose of this study is to review and organise the relevant literature on business location
decisions and provide an explanation of the role and significance of transport-related factors in
influencing these decisions. This will help provide a strong base from which the DfT can develop
further research in this area while avoiding wasteful duplication. Hence the study:
reviews literature on business location decisions, including the role of transport, drawing from a
number of disciplines including transport policy, economics, planning and management, primarily
in the UK, but also in elsewhere;
reviews literature that focuses specifically on identifying the extent to which transport acts as a
determinant of business location;
reviews literature on the ways and the extent to which business location decisions affect transport
behaviour and policy;
identifies the knowledge gaps in relation to the issues identified above;
Overview
There is no consensus concerning the effects of transport on business location and wider economic
development. Changes in transport costs (including money, reliability and time costs) are influenced
by new infrastructure, changes in infrastructure management or congestion/deterioration of existing
infrastructure, as well as by the efficiency of transport operations. These will influence business
productivity, innovation, access to knowledge and markets, regional patterns of commerce and the
commuting and migration decisions of households etc. Hence they may affect the location decisions
of businesses already located in an area (and their long term viability) as well as those thinking of
setting up or locating there.
A key question is what is the relative importance of transport compared to non-transport factors? It
has been long recognised that transport costs make up a relatively small proportion (usually 5-7%) of
total costs, although this varies by industry (CBI, 1985; Diamond and Spence, 1989). The evidence
generally suggests that transport is a necessary but not sufficient condition for influencing business
location, especially in developed countries where transport infrastructure is generally ubiquitous.
Other factors such as access to skilled labour, market changes, tax structures etc., are generally more
significant. However congestion imposes great costs upon businesses and increased use of 'just-in-
time' and other logistic approaches give increasing prominence to factors such as reliability of
transport systems. In addition transport is often seen as an area where government can exert
significant direct influence.
There are important qualifications to this general conclusion concerning the relative low importance
of transport in influencing business location. The role and importance of transport will be affected,
amongst other things, as:
The Importance of Transport in Business' Location Decisions
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The business environment is changing, especially in terms of business organisation and
globalisation, which is likely to lead to a greater importance of logistics and global transport links
(e.g. good access to hubs of delivery company networks may become an increasingly important
location factor for some businesses).
Different types of businesses or business functions have different transport requirements and
priorities (e.g. internationally mobile firms rate air links more highly than domestic firms), and
different sets of comparator locations from which to make a choice (e.g. they may compare
transport services across different countries).
Labour is usually a key location factor for businesses and transport changes may influence its
accessibility through commuting (e.g. better local transport may increase the labour pool for a
business, while congestion may reduce it). Although it should be recognised that locations that
improve car accessibility can adversely affect lower paid and part-time workers and some social
groups.
The spatial scale of analysis is crucial. The relative importance of transport may differ when
considering local, intra-regional, inter-regional or international location choices. Transport is
likely to be more important in influencing a businesses' choice of location within a local area,
rather than its choice between regions (e.g. transport changes may influence a business' choice as
to which part of town to location, but may be irrelevant as to which region of the UK it goes to).
Evidence often confuses the effects of differing scales.
Local redistribution of businesses may have little or no effect on the growth of the regional or
national economy as a whole, so it is important to distinguish transport investment that simply
helps move businesses around a region rather than leads to regional or national growth.
While most forms of transport are available across most of the UK, not all are ubiquitous (e.g. the
availability of airports, and more importantly the number and destinations of flights from them,
varies considerably, and while roads may be ubiquitous, their quality and levels of congestion
vary greatly).
The framework used in the report seeks to unpack the differences in the impacts of and upon transport
according to:
Changing business organisation, including the effects of globalisation, technology and increased
complexity, the role of transport within corporate strategies and the changing role of logistics on
business location.
Business characteristics (e.g. size, sector, ownership, function).
Types of labour supply and also the implications for social inclusion.
The spatial scale of analysis (international, national, inter-regional, intra-regional and local)
including the characteristics of different regions.
Economic growth versus redistribution, and the role of transport investments in generating new
activity or causing the relocation of existing activity.
The characteristics of the transport infrastructure, services using it and its management (in
particular air transport, strategic networks and localised networks).
Meanings of transport and business location in this report
It is useful to set out some understanding of the main terms used in this report. First, transport covers
both investment in new and existing infrastructure and equipment and its management (e.g. service
levels, congestion charging or regulation of air travel, including taxes). Crucial to business location
decisions are the current and expected levels of services provided by it (e.g. the quality, reliability,
time and financial costs of journeys using it etc.) rather than simply the existence of infrastructure.
The Importance of Transport in Business' Location Decisions
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Hence maintenance or improvements to existing infrastructure may be as, or more, important than
providing new infrastructure.
In this report, business location has been taken to involve each of the various components of location
change, including businesses that move all or part of their activities into or away from an area
(relocation), and businesses that start up or stay in an area (location). From the perspective of a given
location, on the positive side these are:
business birth (why did the founder choose this location to start-up);
complete business relocation (relocating the whole business to this location);
partial relocation by moving part of the business elsewhere or setting up a new branch plant;
in-situ business growth (which includes the implicit choice not to move that activity to another
location).
The mirror image or negative side of these concern the components of employment decline, which
again involve implicit or explicit choices affecting the location of businesses:
business death/closure (would the business have survived if it had been in or moved to another
location?);
complete business relocation involving moving the whole business elsewhere;
closing and/or moving part of the business elsewhere;
and in-situ contraction of the business.
The definition of business can cover not just commercial businesses (which is the main focus of this
report) but also other organisations (e.g. third-sector or government). Change is usually measured in
terms of numbers of firms or employment (and type of employment; e.g. full- or part-time; quality of
jobs etc.) but could be measured in other terms (e.g. turnover). The choice of location is only part of a
much wider decision making process, involving choices of strategic direction, how opportunities can
be taken through alternative production means, outsourcing etc., and whether relocation of all or part
of the organisation is needed. The attraction of a new location may be due to 'push factors' (e.g. lack
of space) or 'pull' factors (e.g. access to a new market), and these may influence the range of
alternatives considered.
Outline
Of course, it is not possible to consider all potentially relevant literature in a relatively short study and
so attention has been focussed upon these most relevant to current policy priorities. The structure of
the report is as follows:
Chapter 2 identifies some current and recent historical trends in business location, within the UK and
internationally.
Chapter 3 provides an overview of some of the main theories that seek to explain the drivers of
business location and the relative importance of transport in location decisions. It then presents some
empirical evidence from studies that have sought to determine the degree to which transport factors
influence business location.
Chapter 4 provides a review of evidence concerning the role of transport in business location
decisions. As discussed above, the importance of transport depends on a number of factors including
the changing business environment, the characteristics of businesses, the effects on labour markets,
the spatial scale of the impacts, whether the change mainly influences growth of the economy or
redistribution within an area, and the specific type of transport change. This chapter therefore
examines each of these.
The Importance of Transport in Business' Location Decisions
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Chapter 5 focuses on the link between land use planning and transport. It examines evidence on the
effects of planning decisions and regulation on business competitiveness and location decisions. It
then examines evidence on the influence of business location decisions upon travel, traffic volume
and distribution, and the implications of this for labour accessibility.
Chapter 6 takes a closer look at some of the methodological issues emerging from the review. Some
evidence is presented on the adequacy of existing modelling techniques, particularly Land Use
Transport Interaction models. The need for greater ex-post evaluation and the accuracy of existing ex-
post appraisals is then discussed. Finally we look at the robustness of existing evidence on the link
between transport and business location - particularly in terms of data quality, scale, time period and
geography.
Chapter 7 examines the policy implications and research of the findings of the literature review under
a number of question headings based upon current Department for Transport and Office of the Deputy
Prime Minister policy documents. It briefly: summarises the evidence related to some key questions
arising from current UK government policy documents, and; identifies some major gaps in knowledge
that still remain.
The Importance of Transport in Business' Location Decisions
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2. Some Trends in Business Location
Key References
Breheny (1999) (Ed.) The People: Where Will They Work, Town and Country Planning Association,
London
Chakrabarti (2001), Determinants of FDI: A Comment on Globalization-Induced Changes and the
Role of FDI Policies, UWM, report to the World Bank
Cooke, P. (2002). Knowledge economies: clusters, learning and co-operative advantage. London:
Routledge
Core Cities (2002) Cities, regions and competitiveness, interim report from Core Cities Working
Group, Birmingham
DTI (2001a) Ernst and Young figures show that UK is Europe's favourite place to invest Department
of Trade and Industry report, 2 May 2001
Hospers, G.J, (2002) "Beyond the blue banana? Structural change in Europe's geo-economy" Paper
presented at 42nd European Congress of the Regional Science Association, Dortmund, Germany, 2002
Kokko, A (2000) Globalisation and FDI Incentives, Stockholm School of Economics, report to the
World Bank
Scottish Executive (2002a) Scotland: A Global Connections Strategy, Edinburgh
2.1 Introduction
This chapter provides a broad overview of some current and recent historical trends in business
location, within the UK and internationally, in order to help set a general context. The chapter does
not include the considerable public information on business and commuting traffic flows and their
links to, for example, changing Gross Domestic Product. Care must be taken when considering trends,
as most of the time series are extremely short, so the data are only indicative and not conclusive.
2.2 International Trends
Worldwide Foreign Direct Investment (FDI) has fallen substantially in recent years with a 40% drop
in 2001. The drop of inflows into developed economies was even higher at 50% (Scottish Executive,
2002a), including several of the UK's European competitors such as France, Ireland and the
Netherlands. The UK had 26% of the European market share in FDI in 2000/01, the next largest
nation being France with 15% DTI (2001a).
Traditionally, within the European Union it has been the "core" (sometimes referred to as the 'Blue
Banana', 'Bunch of Grapes' or various other fruits such as 'grapes' etc., and stretching approximately
from London to Milan) that has attracted the majority of investment in Europe. Another emerging
growth pole is the 'Latin Arc' or 'Mediterranean Arc' stretching along the Mediterranean from
Barcelona to Genoa. This area has seen a surge of investment in high technology and advanced
service sector industries in the past decade. These industries are relatively mobile and are greatly
influenced by the need for a skilled workforce that can be relatively easily attracted due to the
favourable climate and lifestyle of the area and investment in higher education and research centres. It
has been compared to the 'Sunbelt' in the US, which has seen considerable new and relocated
investment compared to the traditional 'Rustbelt' industrial areas of the north.
Some researchers have speculated that the current 'Blue Banana' core will be eroded as a magnet for
business location due to the emergence of the 'Yellow Banana' stretching from Paris to Warsaw or
The Importance of Transport in Business' Location Decisions
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even further into Eastern Europe, and the continued growth of the Sunbelt from Valencia to Milan
(Hospers, 2002). The introduction of monetary union and the single currency has arguably meant that
geographical differences, including the transport infrastructure, are increasingly important, rather than
exchange rate policies in the fight for FDI (Cooke, 1995).
The exact factors that will attract a company to a region are varied, and reflect location attractiveness,
resources and skills. In some instances the quality of the environment will be a sufficient attractor. In
many financial and economic pressures will also be significant.
Chakrabarthi (2001) charts the increase in FDI as a result of globalisation and deregulation in the
marketplace in many countries. However, the choice of location remains a question of physical,
natural and economic competitive benefit. Chakrabarthi observes that following the size of its market,
a country's openness to trade is more "likely" to be correlated with its FDI than other potential
determinants. The World Bank1 summarised that [developing] countries with better policies, reduced
restrictions on foreign investment, and progress in health and education indicators were more likely to
receive Foreign Direct Investment.
The growth of knowledge industries is important (Cooke, 2002) and their location needs are related
more to quality of environment, plus personnel movement including air travel, and also commuting at
a local level. Further, Kokko (2000) comments on the necessity for competing countries to provide
access to information technologies infrastructure, this in turn reducing the reliance on market size as a
determinant of investment location. Subsidy per job and the level of government backing for FDI is
also highly significant. Given that few countries compete for foreign investment without any form of
subsidies today (UNCTAD 1996) the level of subsidy per job, and the extent of subsidy between
competing countries, may increase inward investment while reducing the benefit of the investment.
Chart 1.1 shows the number of successful inward investment projects (defined as a case where an
overseas company specifies an interest and successfully completes an investment in the UK), over the
period 1997/98 - 2001/02. This indicates that:
the UK experienced an increase in FDI during the late 1990s and start of the millennium (leading
up to the Single Currency);
this fell again during 2001/02 and the trend may now be downwards;
overall, investment projects increased by 22% over the period 1997/98 - 2001/02;
manufacturing sector investment showed a slow decline until 200/01 with a slight increase in
2001/02;
there was a steady increase in non-manufacturing sector investments until 2000/01, but a decline
in 2001/02.
Chart 2.1: UK Direct Inward Investment Project Successes
1 http://www.worldbank.org/prospects/gdf2002/slideshow/slideshow/sld015.htm
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In monetary value, the inflow of FDI into the UK in 2000 was £86.2 billion compared to a total of
£52.1 billion in 1999, an increase of 65% (DTI, 2001a), although this has since fallen. This created
71,788 new jobs and increased Britain's total global investment stock to £341 billion (DTI, 2001b).
Such figures need to be considered alongside factors such as potential displacement.
Table 1.0 puts this in context by illustrating the value of FDI in Europe. This shows that:
The UK experienced the largest total FDI in 2001/02, closely followed by Belgium/Luxembourg
and Germany.
Ireland experienced the largest increase over the period (80%)
Greece experienced the largest fall (-8%)
Table 1.0: Number of Direct Inward Investment (Inflows), FDI Inward Stock, EU 15, US $m
1997/98 1998/99 1999/2000 2000/01 2001/02 Change
1997/02
Austria 17,510 23,564 23,472 30,431 34,400 49%
Belgium and Lux. 140,818 189,880 185,550 431,111 482,107 71%
Denmark 22,268 31,175 41,222 64,397 64,397 65%
Finland 9,538 16,464 18,315 24,272 26,267 64%
France 195,910 246,214 244,667 257,806 310,430 37%
Germany 192,151 255,379 299,705 449,066 480,899 60%
Greece 15,234 15,319 15,890 12,499 14,059 -8%
2 Sourced from DTI Direct Inward investment project successes: Regional Trends 37. from ONS
http://www.statistics.gov.uk/StatBase/ssdataset.asp?vlnk=6018&Pos=1&ColRank=1&Rank=272
Source: Invest-UK, Department of Trade and Industry2
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Ireland 14,975 26,010 40,939 65,056 74,831 80%
Italy 81,145 103,094 108,701 113,046 107,921 25%
Netherlands 122,193 164,473 192,248 243,430 284,212 57%
Portugal 19,287 24,465 23,519 28,161 32,671 41%
Spain 100,021 118,111 116,665 144,508 158,405 37%
Sweden 34,784 41,513 50,986 82,748 81,275 57%
United Kingdom 252,945 337,410 385,120 435,422 496,776 49%
Source: UNCTAD/DITE
2.3 UK Regional Trends
Table 2.1 below shows the number of successful inward investment project successes, broken down
by region, over the period 1997/98 - 2001/02:
Figures vary considerably year by year, although the recent trend is downwards;
London had the largest number of new investments in 2001/02, with 176;
London also had the largest increase (176%) over the period 1997/98 and 2001/02, followed by
South East England (121%);
North West England experienced the largest decline (-54%), followed by Northern Ireland (-
42%).
Table 2.1: Number of Direct Inward Investment Project Successes, by UK region.
1997/98 1998/99 1999/2000 2000/01 2001/02 Change
1997/02
North East 47 35 49 34 56 19%
North West 71 66 80 39 33 -54%
Yorkshire and Humber 65 86 44 33 40 -38%
East Midlands 18 19 31 17 17 -6%
West Midlands 81 71 99 103 98 21%
East 33 41 37 56 54 64%
London 62 105 159 220 176 184%
South East 57 74 110 191 126 121%
South West 40 34 47 38 30 -25%
England 474 531 656 731 630 33%
Wales 55 48 47 39 61 11%
Scotland 75 54 76 72 59 -21%
Northern Ireland 24 31 20 22 14 -42%
United Kingdom 628 664 800 864 764 22%
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Source: ONS Industry sector
Table 2.2 shows the number of successful inward investment project successes in the UK, split by
industry sector, over the period 1997/98 - 2001/02. This shows that:
The sectors with the largest number of investments in recent years are Mining and Quarrying,
Financial Services; Retail/ wholesale trade & repairs; Real estate & business services;
The number of investments varies considerably from year to year for some sectors.
Table 2.2: Net foreign direct investment flows into the United Kingdom analysed by industrial
activity of UK affiliates, 1998 to 2001
1998 1999 2000 2001
Agriculture, forestry & fishing 16 14 18 10
Mining & quarrying (including
oil/gas) 8504 -148 3175 13844
Food products 989 623 717 -148
Textile & wood, printing &
publishing 1797 1887 3926 -406
Chemical, plastic & fuel products 3058 1689 627 2067
Metal & mechanical products 1619 525 1165 848
Office, IT & communications
equipment -208 2683 496 1144
Transport equipment 2497 3271 2797 -607
Other manufacturing 1211 440 1201 7232
Electricity, gas & water 1875 57 4920 166
Construction 13 113 -15 23
Retail/ wholesale trade & repairs 1205 12036 1766 5606
Hotels & restaurants 667 -35 318 236
Transport & communications 3209 26964 30489 -2878
Financial services 9858 3989 13898 8779
Real estate & business services 8358 -115 12217 4562
Other services 212 384 782 1496
TOTAL 44877 54376 78495 41972
Source: ONS, Foreign Direct Investment 2001 - (Business Monitor MA4)
http://www.statistics.gov.uk/StatBase/Product.asp?vlnk=9614
In terms of employment trends, there has been evidence of a continuation of the 'North-South divide',
with employment increasing in southern regions and decreasing in northern regions. The exception to
this is London, which has experienced a decline in employment (Breheny, 1999). Hence intra-regional
(in terms of the South East) factors are of considerable importance. Table 2.3 gives a summary of
regional employment change, measured by employee job estimates over the period 1992 - 2002. This
The Importance of Transport in Business' Location Decisions
12
shows that it is southern Britain and Northern Ireland that have experienced the largest gains in
employment.
Table 2.3: Change in Employment by Region, 1992 - 2002 (000s)
Region 1992 2002 Change % Change
East Anglia 825 934 109 13.3
East Midlands 1,581 1,730 150 9.5
London 3,352 3,973 621 18.5
North West 2,443 2,686 243 9.9
Northern 1,146 1,144 -2 -0.1
South East 4,093 4,884 790 19.3
South West 1,763 2,090 327 18.5
West Midlands 2,073 2,301 229 11
Yorkshire and Humberside 1,930 2,065 135 7
England 19,206 21,808 2,602 13.5
Wales 994 1,068 74 7.5
Scotland 2,110 2,257 147 7
Northern Ireland 544 659 115 21.1
United Kingdom 22,853 25,792 2,938 12.9
Source: ONS
The Core Cities Interim Report (Core Cities, 2002) also highlights that while the UK is a key
investment location for international business, most of this investment takes place in the South East,
particularly in the case of high value knowledge-based businesses. This is resulting in concerns (that
were also present half a century ago) about the relative under-performance of peripheral regions and
congestion and overheating in the South East. The report also highlights that this is not the case in all
other European countries, with areas such as Rotterdam/Amsterdam, the Ruhr, Frankfurt, Stuttgart,
Munich, Lyon/Grenoble, Turin and Milan attracting considerable business investment and
outperforming the UK regional city regions. However, there are two important points regarding this.
Firstly, although the above are non-capital city regions, they roughly lie inside the traditional EU
'Blue Banana' core and are therefore difficult to describe as peripheral. Secondly, in more
geographically peripheral countries of the EU, such as Ireland or Portugal, the bulk of new business
investment is in or around the capital city.
2.4 Intra-Regional Trends
At an intra-regional level, there is considerable evidence of a trend over recent decades of movement
of business from large cities to urban fringes, and nearby rural areas (exurbs) and smaller towns.
There are notable exceptions to this, such as in the financial services industry, which are examined
later. Table 2.4 provides a summary of trends in employment change during the 1980s and mid-1990s.
While not a direct representation, this does give an approximate picture of trends in business location
and shows that the most rapid growth was in towns and rural areas, while the large conurbations
experienced a decline. However, care must be taken with the definition of 'rural', as many such areas
might be better classified as 'exurbs' that have strong employment and service ties to urban areas.
Hence they may be better seen as expansions of metropolitan influence rather than the re-population
The Importance of Transport in Business' Location Decisions
13
of rural areas. Transport, in particular the growth of road transport, has had a significant effect on both
urban decentralisation and the decline of remote rural areas through increased access to out-of-town
developments. However the effect of transport investment on remote rural areas is under debate, as
illustrated in section 4.5.4. The fact remains that exurbs are growing whereas remote areas are often
seeing continued employment and population decline.
Table 2.4: Employment Change ('000) by Area Type, 1981-1996
Type 1981 1996 Change 81-96 % Change
Conurbations 8,057 7,556 -501 -6.2
Free-standing cities 1,730 1,749 19 1.1
Towns and rural
areas 11,278 12,953 1,675 14.8
Britain 21,065 22,258 1,193 -
Source: Breheny (1999), adapted from Turok and Edge (1999)
Breheny (1999), in a report for the TCPA, states that the urban cores of cities and towns are unlikely
to regain their former status as centres of employment. This is mainly because there are only a few
industrial sectors (banking & finance, catering, education and recreation & culture) that have
remained in urban centres in any strength, and even among these there is expected to be some
movement to decentralised locations. For example, changes in technology will allow downsizing and
'back-officing' of financial service operations to relocate in cheaper locations outside urban centres.
Also, the growth of suburban and ex-urban areas has been sustained enough for current and future
growth to be based on indigenous factors. In the same publication Gillespie, in Breheny (1999),
argues that because of this, a policy of reverse commuting, encouraging business location at the urban
fringe, combined with residential development in the core may be successful in both meeting business
location needs and promoting urban renewal. However, it is likely that the existing public transport
forms and infrastructure, often based upon high densities, would not support this without considerable
fundamental change, as existing networks are established around carrying people from suburban
locations to a central city point, rather than from inner and outer suburbs to dispersed edge of city
developments. At a national level the centralisation takes a different form. Polese and Shearmur
(2002) found that ICT helped centralise services and employment from remote rural areas to
metropolitan areas in Canada (although they may be in the suburban or peri-urban part of the
metropolitan area). So there may be relative centralisation at national level to metropolitan areas, with
potentially a concurrent to decentralisation within these wider metropolitan areas.
2.5 Size of Business
Table 2.5 below shows the breakdown of businesses in Britain by size over the period 1998-2000.
This indicates that the businesses between 1-10 employees make up the majority (83%) of businesses.
The time period is too short to consider long-term trends, so the percentage changes are simply given
as illustration. However, in terms of number of employees, large firms are relatively more important,
as shown in Table 2.6.
Table 2.5: Number of Workplaces in Great Britain by Size, 1998 - 2000 (000s)
Size band 1998 1999 2000 % change
1-10 employees 1,712 1,780 1,802 5.3
11-49 employees 274 273 278 1.4
50-199 employees 61 60 64 5.2
The Importance of Transport in Business' Location Decisions
14
200 employees 15 16 15 3.4
Total 2,062 2,128 2,160 4.8
Source: ONS
Table 2.6: Employees by size of workplace, Great Britain, 2000
Workplace sizeband Number of employees Percentage of employees
1-10 employees 5,436,888 22
11-49 employees 6,153,678 25
50-199 employees 5,898,541 24
200+ employees 7,570,108 30
Total (% rounded) 25,059,215 100
Source: ABI/NOMIS (excludes Census of Agriculture data)
Table 2.7 shows the percentage business size composition of industry by region in Great Britain in the
year 2000. Data were not available for Northern Ireland. This indicates very little regional variation,
but with Northeast England having the lowest proportion of small businesses and the largest number
of medium sized businesses. London has the highest percentage of small businesses.
Table 2.7: Number of Businesses by Size and Region, 2000
Area 1-10
employees
11-49
employees
50-199
employees
200+
employees
Total
North East 78% 17% 4% 1% 100%
North West 82% 14% 3% 1% 100%
Yorkshire/Humber 81% 15% 3% 1% 100%
East Midlands 82% 14% 3% 1% 100%
West Midlands 82% 14% 3% 1% 100%
Eastern 85% 12% 3% 1% 100%
London 86% 10% 3% 1% 100%
South East 85% 11% 3% 1% 100%
South West 84% 12% 3% 1% 100%
England 84% 13% 3% 1% 100%
Wales 82% 14% 3% 1% 100%
Scotland 80% 16% 4% 1% 100%
Great Britain 83% 13% 3% 1% 100%
Source: ONS
Table 2.8 provides a breakdown of industry sector by region. This highlights the following.
The Importance of Transport in Business' Location Decisions
15
Distribution, hotels and restaurants, followed by banking, finance and insurance are the largest
sectors in all regions.
London has the highest proportion of banking, finance and insurance employment. Wales has the
lowest.
The West Midlands have the highest proportion of manufacturing employment, London has the
lowest.
The East Midlands have the highest proportion of transport and communications sector
employment, London has the lowest.
Table 2.8: Percentage Employment by Industry sector and region.
Area Agric.
&
fishing
Energy
& water
Manufa
cturing
Constru
ction
Distn,
hotels,
rests
Transp
&
comms
Bank,
finance,
insure
Public
admin,
educ,
health
Other
services
North
East
0.6 0.3 8.2 7.9 35.6 4.7 21.5 11.5 9.7
North
West
0.3 0.2 8.8 8.3 34.6 4.8 25.6 9.3 8.1
Yorks/Hu
mber
0.5 0.3 9.7 8.9 34.7 5.2 22.6 9.3 8.7
East
Midlands
0.4 0.4 11.5 9.6 32.3 5.3 23.3 8.9 8.3
West
Midlands
0.3 0.2 11.9 9.3 32.4 4.9 24.6 8.5 7.8
Eastern 0.6 0.3 8.9 11.2 28.3 5.2 29.7 7.6 8.2
London 0.1 0.1 6.3 5.5 26.1 3.9 40.0 6.3 11.7
South
East
0.5 0.2 7.5 9.8 26.9 4.2 33.7 7.5 9.7
South
West
0.9 0.3 8.1 10.4 32.1 4.4 26.3 8.9 8.6
England 0.4 0.2 8.6 8.8 30.2 4.6 29.7 8.1 9.2
Wales 0.5 0.4 7.9 10.3 36.0 5 19.8 11.1 8.9
Scotland 2.2 0.7 6.6 8.5 33.3 4.7 22.9 10.8 10.3
Great
Britain
0.6 0.3 8.4 8.9 30.7 4.6 28.8 8.5 9.3
2.6 Conclusions
What we know
Worldwide Foreign Direct Investment (FDI) has fallen substantially in recent years.
Research indicates that following the size of its market, a country's openness to trade is most
likely to be correlated with its FDI.
The Importance of Transport in Business' Location Decisions
16
Access to IT infrastructure may reduce the reliance on market size as a determinant of investment
location. Subsidy per job and the level of government backing for FDI is also significant.
The UK experienced an increase in FDI during the late 1990s and start of the millennium; this fell
again during 2001/02; but overall, investment projects increased by 22% over the period 1997/98
- 2001/02.
Within Europe, the UK experienced the largest total FDI in 2001/02, followed by
Belgium/Luxembourg and Germany. Ireland experienced the largest increase (80%) and Greece
experienced the largest fall (-8%).
In the UK FDI is following the trend of employment as a whole with most projects in the non-
manufacturing sectors and a decline in manufacturing.
Most of UK investment takes place in the South East, particularly in the case of high value
knowledge-based businesses. Southern Britain and Northern Ireland have experienced the largest
gains in employment.
There is evidence of a trend over recent decades of movement of business from large cities to
urban fringes, and nearby rural areas (exurbs) and smaller towns.
In the UK, businesses between 1-10 employees make up the majority (83%) of businesses.
However, in terms of number of employees, large firms are relatively more important.
North East England has the lowest proportion of small businesses and the largest number of
medium sized businesses. London has the highest percentage of small businesses.
Distribution, hotels and restaurants, followed by banking, finance and insurance are the largest
sectors in all regions.
London has the highest proportion of banking, finance and insurance employment. The West
Midlands have the highest proportion of manufacturing employment. Many of the transport needs
of each sector are very different.
What we don't know
Will the current European 'Blue Banana' core from London to Milan be eroded as a magnet for
business location due to growth eastwards, and the continued growth of the 'Sunbelt' from
Valencia to Milan?
Has the introduction of Monetary Union and the Single Currency meant that geographical
differences, including the transport infrastructure, are increasingly important in the fight for FDI?
The Importance of Transport in Business' Location Decisions
17
3. The Drivers of Business Location
The Importance of Transport in Business' Location Decisions
18
Summary
There is a wide body of literature on the theory of business location, stretching back to before the
start of the 20th Century. Examples of models or approaches include: neo-classical; institutional;
behavioural; economic base; location; cumulative causation; core-periphery; industrial district;
innovative milieu and competitive advantage.
Early neo-classical theories place importance on the need to minimise transportation costs to and
from markets or inputs.
The attractiveness of a region to business is influenced by factors such as: infrastructure quality;
factor cost and supply (e.g. labour cost and quality); market demand; good communications;
international links; stable political situation; entrepreneurial culture; technological development;
and the nature of competition between firms. Attractive business locations are likely to score
highly on a number of these measures.
Empirical research in the UK has highlighted the access to markets and availability of skilled
labour, sufficient business accommodation and transport links as key drivers of business location.
Access to markets and skilled labour are generally the most important factors, especially for
higher value adding firms, although transport can help this by improving local accessibility to a
workforce.
Porter's model of competitiveness highlights the interdependence of conditions necessary to
attract and sustain competitive businesses, noting that the quality of the business environment,
including transport infrastructure, is of high importance.
Competitiveness theory also argues that transport provision in an area increases the effective
market size of an area and therefore increases competition, thus attracting more businesses, and
also increases competition.
Transport can affect business location through: goods transport financial costs; relative time costs
and savings; certainty/reliability of travel time; the need to physically meet customers and
suppliers; and staff and customer travel costs.
Empirical evidence from the UK suggests that perceived accessibility can be as important as
actual accessibility.
Empirical research shows that road infrastructure investment can increase commercial
development.
Other research highlights the limitations of transport in influencing location:
labour quality issues can often outweigh the impact of transport;
transactions costs of relocation can be too high to make a move economically viable;
transport infrastructure primarily reduces variable costs, which can be small relative to fixed
transport costs (e.g. vehicle depreciation).
In summary, although transport factors are often less important than some other factors, they may
still be of some significance in influencing location. Often both transport and non-transport
factors are necessary to attract business to an area.
3.1 Introduction
This chapter provides a brief overview of some of the main theories that seek to explain: firstly, the
drivers of business location; and, secondly, the relative importance of transport in location decisions.
It then presents some empirical evidence from studies that have sought to determine what effect
transport factors have on business location.
The Importance of Transport in Business' Location Decisions
19
As set out in chapter 1, business location has been taken to involve each of the various components of
location change, involving businesses that move all or part of their activities into or away from an
area (relocation), but also businesses that start up or stay in an area (location). The decision to locate
(or relocate) will be influenced by specific pressures on the business (e.g. external factors such as the
state of the economy; or internal factors such as lack of space to expand), as well as the range of
alternatives that the business has (location, logistic, production, or financial alternatives etc.).
Internationally mobile firms will usually have a wider range of alternative locations, while small
businesses usually relocate nearby so as not to lose staff and customers.
The definition of business can cover not just commercial businesses but also other organisations (e.g.
third-sector or government). Change is usually measured in terms of numbers of firms or employment
(and type of employment; e.g. full- or part-time; quality of jobs etc.) but could be measured in other
terms (e.g. turnover). It can be useful to disaggregate the differing effects of transport in terms of each
component of change, although most of the applications of the theories or models considered below
focus primarily on change in total employment or firm numbers.
3.2 Theoretical underpinning
3.2.1 Business location and firms' decision-making processes
The determinants of business location are multifaceted, complex and interactive. However, it is
necessary to provide a framework in which these can be classified. Within a national context,
businesses will locate where they have best access to markets and factors of production. Access to
markets and inputs (including employees, links to suppliers, knowledge of and access to production
and product technology changes, market knowledge), and their availability, quality and costs, will be
influenced by transport infrastructure, and increasingly by telecommunications or ICT infrastructure.
There may also be other financial factors such as taxes, government grants, or perceived or real non-
economic factors influencing location such as: the quality of the physical environment (see TSU New
Horizons, forthcoming); low crime rates; and access to quality school and leisure facilities etc. When
faced with international location decisions, businesses are also likely to take into account factors such
as current and expected political stability, regulations, exchange rates, taxation and freedom from
restrictive legislation etc.
The HM Treasury report on Productivity in the UK (Treasury, 2001) states that successful cities
require 'proximity factors', and those factors which are most effective in influencing the location
decisions of organisations are:
existing institutions specialising in innovations in technology and work practices;
good transport links;
access to risk and venture capital; and
a lifestyle that may attract highly-mobile knowledge workers
In addition to the attraction of a location ('pull' factors), there may be 'push' factors which lead to a
business moving, all or in part, from an area (e.g. due to expansion or congestion etc.). We now
outline some theoretical approaches to business location.
At a policy level, emphasis has generally been given to location factors. During the last decade
Porter's Competitiveness model has been prominent amongst regional development and national
policy makers, although the model has been criticised (see below). Porter's model emphasises
transport and communications as important factors that affect the competitiveness of a region and of
businesses within the region. It gives greater prominence to one factor that has arguably been
relatively neglected by policy makers - that is the effect of transport on international competitiveness
for the UK as a whole, and also for the international competitiveness of individual regions (although it
has been raised somewhat in the airport review and by regional development agencies). Of increasing
The Importance of Transport in Business' Location Decisions
20
importance is likely to be the effect of changing logistics on business organisations and their location,
and how transport influences this, although there is relatively little published evidence on how these
interact. Policy makers have also implicitly and explicitly used export base theory, as government
support has generally been restricted to 'export' industries (i.e. 'exporting' from the region, which
would exclude local retailers and service providers from getting assistance) although this does not
necessarily have an explicit transport element.
Classification of theoretical approaches
There are many overlapping approaches, theories or models concerned with the location of business
and the influence of different factors on this. Some examples are:
neo-classical models based upon free markets (see below and, for example, Borts and Stein, 1964,
or Fujita et al., 1999, on the 'New Economic Geography');
behaviouralist models focusing mainly on the individual business behaviour and assuming that
decisions are made with limited information, resulting in the choice of satisficing, not optimal,
locations;
institutional models which argue that economic activities are the result of external factors such as
values and institutions. Factors such as mergers and take-overs are important in influencing the
location of business (e.g. Pellenbarg, et al., 2002);
economic base models focusing upon industries that export form the region or locality (e.g. see
Armstrong and Taylor, 2000);
location theories considering different specific factors and the importance of agglomerations of
economic activity and regional characteristics (e.g. see Malecki, 1997);
cumulative causation theory (Myrdal, 1957) where success breeds success (or lack of success can
lead to a downward spiral for an area);
core-periphery models which focus on the different functions of regions and particularly the
relationships between core regions and peripheral ones. Access and transport often being crucial
as to whether one is within the core or determining a region's relationship to the core (e.g.
Parkinson et al., 1992);
industrial district models focusing on the importance of networks, entrepreneurship, innovation,
co-operation, flexible production and specialisation that help to make a successful regional
economy - initially using the example of the success of northern Italy (e.g. Piore and Sabel,
1984);
innovative milieu models focus upon the importance of the cultural and institutions (i.e. wide
synergies among local actors which give rise to fast innovation processes) in successful regional
economies (e.g. Campagni, 1995); and
the competitive advantage theory of Porter (1990; 1998).
Useful overviews of neo-classical and behaviouralist models can be found in McCann (2001) and
comparisons of theoretical approaches in McCann (1998). Some of the main approaches are now
briefly considered.
The importance of location characteristics
The characteristics of the region and the interaction and synergy of these characteristics are key to
identifying the likely attractiveness and development of a location. For example industrial structure,
the quality and scope of physical and business infrastructures, factor cost and supply, market demand
including links to international markets, institutional infrastructure and networks, a 'culture'
supporting 'civicness' and entrepreneurship, indigenous company growth, agglomeration economies
(incorporating static and dynamic externalities) and technological development, are all important to
The Importance of Transport in Business' Location Decisions
21
the development of regions. In addition inter-regional relationships (e.g. in terms of transport and
communication costs), and overlapping intra-regional factors such as inputs, agglomeration
economies and production networks need to be fully considered.
The importance of non-economic factors, such as climate, crime rates and other quality of life
measures have also been highlighted as important in attracting business investment. The pleasant
working and living climate of the Mediterranean 'Arc' or 'European Sunbelt' has contributed to the
attraction of new high-tech and service businesses (RECLUS, 1999; Schatzl, 1993; Hospers, 2002).
Further evidence for the importance of non-economic factors is considered in Section 3.3.1. The
effectiveness of regional development agencies may also be important.
The abilities to develop and utilise new technologies (products and production processes) are
important for a firm and affects location choice. Research on the development of successful
technological regions, such as the UK's "M4 Corridor" suggests that policy played an important role,
as did institutional factors and inter-firm links (e.g. Hall et al., 1987). While in the U.S. the East and
West coast high-tech industries exhibited very different forms of co-operation, with considerable
informal knowledge transfer even among competitors in Silicon Valley but lower levels of such co-
operation among East coast firms (Saxenian, 1995). This is discussed further in Section 4.2.
Technological change includes access to new technologies and help in utilising them, propensity to
innovate and opportunities for skilled staff so that they may be retained in the region.
Hence, the competitive advantages for firms and people in regions are based on various, overlapping,
factors according to different authors but based around forms of agglomeration economies or clusters
of industries (as discussed by Marshall in 1890, but popular currently through the work of Porter);
flexible production and specialisation; competition with rival firms, pressure from customers,
specialised suppliers and factor inputs such as labour and technology; economies of scale (Krugman,
1991); and also dynamic inter-industry clusters (Doeringer and Terkla, 1995).
Networks of formal and informal relations between organisations are important for regional growth
(Mazzonis, 1989), as well as wider "un-traded interdependencies" such as labour markets, public
institutions and locally or nationally derived rules of action, customs, understanding and values
(Storper, 1995, p. 205). As an example, Pal et al. (2001) explore what they believe to be a neglected
issue in retail store location by considering policy networks operating at the interface between
retailers and central government. They argue that informal networks, together with the economic
power of retailers and the legitimisation of their activities in the 'consumer interest' have provided
retailers with influence to exert power over the regulatory environment within which they operate.
This study draws on a case study in the UK and identifies the existence of these networks, the authors
arguing that these must be recognised in the development and implementation of PPG6 in order to
ensure maximum effectiveness. This implies that informal networks may currently allow retailers to
circumvent planning regulation.
Further evidence is provided by Walcott (2001) in an international case study, which identifies the
importance of informal networks in high-tech life science business location. Walcott discusses
informal 'learning location' networks that allow these businesses to exchange information and thereby
gain competitive advantage. Almeida and Kogut (1997) argue that choice of location is particularly
important to manufacturing businesses that rely on face-to-face networking with suppliers and
customers, citing Silicon Valley semiconductor manufacturers as an example. Transport factors in this
sector are secondary to the need to be located in proximity to other firms in the 'cluster'.
This also suggests that as many employers become increasingly footloose then a key location factor is
the ability to attract workers to live there, so quality of life becomes very important (e.g. Richard
Florida has done recent work in the US on this and there are proposals to extend this to the UK).
Florida (2002) argues that localities that attract 'creative' people will be the centres of wealth
generation in the future as the economy increasingly is based upon knowledge and the exploitation of
ideas. This core of key economic actors are "people in science and engineering, architecture and
design, education, arts, music, and entertainment, whose economic function is to create new ideas,
new technology, and/or new creative content." So the ability to attract such people, including quality
The Importance of Transport in Business' Location Decisions
22
of life factors relevant for such core people will be increasingly important for economic prosperity.
However, this perhaps underplays the importance of the globalisation of work (e.g. transferring
software design to India), underplays the creativity in good management and production of existing
industries). Informal networks from former university friends etc. can help convince key staff to come
to an area.
Hence policies need to address these issues as well as the physical and direct business support and
labour supply issues, particularly in peripheral regions with limited levels of economic development
and where large historic out migration may weaken the institutional base. The relative effectiveness of
regions in providing the necessary economic, social and physical infrastructure is important to
maximise the opportunities presented by the existing and future industrial structure and development
opportunities.
Cluster Theory and Competitiveness
The nature of business competition and co-operation in an area or region will have implications for
business location decisions. The level of competitiveness of different geographical areas varies
considerably. A competitive environment will allow more firms to operate and therefore attract
business or assist the expansion of existing or new indigenous businesses. Good transport provision in
an area will increase effective market size and competition in any given area, thus allowing a greater
number of businesses to operate. Without good transport links, markets are likely to become
segmented (separated) (Treasury, 2001), thus reducing competition and the potential for new
businesses to enter.
The DTI (1998) defined clusters as "concentrations of competing, collaborating and independent
companies and institutions which are connected by a system of market and non-market links."
Agglomerations or clusters of businesses, which may consist of one, or a series of interconnected
industries, may be vital to a region's ability to attract and retain high productivity businesses. Clusters
attract business through the potential for knowledge transfer, increased market size and inter-industry
linkages and a pool of appropriately skilled labour. Porter (1990, 1998) argues that clustering allows
businesses to operate in close competition with each other, thereby increasing the competitiveness of
the whole cluster (and region or economy). It also allows firms to take advantages of factors such as
information flows as noted above.
Porter's model of competitiveness has influenced economic development policy in a number of
countries and regions. He argues that there are four broad determinants of the competitive advantage
of nations -factor conditions, demand conditions, related and supporting industries and firm strategy,
structure and rivalry. Government and chance also play a role. The model argues that the inter-
connectedness of economic factors influences the ability of business to compete effectively; that
public policy can have positive and negative impacts; and that it is firms that compete not nations.
Porter (1998, p. 80) states, "the sophistication with which companies compete in a particular location,
however, is strongly influenced by the quality of the local business environment. Companies cannot
employ advanced logistical techniques, for example, without a high quality transportation
infrastructure. Nor can companies effectively compete on sophisticated service without well-
educated employees. Businesses cannot operate efficiently under onerous regulatory red tape". Porter
(1990) argues that a demanding home market is crucial to the development of an industry, although for
different products or services the 'home' market may be, for example, at the regional, national or EU
level.
However, Krugman (1994) argues that there is a danger of policy makers treating nations as large
firms competing on world markets, without considering the implications or validity of this hypothesis.
There has also been considerable debate over the definition of competitiveness and how it can be
measured (Begg, 1999; and Deas and Giordano, 2001). According to Krugman (1994, p.31-32), the
most popular definition of competitiveness is "our ability to produce goods and services that meet the
test of international competition while our citizens enjoy a standard of living that is both rising and
sustainable". Krugman (1996) also argues that cities, as such, do not compete with one another. They
are merely the locus for firms and enterprises that compete. The groups of asset which cities develop
The Importance of Transport in Business' Location Decisions
23
do not facilitate inter-firm competition, which is based fundamentally on cost efficiency, innovation,
marketing and other factors internal to the firm. At best, the characteristics or attributes of locations
are basic requirements, or necessary conditions, for competitive success but are not sufficient
conditions.
Competitiveness has influenced policy despite limited agreement on its precise meaning (e.g. the
European Commission's Competitiveness White Paper, 1993). The DTI states that capabilities are the
"bedrock of our competitiveness" (DTI, 1998, p.6) and that "to compete more effectively we have to
collaborate more intelligently" (p.7). The White paper also stresses, "competition is the sharpest spur
to improve productivity and the best guarantee of reward for talent and innovation" (p.8). The World
Economic Forum (2000, p.17) states in their Global Competitiveness Report "successful economic
development is thus a process of successfully upgrading, in which businesses and their supporting
environments co-evolve, to foster increasingly sophisticated ways of producing and competing".
The issue of competitiveness was examined in considerable depth in the report on Transport and City
Competitiveness (Department for Transport, 2003b). The report highlights that although city and
wider regions strive to achieve 'competitiveness', there is a lack of consensus regarding the meaning
of the term and how it can be achieved. It also highlights the need to identify the role of transport in
creating an attractive business environment. The report concludes that there are several competing
definitions of competitiveness, highlighting Porter's (1990) model. It states that research into the
direct role of transport on city competitiveness is fairly scarce, but there is a wide field examining the
nature of city competitiveness and the role of transport in economic development.
In many industry sectors, for example biotech and electronics, the existence of other firms in the
cluster can be as, if not more important that the provision of transport infrastructure, provided that
infrastructure meets a minimum standard. This implies that policies aimed at building clusters in areas
with weak industrial bases may be unsuccessful if conducted through the provision of infrastructure.
Transport has a role in enhancing competitiveness, but is only one of a number of contributing factors.
Policies aimed at directly encouraging other business, especially 'anchor' firms in the cluster may be a
better use of resources (Karlsson, 2003).
3.2.2. The role of transport in business location decisions
This subsection aims to focus on the theory of transport-related drivers of business location. It
provides an overview of literature examining whereby, and mechanisms by which, changes in
transport infrastructure and costs impact upon business decisions.
To put this in context, SACTRA (1999) noted that changes in transport costs have economic effects
through:
the location decisions of firms;
their influence on regional patterns of commerce;
incentives to invest and to innovate;
the commuting and migration decisions of households.
Transport improvements can influence location decisions through market and competitiveness
changes, such as costs of delivery or increased reliability of logistics systems and lower costs of
access to supplies; labour market impacts through access to a larger pool of labour, which might have
efficiency benefits; land and property impacts arising through access to land for business development
and expansion or the attraction of mobile investment (SACTRA, 1999).
Similarly, McQuaid (2000) argues that transport affects the characteristics of a location in terms of:
transport costs (e.g. large low value goods such as insulation material); travel costs for staff,
customers, (including tourists); time (which is becoming the main 'cost' in manufacturing according to
Drucker (1990) but more specifically can be important when industry logistics are organised in a
manner such as 'Just-in-Time'); risk and uncertainty (this relates to time in the sense that if delivery is
The Importance of Transport in Business' Location Decisions
24
highly reliable then the time a delivery takes need not be such a significant disadvantage); need for
liaison between supplier and customer; need for supplier to access market information and innovation
directly in the market. Many costs are inter-related, with for example improvements in logistics
reducing storage as well as transport costs, hence improve productivity, as well as opening new
market and production opportunities.
There is no simple link between transport costs and distance. Transport between nodes may be
cheaper than from a node to its hinterland (i.e. costs may not be geographically linear), so parts of
regions (often the capitals) may not be particularly disadvantaged. Additionally the transport of
people, ideas and capital may not be closely related to the transport costs of goods, yet these are
crucial to the competitiveness of organisations in a peripheral region and investment to these regions.
So using standard costs of transport may not reflect the costs of different industries, and even if these
are weighted by industrial structure the actual costs may differ due to the particular transport
infrastructure and logistics, such as return loading, and transport costs may be non-linear and subject
to varying uncertainty or risk
Looking at some of the mechanisms behind these effects, investments in transport infrastructure can
have a direct economic effect by reducing transportation costs for firms and increasing the effective
size of regional and local markets. This in turn creates new growth opportunities for successful
companies and increases the attractiveness of an area to new businesses. The Treasury (2001) state
that falling transportation costs may allow some economic activities to move to lower growth regions,
as this enables firms to reorganise and outsource certain aspects of their production to take advantage
of lower costs of production in peripheral, low-wage regions.
3.3 Empirical Evidence
This section examines more recent empirical evidence drawn from a range of reports and academic
studies. It examines the empirical evidence for the relative importance of factors that influence
business location, and the specific role of transport within these. These are often behaviouralist type
studies, asking businesses what factors influence their choices.
3.3.1 Drivers of Location
As stated in SACTRA (1999), firms have to determine the availability of a suitable labour force at an
appropriate cost as part of their location decisions. Firms may choose a location based on the cost and
quality of labour, and market accessibility, balanced against other transport costs. The AA/CBI (1998)
survey of local authority economic development officers indicates that issues such as the availability
of suitable sites and a skilled workforce are as important as transport, if not more so, to investors
when they choose where to locate.
Cushman and Wakefield (2002) reported on London being voted the top European trading location for
business by the European Cities Monitor 2002, based on the views of senior executives from over 500
European companies. The ranking was based on a broad range of issues. These included all the
communications factors and the availability of qualified staff, which, for the first time, was seen as the
single most important factor in deciding where to locate. London was rated first in seven out of 12 key
criteria. These were:
availability of qualified staff;
easy access to markets;
external transport links;
quality of telecommunications;
availability of office space;
internal transport;
The Importance of Transport in Business' Location Decisions
25
and number of languages spoken.
Another report (London First Centre, 2002) mirrors the above findings. This shows that the main
factors influencing the decision to locate in the UK capital were access to European markets,
London's status as a global business city, proximity of the client base, the English language, and good
transport links.
Invest UK (2000) also reported on the establishment of a client service centre in Glasgow, by a major
US company. The company vice-president stated that the primary reasons for locating in Glasgow
were:
the availability of a technologically skilled and customer-service-focused workforce;
property availability at a reasonable cost was also a factor;
the college and university systems are a definite asset to a growing company;
and the availability of excellent public transport adds to the effective size of the labour market.
A study by the Corporation of London (2002) highlighted the importance of air travel to business in
the City of London. The findings highlighted that:
almost 70% of firms consider air services to be critical for business travel by their staff;
50% consider air services critical for travel by their clients to meet with them;
video conferencing and other technologies provide useful communication aids, but are no
substitute for face-to-face meetings when it comes to client relationship building.
Non-economic factors have also been highlighted as important. Studies in the UK have found that the
quality of life and environment was an attraction for inward migration and inward investment, in one
report 57% of executives surveyed quoted this as the most important factor in relocation decisions
(Cornwall County Council, 1999). The importance of scenery in attracting investment has been noted
in an extensive consultation conducted by Scottish Natural Heritage (1997), concluding that it is it is
an intrinsic element of the package that helps to make Scotland an attractive place for inward
investment. In a US survey of inward investors in North Carolina, quality of life was ranked third
behind labour supply and transport as attractors (Rondinelli and Burpitt, 2000). Notably, government
incentives such as tax breaks were ranked low. However, it is important to note that there may be
necessary conditions (such as the profitability of the location) that may be more important than these
quality of life factors. In addition, many people appear to rank their own area as having quite high
quality (perhaps due to ex-post rationalisation).
3.3.2 The Role of Transport
Road Infrastructure
One aspect of asking firms how important transport was to their location choice is that the answers
may confuse local (site choice) factors from more significant regional factors (Hall et al., 1988;
McQuaid and Greig, 2002). For instance, forms may say that the presence of the M4 may have been
crucial to their choice of location. However, when questioned further they may say that they if their
major customer relocated in another region, then they would relocate there also. Hence the Motorway
is an important intra-regional location factor, but is relatively unimportant in the more significant
inter-regional location choice. Many studies do not explicitly distinguish such inter- and intra-regional
factors.
Halcrow Group (2002) in a case study of the M65 extension in Lancashire, used a weighted average
of location determinants based on employer interviews and found that, overall, 27% of decision-
making processes were influenced by factors that had some transport component. The most important
factors cited by businesses when making the decision to locate at the M65 were:
The Importance of Transport in Business' Location Decisions
26
cost of premises;
quality of site environment;
access to customers;
availability of suitable sized site.
The report highlights that although transport-related factors were overall less important than
combined non-transport factors, they still contributed significantly to the economic regeneration of the
area. What this study does not show is the interaction between different factors, for example, if there
were only poor transport links would businesses consider the cost of premises at all? This is addressed
in the section below on decision processes.
A study by the Welsh Economy Research Unit (1997) on economic development in Merthyr implies
that improved road access has been an important factor in influencing the location decisions of recent
investors. As a result, in addition to direct transport cost savings for existing businesses, there have
been even greater wider benefits in terms of income and employment from new business investment.
However, recent Welsh government evidence has highlighted the importance of putting transport
factors in context, citing cases where labour quality issues have deterred new business investment in
the valleys, despite the presence of new road transport infrastructure.
Another example is the A14 link between the A1 and M1 that is reported to have saved 30-35 minutes
on journeys accessing the motorway network (Government Office for Eastern Region, 1997). Since
completion of this road link, SACTRA (1999) reports that industrial and commercial development
within seven miles of the road increased by 470%, although this includes expansion of existing
companies. It is not clear how much of this was influenced by changes in planning policies as well as
increased demand.
Ernst & Young (1996) found that congestion and the unreliability of trips adds to business costs,
particularly for companies in the service sector and those serving urban areas. Although they note that
through improvements in logistics, transportation unit costs have fallen in real terms over the past 5
years for many businesses. SACTRA (1999) argues that to overcome these problems, substantial
investment is needed to improve the existing network in the UK to ensure competitiveness, primarily
road, heavy rail, urban public transport and airports.
Transport Interchanges
McCalla et al. (2001) studied 196 manufacturing and wholesaling firms in the areas around eight
Canadian inter-modal freight terminals - three seaports, three airports and two rail yards. They found
that transportation land use dominated other industrial land use, and crucially, that linkages between
industry and the transport hubs were weak, i.e. businesses in proximity to the terminals make
relatively little use of the facilities and very few businesses indicated that proximity to the terminal
was a primary location consideration. They found the industrial location-transport terminal
relationship was indirect, business located there because of the high level of accessibility found in the
terminal zones.
Accessibility and Labour Supply
The OECD (2002) report concludes that accessibility is one of the wider benefits from transport
infrastructure investment, and that improvements in accessibility can increase the market size for
labour. This finding is backed up by Trinder (2001), who argues that this may be due to reductions in
job search time, cost and accessibility (e.g. convenience, comfort, reliability and safety of travel).
Trinder also states that although other factors such as planning and other urban policies have an effect,
transport efficiency does influence the location of both firms and workers. SACTRA (1999) notes that
transport affects not just labour as an input to production (commuting), but also as an input to other
activities (social, leisure, etc.) that constitute the final demand for an increasing set of activities and
therefore influence the market for goods and services. This will affect a business through direct,
The Importance of Transport in Business' Location Decisions
27
indirect and induced demand. There is therefore evidence that the influence of transport on labour
supply can be an important component of business location.
While transport is a factor in determining labour supply for businesses, there is more debate over
whether labour supply itself is elastic to changes in transport. In other words, are improvements in
transport in a given area likely to induce workers to move to or from that area? If not, this makes the
choice of business location all the more important. SACTRA (1999) finds that in most studies carried
out, transport factors were not a major influence in causing people to move either employment or
residential locations, although it may influence choice of location once the decision to move has been
taken. So transport may influence local moves rather than, for instance, inter-regional moves, so it is
important to distinguish the different spatial scale of choice.
Trinder (2002) argues that workers may be encouraged to migrate into an area with improved
transport to take advantage of lower house prices made possible by the extension of the effective
commuting area, and may also be attracted by improved living conditions (e.g. larger gardens and/or
house) that the transport improvements bring. This is supported by SACTRA (1999), which states that
transport acts as an input to both commuting and other (social and leisure) activities.
EEDA (2000) note that infrastructure investment might alter the perceived accessibility of places,
thereby attracting inward investment, regardless of any change in actual accessibility. This is also
noted by others in relation to air and rail infrastructure (see below). They also state that transport
infrastructure can play an important role in supporting industry clusters by increasing labour
catchment areas and enhancing intra-area interactions. In relation to inward investment, they find
transport investment to be an important factor in firms' location decisions, and therefore a useful
policy for regions competing for mobile investment.
Limitations of The Influence of Transport on Location
There is further evidence that points to the limitations of transport-related factors in influencing
business location decisions, which are explored further in Chapter 4. SACTRA (1999) notes that
traditional approaches have suggested that because transport costs are generally a relatively small
proportion of total business costs, we can expect the response to any change in transport costs to be
small, although transport costs might have a larger role if we assume that they are more variable than
other costs of production, thus increasing the relative their impact. However, the transactions cost to
any change in transport may be too high to enable the firm to respond fully to a change in transport
costs. Therefore businesses are likely to change operations in discrete steps, and it is only when
certain cost thresholds are reached that it becomes efficient to the firm to revise its number or location
of depots.
Ernst & Young (1996) note that fixed costs, such as terminal and vehicle standing costs, can make up
a large proportion of transport operating costs and therefore improvements to transport infrastructure
will reduce only the variable (i.e. transport movement) elements of cost. This implies that transport
infrastructure improvements will have a limited effect on business location decisions as other factors
such as land costs, vehicle purchase price and depreciation will also be major decision criteria. Indeed,
SACTRA (1999) argues that it is not sensible in general to attribute any product market benefits, and
hence any price/cost margin benefits, to individual road and transport schemes. In other words,
transport improvements alone are unlikely to boost the market share, turnover or profitability of
businesses. An exception to this is where the new link makes possible economic activities that are
inherently fixed in location and for which transport costs are a significant proportion of total costs, for
example, mining, quarrying, forestry and fishing. In this case transport investments may reduce costs
to the threshold where it becomes commercially viable to engage in a new activity.
Lawless and Gore (1999) argue that transport, in particular public transport, is of fairly minimal
importance in explaining business location decisions, with only 7% of their Sheffield case study
sample of 300 indicating that public transport was a main 'push' factor in location. In this case they
were considering primarily relatively 'local' (re)location. The majority of businesses in the LRT
investment area indicated that they did not believe that the investment would change the amount of
The Importance of Transport in Business' Location Decisions
28
business they had, and this increased only slightly in a follow-up survey 2 years later. Good road
access was listed as important by over 30% of respondents; however, the study was not designed to
test the impact of a new road scheme.
There is also evidence, although somewhat speculative, to support the argument that certain types of
transport infrastructure development may cause businesses to relocate out of an area, especially at the
micro level. For example, the Scottish Executive (2000) report highlights that many local businesses
in Edinburgh blame new style bus lanes for a decrease in turnover, mainly due to parking restrictions.
Similar concerns have also been raised regarding congestion charging. And this point is also raised by
the STAG report (Scottish Executive, 2001).
3.4 Conclusions and Some Questions Arising
There is a wide body of knowledge stretching back to the 19th Century outlining the theoretical
transport-related drivers of business location, taking into account a range of economic and non-
economic theories. This initial review indicates that transport is a factor in business location decisions
but is neither the only, nor the most important factor. There are cases where the linkages between
transport investment in isolation and industrial location appear to be weak, or indirect. However, there
is strong evidence to suggest that while not sufficient, adequate transport may be a necessary
condition for business location. Of fundamental importance is the need to distinguish the influence of
transport on long distance (re)locations (e.g., long distance intra-regional, inter-regional or
international), and relatively local business location decisions where transport infrastructure changes
are likely to be more influential.
It is therefore important to address in more depth the following questions regarding the precise
relationship of the nature of the linkages between transport and business location. In other words,
there is a need to 'unpack' the role of transport in determining business location in different
circumstances.
Because the factors influencing location are inherently dynamic in nature, theories that ignore them,
or treat them as static, are likely to be incomplete. Some of the questions that are raised help form the
basis of our literature review in the following chapter. In particular the following factors influence the
relationship between transport and business location decisions:
Changing business organisation due to changing circumstances, globalisation and complexity,
including the role of logistics to business location, technology and transport provision and
requirements.
The spatial scale that the decision is taken at (international, national, inter-regional, intra-regional
and local) including the merits of different regions.
Firm characteristics (e.g., size, sector, ownership, function).
The issue of growth versus redistribution, i.e. do transport investments generate new activity or
merely cause relocation of existing activity? This is strongly linked to the scale of the analysis, as
inter-regional moves may be considered as growth for one region, but redistribution at a national
level.
In summary we can say the following.
The evidence suggests that transport is a necessary, but not sufficient condition in determining
business location. Other factors such as a skilled and/or cost of workforce, the quality of the local
environment and cost of premises have been shown to be equally, if not more important when
considered in isolation.
Research has also shown that climate, business environment and government assistance may be
magnets for business location.
The Importance of Transport in Business' Location Decisions
29
When combined with other measures, such as up-skilling, and integrated into part of a business
development programme, transport can help to influence location.
The evidence for road transport alone to attract business is mixed, however. Road investment is
unlikely to compensate for poor quality labour and some research suggests road building can have
negative effects in certain circumstances.
Research indicates that business clustering around transport interchanges is a result of the
generally high levels of accessibility found in such areas, rather than the interchange itself.
Air also appears to be important in promoting the perceived accessibility of an area - a function
that motorways can also perform in some circumstances.
Good transport links can increase the supply of labour in an area directly through easier access to
the workplace, but also through increasing the attractiveness of an area to live.
Transport costs are often a small proportion of firms' total costs and make little or no contribution
to fixed costs. Also businesses change location in discrete steps. Hence (re)location responses to
changes in transport costs will occur only after a substantial cost saving threshold has been
reached.
Transport infrastructure is likely to be relatively more influential at local levels of (re)location
than at broader levels, where other factors may be relatively more significant.
Evidence implies that informal networks among retail businesses may currently allow them to
circumvent planning regulation when locating.
The Importance of Transport in Business' Location Decisions
30
4. The Role of Transport in Business Location
Chapter 4 provides a review of evidence on the effects of different factors on the role of transport on
business location decisions. In order to assist in identification of issues relevant to current policy
issues, summaries are separated according to: Air Transport and Infrastructure; Strategic Networks;
and Localised Networks.
It is divided into six sections considering the influence of transport according to: changes in business
organisation; firm characteristics; labour supply, travel to work and social inclusion; spatial scale;
growth versus displacement; and conclusions.
4.1 Changes in Business Organisation and Technology
The Importance of Transport in Business' Location Decisions
31
Summary
Air Transport and Infrastructure
Air transport has had a key role in facilitating globalisation, through reducing travel times and
cost and increasing accessibility to markets and supply chains.
Businesses most dependent on air transport have a requirement for rapid goods delivery and for
international business travel.
Research indicates that the most important factor governing whether a company needs to be near
an airport appears to be the degree to which it is involved in multinational trading or contacts.
Strategic Networks
Changes in world markets and the increase in globalisation have lead to increasing complexity in
business structures. Tighter delivery and stockholding through practices such as Just-in-Time
(JIT) and an increasing demand for added value in components have all increased the logistical
demands of businesses.
The increasing demand for transport firms to become involved in pre-assembly (and adding value
to components supplied by, for example, sorting and packaging them) has led to changes in the
location of depots, and consolidation of these.
Multinational Enterprises (MNEs) have increased the complexity of their operations while using
outsourcing to reduce their own internal transport provision (and their own internal production).
This has changed the relationship between suppliers and consumers of transport services. In
particular, more businesses are becoming reliant on externally contracted transport services, who
can offer lower costs through economies of scale and scope in both transport and other services
(e.g. pre-assembly as discussed above).
As a result, it is the impact of transport upon freight businesses, as well as on actual final
manufacturing or service firms, that is becoming increasingly important. The existence of
networks of these freight companies is becoming more influential in business location, with hub
locations of such firms (e.g. the East Midlands) becoming more attractive. Competition between
countries and regions to host such hubs may increase.
Global sourcing may lead to the consolidation of suppliers in fewer locations.
Cost, speed, reliability and the quality of links between firms and suppliers/customers are
important.
Localised Networks
The emergence of 'City Logistics' - centralised delivery to the city edge combined with local scale
deliveries within the city - is likely to lead to a shift from large to small business premises within
the city area.
The emergence of Information and Communication Technologies (ICTs), particularly
teleworking, may have the potential to reduce business location dependence on proximity to the
labour market. However, evidence examining transport substitution rates suggests that this
potential is limited. Studies have shown teleworking may reduce conventional commuting by
between 1 and 8%.
In addition, ICT developments can increase business' reliance on physical transport infrastructure
by facilitating automated and fragmented production and increased geographical separation.
The Importance of Transport in Business' Location Decisions
32
Key References
Gillis, W. R. and Casavant, K. L. (1994) Linking transportation system improvements to new
business development in eastern Washington, Washington State Department of Transportation
Home Office Partnership & Hague Consulting Group (1997) Assessing the Impact of Advanced
Telecommunications on Work-related Travel. Study commissioned by the Department of the
Environment, Transport and the regions, under the Seedcorn programme
HOP Associates (2000) Telecommuting 2000, HOP Associates, Cambridge, UK
Huws U, and O'Regan S. (2001) eWork in Europe: Results from the Emergence 18-Country Employer
Survey, Institute for Employment Studies Report 380, for EU Emergence project
McCann, P.(1998) The Economics of Industrial Location: A Logistics-Costs Approach, Springer,
Berlin
4.1.1 Introduction
The interaction between transport provision, business and infrastructure is an established element of
the production cycle. As the markets for production and consumption develop, so do the demands on
transport provision and use. Recent changes in business organisation and structure are affected by a
range of factors ranging from an increased reliance on a global marketplace and new technologies,
especially ICT, to local and intra-regional issues of access to retail services. Similarly transport
provision and the nature of the relationships between the supplier of transport services and the
consumer has developed. This is in part as a result of the changes in the global marketplace, and in
part as a driver of the decisions that allow for the development of wider market opportunities.
Transport of raw materials, semi-finished goods, and products between points of production and
consumption forms the basis of the supply chain, while further elements of retail consumption include
consumer access to goods and services.
Theoretical approaches (see Paelinck and Kulkarni, 1999) relate spatial location to systems, including
those of production, in which movement of goods and people is a function of distance, cost and need.
Classic theories (see Von Thunen; Alonso; and Lösch) provide relevant concepts of distance and cost
equilibrium within which the role of transport can be clearly identified.
Complex business structures have emerged as a result of changes in world markets, the emergence of
global corporations, and increasing expectations of suppliers. The development of world and regional
markets in turn increases dependencies on the transport infrastructure facilitating movement.
Outman (1975) identifies three areas of this relationship, economic activity, demographic activity and
transportation facilities. As the nature of business develops, so the demand and need for transport
services change, but so do demands on the workforce. This in turn impacts on the use and needs of
personal transport. Shared commercial and personal infrastructure (e.g., Highways) can be impacted
upon by either transport form, the one impacting upon the other. Equally, developments in the
provision of transport services, their reliability and the perception of accessibility all play a part in the
location decisions of the company, its suppliers and consumers of its product(s).
Transport is not a separate element in business decision-making, but an integrated and vital
component of the logistics of operating a business, impacting upon and influenced by changes in the
business, business economies, location specific demographics and existing travel patterns.
The Importance of Transport in Business' Location Decisions
33
4.1.2 Changes because of globalisation
Change in the structure of businesses is an inherent facet of the business economy. Recent changes
range significantly from an increased reliance on a global marketplace, to local and intra-regional
issues of access to retail services. Similarly transport provision and the nature of the relationships
between the supplier of transport services and the consumer has developed. This is in part as a result
of the changes in the global marketplace, and partly as a driver of the decisions that allow for the
development of the wider market opportunities.
Gillis and Casavant (1994) observe a shift in manufacturing and secondary industrial markets from
own account to contracted and third party service provision, i.e. an increasing reliance on the use of
externally contracted services. In transport terms, this is witnessed by the growth of the logistics and
total distribution providers including express freight and logistics services companies. Economies of
scale achieved within the transport sector by logistics providers act to reduce the costs of provision of
the transport element of a business, together with increased complexity and benefit of using Intelligent
Transport Systems (ITS) in the delivery of the logistics 'product'. UK High street retailers including
Marks and Spencer and Sainsburys regularly contract a majority of their distribution functions to third
party suppliers, although Sainsburys maintains a small number of own account transport distribution
facilities.
Key to the increasing globalisation of industry is the provision of quality air transport. Air services
have a vital role in reducing travel times, increasing accessibility and therefore improving economic
efficiency and productivity. Critical factors in companies' decisions to locate near an airport include
the need for rapid delivery of products (air freight) and for international business travel. Airports
serve an important role in attracting inward investment, particularly from overseas, help to stimulate
and sustain the growth of local businesses by opening up new markets and supply chains. Of course of
particular importance for air transport is the level of services provided (e.g. direct flights to relevant
locations at suitable times or good inter-connections) and surface access as well as the actual physical
infrastructure.
Businesses in computing, software, research and development, biotechnology and some food
manufactures as well as the banking, finance and insurance are heavily dependent on air freight and
air services. However, research has shown that the most important factor governing whether a
company needs to be near an airport appears to be the degree to which the company is involved in
multinational trading or contacts (Smyth, 2003).
Airports can promote the 'clustering' of businesses, whereby a number of interlinked manufacturing
and service activities are concentrated in one place. Airports are frequently the focus of 'clusters' of
businesses serving the aviation industry directly or requiring easy and frequent access to air services,
and to freight-orientated businesses and business parks. Companies in many clusters are directly
related to air-dependent services, such as aircraft maintenance or the manufacture of aeronautical
parts. Wider clusters may develop of industries dependent on frequent air transport such as business
services and high technology manufacturing. Additionally smaller, more localised clusters of
businesses may develop in areas such as catering, cleaning and security that may provide accessible
employment for local people.
4.1.3 Transport of goods as an element in the supply chain
McCann (1998) notes that transport costs are only part of logistics costs, estimating this at between
10% and 30%. He concludes, "Transport costs, although central to classical location theory, are
empirically of very little significance in explaining overall costs faced by firms."
Having said that, it is important, to examine where and how transport fits in to the logistics process, as
other transport factors such as timing, reliability and perception of cost can be as important as cost
itself. Movement of goods both upstream and downstream of elements of the manufacturing process
has become typified by inclusion within the wider production process. The transport elements of the
production become internalised to the costs and pressures of the wider supply structure. Tighter
The Importance of Transport in Business' Location Decisions
34
control of delivery and use of stock (Lai, et al., 2003), Just In Time (JIT) practices, and a demand for
added value in components (part finished and partial component assembly) increases demands on the
logistics elements of the supply chain.
Possibly as a result of this, the way transport and logistics companies operate has developed with a
reappraisal of modal combinations. As an example, traditional rail using industries, such as the Royal
Mail have moved in a large part to road and air transport. Speed of delivery and distance attainable are
improved, benefiting from the faster mode(s), while facility requirements change as a result.
Transhipment points between the old and the new infrastructures may be required, introducing a
further element of potential delay and costs. Transhipment and the accuracy of information exchange
may be a particular issue (Fuller-Love, and Cooper, 2000) where third party facilities are used,
airports, shipping terminals and/or railway services handle many differing operators shipments and
may add delay (Vis and de Koster, 2003) in the total logistics chain.
Demands placed on businesses and supply are also changing, in line with increased accuracy and flow
of information, and in terms of consumer expectations. Multi-national and large firms have
maintained and increased the complexity of their operations while reducing own account transport
requirements, while many smaller sized companies have developed around geographical and technical
clusters resulting in changed demand and reducing costs of transport provision. Ellison and Glaeser
(1997) observe that the presence of one firm in a location reduces transport costs for subsequent firms
and this forms a driver for geographic concentrations.
There are also secondary transport influences that impact on the reliability and costs of transport
within the logistics chain. ITS and communication systems have impacted on the perceived and actual
reliability of the transport element (Groodvahl and Hill, 2000). Ability for customers to track and
trace products in real time improves the reliability and reduces the need for stock holding, while
internet and automated ordering and customer handling reduces the costs of provision. The Financial
Times (09.01.2003, companies and markets) compares the cost to YellowVan Trucks, a US contract
hire company, of 6 cents (US) for electronic orders to US $1.50, for traditionally manned enquiries.
4.1.4 Further development of logistics 'models' and changing impacts upon transport.
Role of transport firms in location.
As firms increasingly outsource transport services, it is the impact of transport infrastructure upon
freight companies, rather than actual manufacturers or service companies (Horner, and O'Kelly,
2001), that becomes key in many circumstances. For instance, a firm may not be concerned with
transport as once the goods leave the factory it is up to the freight company to deliver. So the unit of
analysis may most appropriately be the freight companies and their networks, economies of scale,
scope etc. (and it may be these economies of scale, scope etc. of the freight companies that may
influence overall transport costs in a region, rather than the simple transport costs of a single
manufacturer). The existing, and potential, networks of these freight companies may then be a
necessary, but not sufficient, condition for a firm's location.
Widening role of assembly and transport
The changing pattern of logistics especially (but not solely) in manufacturing has potentially profound
implications for the role and impact of transport upon employment location (consumer service
companies are also greatly affected by logistics changes but front line premises are more dependent
upon the best customer location, although warehousing may be affected by logistical changes). Taking
logistics to mean the management and flow of inputs through an organisation, then the operation and
control of logistics is undergoing change. Just-in-time production has been used for some decades
(some argue that its original introduction was based upon Japanese firms trying to reduce the cost of
inventories (Arnold and Bernard, 1989), and not to do with transport per se). Just-in-time does not
necessarily imply close geographical proximity between supply source and customer, but rather
factors such as certainty and precise timing of delivery. The increase in 'Build-to-order' products or
requirements for rapid adjustments to changing sales, often on a national or supra-national scale, (e.g.
The Importance of Transport in Business' Location Decisions
35
many computers are built to a particular customer's specification, with possibly only one plant
servicing the whole of the EU) suggests that supplying and transporting components needs to improve
in terms of speed and flexibility. Also increasing emphasis is given to small batch deliveries to
dispersed customers (emphasising the importance of access to delivery company hubs). Further moves
have been made to reduce storage and other inventory costs and also, importantly, administration
costs, through delivery direct to the production line, so that inputs do not need to be stored, but also
they do not need to be (for instance) counted as any shortfall or surplus of inputs will be identified at
the end of the production process. Strict quality penalties can also further transfer risk and obligations
to the suppliers.
Increasingly this has moved even further with suppliers responsible for pre-assembly (including
packaging) of components, so a partially assembled component is delivered to the production line. In
addition many firms have been moving towards global sourcing (Minner, 2003), so only one (or
perhaps two to avoid over-reliance) firms needs to supply components, or services, globally. This can
force smaller firms into difficult choices (e.g. one Scottish firm had to decide whether to set up a new
supply centre in California as its main customer in Scotland had moved towards single global
sourcing. This involved important risks for the firm, but if it did not expand overseas, it would lose a
major customer). This trend could be moved to dealing with other inputs such as staff, where a
subcontractor may be responsible for ensuring that a particular function is provided for within a wider
'production process' (i.e. an intense form of out-sourcing).
This may have profound impacts upon transport and transport firms. First, increased speed, reliability
and certainty of transport links between firms and suppliers, and firms and their final customers, is
increasingly important. Also transport firms may have to get increasingly involved in the pre-
assembly of components (or assemblers/suppliers need to become more involved with transport
services). This is likely to influence the location of their depots and possibly the merging of depots
and assembly functions. In either case this should affect the location of employment. The global
sourcing also forces firms to reorganise their entire firm and distribution system and leads to
consolidation in the freight industry and an increase in assembly.
4.1.5 City Logistics
Taniguchi et al. (1999, 2001) introduce concepts of city logistics - a process for totally optimising the
logistics and transport activities by private companies in urban areas - as complimentary to the
development of the city structure. The concept of centralising delivery functions to the city periphery
and providing local scale deliveries within the city, will also impact on the ability of the city scale to
compete for larger business locations. The concept is, however, a positive drive in environment and
access for city users in other areas of activity and may provide a longer-term benefit to location of
SMEs.
4.1.6 The Role of Changing Technology in Business Location
There has been a considerable amount of research, stretching back several decades, concerning the
potential for changing technology, in particular the implementation of Information and
Communication Technologies (ICTs) to facilitate 'e-working' or 'teleworking' from remote locations.
Arguments by Weber (1909, 1929), Castells (1993, 1996) and Cairncross (1997) have suggested that
the rise of technology will diminish the importance of business location as communication over
distance becomes easier.
ICTs can also lower costs of communication and can lead to improved efficiencies in production and
logistics. Implemented in parallel to the development of traditional transport services, ICTs have had
an impact on location and transport choices and this is expected to increase.
The Importance of Transport in Business' Location Decisions
36
E-Working
Huws and O'Regan (2001) define eWork as: "any work which is carried out away from an
establishment and managed from that establishment using information technology and a
telecommunications link for receipt or delivery of the work".
A study by the European Commission (2002) highlighted the results of the EU EMERGENCE project
which showed that under current technology, approximately 10 million new e-workers are likely by
2010, however, if changes in technology continue at the current rate, this is likely to reach 27 million
by 2010. The study found that the most common forms of eWork have become use of remote offices,
such as call centres, and employment of multi-locational workers, rather than fully home-based
eWork. The study found that the single biggest (and most rapidly growing) sector is outsourcing
driven by the search for technical expertise, cost and quality.
Huws and O'Regan (2001) identified eight factors that appear to influence eWork location:
relative service sector salaries
graduate availability
language
time zone
telecommunications infrastructure
trust or previous contact
internet literacy
economic development and 'openness'.
Studies have shown that workers in lighter industries are more able to engage in e-work, i.e.
telecommute, work from home or split work between locations, (Graham, 1998), although
Corporation of London (2002) notes that video conferencing and other technologies provide useful
communication aids, but are not a substitute for face-to-face meetings when it comes to client
relationship building. E-work can also involve the outsourcing of work en masse to remote locations,
for example, to take advantage of low rates of taxation and/or labour costs. A commonly cited
example would be the outsourcing software production to India and business services to the Cayman
Islands.
There are, however, arguments as to the extent to which of e-work can influence location and
substitute for conventional travel. Huws and O'Regan (2001) argue from the results of an empirical
study that the skills of the workforce and technical expertise in a region are the most important drivers
of location and that this leads to a clustering of similar firms. They argue that transport factors play a
minimal role; therefore the potential for e-work to influence location through substitution is limited. A
study by the Home Office Partnership & Hague Consulting Group (1997) estimated that uptake of
teleworking in the Cambridge area could result in traffic reduction of between 4% and 8%, mainly in
the morning peak, which is a significant but modest figure. A similar study by Amárach Consulting
(1999) estimated traffic reduction figures from telecommuting in Dublin to be around 1 to 1.5%.
The above figures are disappointing and suggest that there may be factors limiting the expansion of
telecommuting. A report by HOP Associates (2000) states that problems expanding telecommuting
result partly from an industrial age culture, i.e. an inherited model of work that involves belonging to
a company, having a designated workplace and commuting. Other problems identified were social
isolation, quality issues, and lack of employer support.
The Importance of Transport in Business' Location Decisions
37
Technology, Production and Logistics
Freeman (2002) states that ICTs have had a significant impact on the location and transport choices
through lower costs of communication and can lead to improved efficiencies both in terms of
production and in terms of logistics. This does, however, vary dependant upon the nature of ICT
application. In addition, evidence from Greenaway and Nelson (2000), and Venables (1998) implies
that changes in the firm, use of automated production, differing patterns of labour forces, and
fragmentation of the production process has increased the need for carriage over distance in some
elements of the production process, and led to the development of new trade theories.
4.1.7 Conclusions
What we know
Changes in the operation of business and markets, particularly increasing globalisation, have
increased the complexity of business operations.
This has changed business' transport and logistics requirements. One consequence of this is that
more transport services are being externally contracted, but also these external transport firms are
increasingly carrying out assembly functions. This can lead to changes in location and merging of
depots.
As a result, it is the location of specialist logistics firms that may increasingly attract other
businesses. Transport has an increasing influence on these specialist firms but less influence on
manufacturing and service firms.
Partly due to the above, the presence of other firms in the same sector can lower transport costs
for a business and increase the attractiveness of a location.
Air transport has a key role in the increasing globalisation of business and increased European
integration, due to firms' requirements for rapid goods delivery and international air travel.
Air transport is an important factor in attracting global inward investment and local and regional
clusters of businesses.
Businesses involved in multinational trading, or with multinational contacts, are most likely to be
dependent on air transport.
The development of city logistic techniques may increase the attractiveness of CBD locations.
Changes in technology have lead to outsourcing of work (including services) to remote locations
often in developing countries.
The impact of telecommuting has so far had a relatively small impact on business location,
although there is increasing relocation of service as well as manufacturing functions abroad.
What we don't know
The full influence of transport infrastructure and management on the location of international and
national distribution companies.
The extent of the influence that networks of freight companies have on location decisions of other
business.
What are the significance of transhipment and information-exchange costs (time and money) at
transport hubs?
The increased demand for pre-assembled components has placed greater demands on links
between suppliers and customers. However, to what extent is the merging of assembly/supply and
transport functions influencing the location of their depots?
The Importance of Transport in Business' Location Decisions
38
Will the role of telecommuting expand to influence physical commuting and location decisions?
How does the distribution and services provided (e.g. flight destinations) of the airport system
influence business location?
Can we develop a more logistics-based model of business location?
The Importance of Transport in Business' Location Decisions
39
4.2 Influence of Transport Varies by Firm Characteristics
The Importance of Transport in Business' Location Decisions
40
Summary
Air Transport and Infrastructure
Air transport is vital to Business Service firms - air transport per employee in this sector is 6 times
the average for UK businesses in general.
Air transport is of less importance to the other sectors, but still important in computing, software,
R&D, biotechnology and some food manufacturing. These businesses tend to manufacture high-
value, low-weight and/or perishable goods, and/or are likely to have highly mobile staff. Like
Business Services, air transport primarily provides access to external expertise and face-to-face
meetings.
Research has shown that air is the most influential transport factor in the location decisions of
most overseas-based business investing in the UK, and is important in attracting tourism.
Regional air links within the UK are also important in attracting and maintaining business
investment.
Air transport is important to the perceived quality of a location, particularly when a business is
unfamiliar with the area.
There have been concerns raised about air infrastructure investment, specifically overheating of
local economies (e.g. Southeast England) and subsequent wage, land and house price inflation,
deterring business investment, particularly among SMEs.
However, the benefit of air transport in regional development has been questioned, specifically
that road infrastructure, labour accessibility and a skilled workforce are all more important factors
in attracting business investment.
Strategic Networks
Research has shown transport and communication to be among the most important factors
affecting Business Service firms location decisions.
Traditional location theory suggests that heavy industries usually incur the highest transport costs
and are likely to be the most location dependent. However, there is growing evidence on location
dependency of light manufacture and service firms - particularly road and air access.
Research suggests that large firms' location decisions are most likely to be influenced by large-
scale transport that allows international movement, and that small firms are less affected, as they
will tend to subcontract out international connections.
Motorway links are of prime importance to UK headquartered businesses investing in the UK. Air
links are seen as more important by overseas-based investors.
Localised Networks
Retail location is influenced mainly by consumer accessibility. Transport development that
facilitates this access is likely to attract retail business. This has resulted in a proliferation of out-
of-town retailing, accessible to the private motorist and road-based suppliers.
Specialist retailers are concentrated in city centre locations, as they tend to sell smaller, high value
goods, and have less demand for car access. Also city centres may retain agglomeration
economies for specialist shops, but this may change as more retail activity is concentrated in
suburban areas and also as larger shops sell specialist items. Public transport infrastructure
development in and to cities will attract this type of business.
Similarly, businesses in the tourist sector are dependent on customer accessibility. Although they
are tied to specific locations, access may influence the viability of a potential development.
High-technology manufacturing businesses often 'cluster' together in technology parks, where
access to road infrastructure is important.
However, for many high-tech manufacturing firms, transport is of secondary importance to the
accessibility and proximity of staff and other firms to allow face-to-face networking.
The Importance of Transport in Business' Location Decisions
41
Key References
Button, K., Leitham, S., McQuaid, R.W., and Nelson, J.D. (1995) "Transport and industrial and
commercial location" The Annals of Regional Science, 29, 189-206
Corporation of London (2002) The Use of Aviation Services in the City of London and the Central
London Business District and the Implications for Future Aviation Policy
Department for Transport (2001a) Government's consultation document on air transport policy: A
report on the response to the public consultation, 12 Nov 2001
Gillis, W. R. and Casavant, K. L. (1994) Linking transportation system improvements to new
business development in eastern Washington, Washington State Department of Transportation
Kawamura , K. (2001) Empirical examination of relationship between firm location and
transportation facilities Transportation Research Record Transportation and Public Policy 1747
4.2.1 Introduction
Particular types of firms have particular needs for transport. Historically the movement of perishable
goods by train increased the range of their market (Cole, 1986) and for example encouraging the
development of dairy sectors in the South and West of England. Current transport speed and service
levels are more evenly distributed across a wider spatial area. However differing firm types still
demand differing transport provision, and are influenced differently by the infrastructure and transport
operations. Nicolaidis and Dobson (1975) model clusters of homogenous populations, including
industries, on the basis of common pattern of preferences.
Changes in the firm, use of automated production, differing patterns of labour forces, and a
fragmentation of the production process (Greenaway and Nelson, 2000) has increased the need for
carriage over distance in some elements of the production process. These led to the development of
new trade theories (described in detail in Venables, 1998) and models in the 1980s including
increasing distance trade barrier and market access issues. Individual sectors are also documented in
terms of their dependencies on transport as a factor of production.
4.2.2 Sectoral Differences
"As we enter the age of human capital, where firms merely lease knowledge-assets, firms'
location decisions will be increasingly based upon quality of life factors that are important to
attracting and retaining this most vital economic asset. In hi-tech services, strict business cost
measures will be less important to growing and sustaining technology clusters... locations
that are attractive to knowledge assets will play a vital role in determining new economic
successful regions." R C DeVol, Scottish Executive (2002a).
The above quote highlights the shifting emphasis from physical input-based location decisions to
decisions based on the availability of skilled labour, as the economy moves towards high value-added
service activities. However, access to suppliers and customers still remain important location criteria
for many industries.
The Business Service Sector
Phelps at al. (2001) identify transport and communication as first ranked factor in choice of location
for business service sectors. The Corporation of London (2002) study argues that good air transport in
particular is important for attracting business service firms as average spending per employee on air
services by the financial services sector is six times the average for UK business as a whole.
The Importance of Transport in Business' Location Decisions
42
Figures from Chapter 2 show that financial and business services make up at least one quarter of total
UK investment flows in 2001, although no long-term trend is clear. Analysis suggests that the
banking, finance and insurance sectors are heavily dependent on air freight and air services (Smyth,
2003). As well as requirements for rapid delivery by air, business travel is also a critical factor in
many companies' decision to be near an airport. This highlights the importance of air travel to
business investment as a whole in the UK.
Retail
Retail business location differs significantly from manufacturing and industrial requirements, as it is
normally the consumer that collects goods, rather than the producer that delivers them. Transport
influences on location are as much to do with consumer accessibility as producer supplier
requirements. Typically mass retailing has seen a move away from city centres, where access for
private vehicles may be restricted, to peripheral locations where access is increased (Kawamura,
2001). The result has been a proliferation in many western economies of out of town retail centres
easily accessible to the private motorist and equally to the supplier delivering goods to outlets.
However, a number of factors have developed against this trend. The UK, as with most western
nations, has experienced a split between mass retail - tending to become established in 'Out of Town'
shopping locations on the urban periphery, and specialist sale within the central area. What Audretsch
(1998) sees as a paradox - the importance of local proximity precisely at a time where scale appears to
dominate economic activity - highlights the divergent pressures on the location of businesses by type
influenced by and impacting upon transport facilities and use. The city centre location is therefore
experiencing a comeback, both in terms of the specialist retailer for whom mass access by private
transport is not as significant a factor, and as a result of reaction against out of town shopping by
consumers and legislators.
Chapter 2 highlights that the Retail/wholesale trade and repairs sector accounted for around 15% of
total FDI flows into the UK in 2001. This provides one reason as to why road infrastructure is
important to FDI in the UK, although the value to the economy of retail FDI is unclear as it is likely to
involve substantial displacement of domestic retail investment.
Manufacturing
Evidence from Chapter 2 (Chart 1.1) shows that manufacturing investment remains an important
component of overall FDI, although it's relative share has declined in recent years. Manufacturing and
technology industries have also experienced location specific pressures identifiable by sector.
Agglomerations (concentrations) of industries, and the benefits of proximity of similar industries and
their suppliers and or consumers is noticeable in different sectors. Ellison and Glaeser (1997) identify
a propensity to agglomeration, in specified Standard Industrial Classification (SIC) codes, i.e. a
clustering of business of a given industry in the same location. Natural propensity exists in industry
types dependant on natural resources (ship building is given as an example), while benefits of
reducing transport costs are often cited (Bennett, 2000) as factors in the location of similar industries
in the same location. As discussed in Section 3.2.1, Almeida and Kogut (1997) argue that choice of
location is particularly important to manufacturing businesses, citing Silicon Valley semiconductor
manufacturers as an example. Such businesses require being located in the proximity of businesses in
the same cluster to allow face-to-face networking and ensure competitiveness. In this sub-sector
transport is a secondary location factor.
Light industrial and electronics sector companies appear to favour new computing parks with
particular characteristics. These are often located at the periphery of the city, and in open and
preserved 'green' land. Examples of this can be found in most countries, including the UK, such as
Cambridge Technology Park, and Tandem (formerly Wang and Compaq) in Stirling (Markusen et al.,
1986; Feldman, 1994; Acs and Ndikumwami, 1998; DeVol, 1999). The location and form of these
parks often leads to the production of reverse commuting from inner cities to the outer suburban
locations. Also there is often a spatial mismatch between some labour tasks to company location. In
terms of FDI, Chapter 2 highlights that light manufacturing in the Office, IT and communications
The Importance of Transport in Business' Location Decisions
43
equipment sector accounts for only around 3% of total investment flows, although the value of this
may be higher.
Gillis and Casavant (1994) highlight the following regarding manufacturing location:
Investment in road infrastructure is a key to the location values of light industrial and commercial
businesses;
Air freight has an increasing impact on the development of some areas of manufacturing;
Development of a regional economy should encompass parallel ICT and ITS.
Analysis suggests that computing, software, research and development, biotechnology and certain
food manufactures are heavily dependent on air freight and air services (Smyth, 2003). Many of these
sectors are producers of high-value, low-weight products, with an international customer base that
demands rapid delivery. Typically these companies are in high-tech, 'knowledge-intensive' industries.
Sectors with a high degree of research activity, such as biotechnology and pharmaceuticals, need easy
access to air services, because their staff are often highly mobile and their competitive position
depends on accessing external sources of expertise and information. The manufacturing sector only
accounts for around 15% of demand for inter-industry air services, although much of this demand can
be accounted for by the higher' order activities within the sector that the regions are trying to attract.
In addition research has shown air transport links to be important for manufacturing businesses that
require face-to-face meetings (Almeida and Kogut, 1997) and that the quality of air transport
provision is an important determinant of perceived location quality (for example, Corporation of
London, 2002)
Electronics and computing industry businesses remain the most adaptable to ICT and other electronic
developments. Evidence suggests, however, that the benefits of agglomeration are significant to these
industries. (Almeida and Kogut, 1997). In contrast, heavy industry is likely to incur the highest
transport costs, and have the highest location dependencies. The workforce is less likely to
telecommute than in lighter industry and service sectors.
Tourism
In tourism, although natural assets are fixed, transport infrastructure can influence the viability of
investments that maximise the economic potential of these assets. An example might be a road
leading to a mountain area that allows development of a ski resort. In addition to road access, the DfT
(2001a) report highlighted the importance of air transport in tourism.
SACTRA (1999) notes regarding tourist attractions that as natural assets are fixed in location,
transport costs are a significant proportion of total costs and tourism is important to many peripheral
economies. It is also important to cities (e.g. cheaper air travel has permitted greater inward and
outward 'short stay' and other tourism) However, transport costs in this case are borne mainly by the
consumer, not the service provider. In some case slow transport may be part of the tourist experience
(e.g. single track roads or ferries), but this only operates at a local level and good access to the region
is still required. It also notes that there are problems in measuring the effect of transport on tourism, as
the tourist 'industry' is comprised of multiple sectors. SACTRA recommends that further research be
undertaken into the effects of transportation on tourism due to the importance that this industry plays
in the economic performance of many fragile economies.
4.2.3 Firm Size
It is suggested that the impacts of transport infrastructure reflect the scale of the business itself. A
multi-national enterprise necessarily needs to move products across national boundaries and is
influenced the most by the ability to operate on a large scale internationally. This does not, however,
remain the case for smaller scale companies sourcing internationally, in which international
movements are often contracted to either supplier or third party. The same can be demonstrated
downstream of production, in which small and medium sized enterprises are considered more likely to
The Importance of Transport in Business' Location Decisions
44
contract to third parties than operate own account (Tibbet and Britten, 2003). An exception to this
exists at the local urban level where retailers with a community or neighbourhood district are
providing delivery to consumers, such as local supermarket delivery services (e.g., SuperValue,
COOP to house etc.)
Mairel and Sedillot (1991) identify a correlation between physical size of business and scale of
location, including access to raw materials for manufacturing production; historical possession and
location possession for secondary industry; knowledge and concentration for technology industry.
Button et al. (1995) in an empirical study based on a survey of 939 firms in new premises in west-
central Scotland found bus links had a greater importance for large firms (probably for travel-to-work
for lower skilled workers). They found that the quality of transport infrastructure did not induce firm
migration but influenced location decisions once firms had decided to move.
4.2.4 Ownership of Business
Leitham et al. (2000) carried out an empirical stated preference study of 40 firms in west-central
Scotland. They found that different types of firms (e.g. foreign inward investors, UK inward investors
and local firms) varied in their views as to the importance of transport and of different modes, and of
different proposed transport infrastructure investments. Specifically firm location factors were found
to vary according to the origin of the firm - classified as local relocations; foreign inward investors,
and; branch plants sourced from national bases.
The importance of road links to location choice varied considerably between these groups with the
latter rating motorway links the highest of any of the groups of firms. In contrast, overseas sourced
branch firms found road links largely unimportant, being outweighed primarily by considerations of
workforce and premises. Local relocations fell into two distinct groups with respect to the importance
attached to road links (between relatively important and non-important), whilst considering the other
factors simultaneously.
Similarly, using different data, Button et al. (1995), found that there were important differences in the
type influence of different types of transport infrastructure investment on firm location. Road and air
infrastructure had a greater impact on inward investment than endogenous firms, (with roads
particularly important for UK headquartered inward investment and airports for overseas inward
investment).
Because of the importance of air transport to foreign inward investors, it is useful to examine the
effects of air transport provision in more detail. The DfT (2001a) air transport study drew upon
consultation with a wide range of interested organisations and individuals. The study examined,
among other issues, the effects of developing air transport on business and the economy. Feedback on
positive effects linked to business investment included:
good air transport links to and from regional airports are an important factor in decisions about
inward investment and location of business;
airports brought in tourism and inward investment;
airports boosted GDP and provided many thousands of jobs;
airports provided arteries for trade and investment in the global economy.
There were some concerns raised regarding negative effects of air transport that could impact on
business location decisions including:
overheating of local economies in areas of high employment (such as the South East), leading to
labour shortages, wage inflation, increased land and house prices;
damage to small firms;
road congestion;
The Importance of Transport in Business' Location Decisions
45
regional imbalance caused by concentration in the South East;
accessibility to skilled workforce and road links, rather than air links, are more important for air
links and cause less environmental damage, especially for short- and medium-trips in the UK.
4.2.5 Conclusions
What we know
Business Service firms' location decisions are very transport-dependent, particularly related to air
transport.
Air transport is also important for many light manufacturing and research businesses, and for
tourism.
The location of foreign investment in the UK is influenced by air transport, workforce and
premises, whereas domestic investment is more dependent on road transport.
Road infrastructure is important to the location of domestic light industrial and commercial
business.
Air transport investment can have negative location impacts through increasing congestion and
wage inflation in high-growth areas.
There is evidence to suggest that the size of the firm may be proportional to the scale of the
transport infrastructure that it is dependent on.
Proximity to other businesses in the cluster is important to many, especially, high-tech,
manufacturing firms.
Many retail businesses depend on consumer access by car. This is generally maximised in out-of-
town locations.
New retail location appears to be splitting between mass retail on out-of-town locations and
specialist retail in the CBD.
Transport infrastructure provision does not induce relocation but can affect location decisions.
What we don't know
Is there a potential long-term trend back to town and city centre retail development?
How important is perceived relative to actual transport quality in location decisions of investors?
The effects of transportation on tourism, particularly in fragile peripheral economies where it is of
most importance.
Which types of business can realistically be encouraged to locate in more centralised locations?
How will the location requirements of businesses change and how will this differ between type of
business?
The Importance of Transport in Business' Location Decisions
46
4.3 Labour Supply, Travel to Work and Social Inclusion
The Importance of Transport in Business' Location Decisions
47
Summary
Air Transport and Infrastructure
The presence and development of airports accessible from deprived areas can create employment
opportunities both directly, and indirectly through encouraging business clustering, inward
investment and tourism.
Strategic Networks
Transport improvements can increase the market size for labour and reduce the search time for job
seekers.
Increased ruralisation of business location in the UK has been attributed to the reduced need for
access to large pools of labour found in conurbations. However, much of the apparent ruralisation
is about movement to 'exurbs' and small towns accessible to urban areas by strategic roads (i.e.
expanding the city influence as suburbs did 50 years ago, a process reinforced by jobs moving to
suburbs and hence accessible from 'rural' and small nearby towns areas).
Localised Networks
There is no clear consensus as to whether shifts in business location induce long- or short-distance
labour migration.
There is a body of evidence to suggest that suburbanisation of business location follows
population movements, but also evidence to suggest that business investment cores attract
residential development.
Following from the above, there is a lack of consensus, particularly at city scale, as to whether
workers relocate to follow employment or vice-versa.
Take-up of Travel Plans/Green Transport plans in the UK has been limited in the private sector,
but more successful in the public sector. This could be improved by increased Central
Government guidance to local authorities, grants for surrendering parking spaces and tax
incentives for work bus provision.
Inappropriate location of business and/or poor transport provision to centres of employment and
services can contribute to social exclusion. Socially excluded people may be prevented from
accessing employment because they have no access to private transport or cannot afford fares or
there are inadequate services and connections. This reinforces existing exclusion.
Research has highlighted that women, lone parents, part-time workers and residents of rural areas
are groups particularly at risk from transport-induced exclusion.
Business relocation to decentralised locations can create accessibility problems for certain
employees, particularly those on low wages, those dependent on public transport, part-time
workers and black manual workers (in US). Improvements to transport can help solve this but
decentralised locations are more difficult to service by public transport.
Measures to reduce accessibility exclusion can include both business location and transport
provision:
planning policy to encourage major employers to locate in urban cores and near to public
transport interchanges;
subsidising commuting costs;
grants for driving lessons and/or car purchase;
transport improvements at a local level are likely to be the most effective.
The Importance of Transport in Business' Location Decisions
48
Key References
Department for Transport (2001b) Take Up and Effectiveness of Travel Plans and Travel Awareness
Campaigns, February 2001
EEDA (2000) Infrastructure benchmarking study Report by Steer Davies Gleave to East of England
Development Agency, Cambridge
ODPM (2003a) Making the Connections: Final Report on Transport and Social Exclusion, Report by
the Social Exclusion Unit
OECD (2002) Impact of Transport Infrastructure Investment on Regional Development, OECD
Publications, Paris
Phelps, N. A., Fallon, R. J. and Williams, C. J. (2001) "Small Firms, Borrowed Size and the Urban-
Rural Shift" Regional Studies Vol. 35/7, pp. 613-624)
Trinder, D. (2001) Transport Infrastructure and Economic Growth, Structural Issues Development
Group Working Paper 01(06)
4.3.1 Introduction
Access to labour is often cited as the most important determinant of business location (Invest UK,
2000/2002; AA/CBI, 1998). Conversely, the location of firms and the subsequent ways they source
their labour supply can also have an effect on transport efficiency and job accessibility. Because of
this it is important to identify:
how do transport factors influence business' ability to source labour?
what are the impacts of business location on travel to work and commuting?
does firm location and transport provision impact on the ability of socially excluded people to
access employment?
4.3.2 Labour Accessibility
In this section we examine the evidence examining how transport affects business' ability to access
labour supply and how this in turn can influence location.
The influence of transport on labour supply
There exists a body of literature assessing the impact of transport infrastructure on labour
accessibility. The OECD (2002) report found accessibility to be one of the wider benefits from
transport infrastructure investment. It stated that improvements in accessibility can increase the
market size for labour, but noted that this could have positive or negative implications for the region
in question (for example, if an area of high unemployment was opened up to increased labour market
competition). Additionally, EEDA (2000) stated that transport infrastructure can play an important
role in supporting industry clusters by increasing labour catchment areas and enhancing intra-area
interactions. Bruinsma et al. (1997), found that road construction was beneficial to travel and
perceived travel times; this would increase the effective labour supply of businesses in the area.
Trinder (2001) puts forward evidence that investment in transport infrastructure can reduce the search
time for job seekers, which will increase the potential labour supply for businesses in the area.
Felsenstein (2002) argues that suburbanisation of the labour supply, i.e. a movement of the residential
population from the city to the suburbs, has resulted from changes in the accessibility/cost equilibrium
The Importance of Transport in Business' Location Decisions
49
and is largely related to transport infrastructure. In other words transport factors do not just increase
firms' access to an existing fixed supply of labour, but can be instrumental in inducing labour itself to
move (Trinder, 2002). Although such labour migration has been found to be selective (Houston, 2001)
with lower skilled people 'left behind'.
The influence of labour supply on location
Looking at evidence for the mechanisms by which labour accessibility can influence location, Phelps
et al. (2001) argue that part of the reason for the recent urban to rural shift in location experienced in
the UK can be explained by companies retaining a large majority of labour inputs from immediate and
local vicinity, rather than conurbations. They argue some elements of an observed urban-rural shift
may centre on the phenomenon of 'borrowed size' - the formation of agglomeration of firms and other
factors (including labour) with similar interests. Small firms may locate in small settlements while
having access to specialised labour from nearby conurbations.
Whereas Phelps et al. (2001) consider the impacts of borrowed scale as positive to labour production;
Keeble and Tyler (1995) suggest the 'Ruralisation' of a business as an opportunity for reducing
workforce size. Their study provides a review of a shift, seen as generic, of industry away from city
centre locations to urban periphery and rural locations.
Felsenstein (2002) from the theory of suburbanisation (above) argues that move of population out of
the centre, impacts on the move of some industry sectors to the periphery partly as a result of
following the population for market share. At the city scale, the factors that impact on the residential
population are driving forces for the light industrial and commercial businesses with limited barriers
to movement. This finding is significant, as a disparate body of empirical evidence suggests the
opposite sequence, i.e. people follow jobs. However, it is important to distinguish literature that refers
to short distance migration (e.g. intra regional or within a city) and long distance (inter-regional)
migration. High technology agship employment centres such as science parks and government
laboratories have been credited with producing the seeds of metropolitan expansion. Different high
technology locations such as Lawrence Livermore Labs in California, the British defence
establishment facilities along the M4 motorway west of London, Bell Labs in New Jersey, French
government research centres in Sophia Antipolis and Federal facilities in the Research Triangle in
North Carolina, all suggest major high technology clusters which lead to residential development and
in-migration in their wake (Hall et al., 1987; Markusen et al., 1986; Catells and Hall, 1994; Luger and
Goldstein, 1991).
Travel plans
A recent policy tool used by the UK government has been the promotion of Travel Plans, formerly
known as Green Transport Plans. Travel Plans are basically packages of practical measures to
encourage staff to use alternative commuting methods to single-occupancy cars, and to reduce the
need to travel to work, or as part of work, at all. A report by the Department (DfT, 2001b) showed
that the take up of Travel Plans has been limited among private sector businesses, but more successful
in certain areas of the public sector. Among the findings were that:
24% of local authorities, 61% of hospitals and 50% of higher education establishments had a
travel plan in place;
however only 7% of the businesses surveyed had a travel plan in place or were developing one,
and only 4% were considering one.
The figure for businesses is low, but the report highlighted that that 22% of businesses might be
encouraged to implement a travel plan if provided with more assistance by the local authority in their
development. The report concludes that there may be a case for more Central Government guidance
for local authorities in helping businesses to implement plans.
The reasons for take up, or lack of take up of travel plans was also examined in the Department for
Transport (2001b) report. It concluded that:
The Importance of Transport in Business' Location Decisions
50
the main motivation for local authorities was to 'lead by example' - they felt that they could best
persuade businesses to take up travel plans if they had one of their own;
the main incentive for hospitals was pressures on parking space;
the main reason for higher education establishments was to gain planning permission - those who
did not develop one reported lack of funding and time to be the main obstacles.
the primary motive for businesses was environmental reasons, and the main impediments were
lack of financial support from Central Government.
The report noted that one possible method to increase the attractiveness of travel plans to businesses
would be to offer employees a tax-free sum for surrendering their parking space. It was also noted that
there were currently tax disincentives for companies running work buses.
Chapter 7 examines the policy implications of the findings of the literature review. It examines the
policy implications arising from the areas outlined in Chapters 3, 4, 5 and 6 under a number of
questions headings arising from current DfT and ODPM policy documents.
4.3.3 Transport, Business Location and Social Inclusion
Introduction
The right employment location and transport provision can have positive social inclusion impacts by
connecting workers and potential workers in vulnerable social circumstances to employment.
Conversely, the wrong location and/or lack of transport can reduce employment accessibility, with
negative inclusion impacts. For example, the location of a bank call centre in an out-of-town location
with ample car parking but poor public transport to the site will limit the employment opportunities
for those without private transport. The OECD (2002) report concluded that transport infrastructure
investment could have positive (through increased accessibility and mobility) or negative effects on
social inclusion within a region.
The policy agenda
The ODPM (2003a) Social Exclusion Unit report highlights the importance of accessibility planning
in reducing social exclusion. Accessibility planning is the co-ordinated transport, business and
inclusion planning to identify those most at risk and take action to increase employment access. The
report identifies the following issues;
People may be prevented from accessing employment and services because they are socially
excluded. In particular the lack of access to private transport is a barrier;
Inappropriate location of employment and services combined with poor transport provision act to
reinforce social exclusion;
Negative transport externalities also impact on socially excluded people as they are often affected
by traffic noise and pollution.
Groups at risk
Specific groups at risk have been highlighted. Hamilton and Jenkins (2000) in an analysis of
secondary data sourced mainly from UK government statistics, found that poor transport limits
women's employment and quality of life, as women rely more upon trip-chaining and off-peak travel
(due to part-time work). They suggest that reforming public transport to meet the needs of women
would have commercial, inclusion and environmental benefits. In addition, evidence shows that
women can face constraints in their travel patterns, and hence employment opportunities, due to
household responsibility - the 'household responsibility hypothesis' - has been advocated by Pickup
(1989) and Turner and Niemeier (1997). McQuaid et al. (2001) found that socio-economic factors
such as females, having dependent children and low education levels were more influential in
The Importance of Transport in Business' Location Decisions
51
determining shorter potential travel times of job seekers (and hence the chance of gaining
employment) than provision of public transport, accessibility or access to private transport.
The Select Committee on Education and Employment (1998), reported that lone parents were at a
disadvantage in getting to work as only 35% have access to a car, compared with 90% of couples with
children. Similarly, McGregor et al. (1998) found that travel problems, connected with child care, low
wages and part-time work can act as a barrier to employment and that some employers also
discriminated on travel-to-work grounds.
Residents of rural areas are at risk from exclusion, particularly if they do not have access to private
transport (Monk et al., 1999). A survey of unemployed job seekers in the north of Scotland (Lindsay
et al., 2003) highlighted that despite the majority of these job seekers holding current driving licences,
relatively few had access to their own transport. The cost of owning and running a vehicle was cited
as the main reason for this. For 54% of long-term unemployed the sample the costs associated with
private transport were viewed as an important barrier to work.
Business relocation
Houston (2001) conducted a retrospective longitudinal study of firms who relocated to decentralised
locations within the Glasgow conurbation. He found that when firms relocated to decentralised
locations difficulties were created for certain groups of workers that could not relocate or move house,
particularly lower paid and lower skilled workers and those dependent on public transport, especially
women. Houston stated that improvements in transport infrastructure would partially alleviate this,
however, there is a problem in that decentralised locations are more difficult to service by public
transport.
Studies in the US have identified the problem of employment shift to suburban areas not served by
public transport. This creates problems for inner-city residents, particularly black and manual workers
(Zax and Kain, 1996). Similarly in the US, Goldenberg et al. (1998), in a US study of unemployed
and evaluation of a project to link transport measures into employment initiatives, found that
problems exist where jobs move from urban centres to outlying areas not served by public transport.
This is an issue that we consider in more detail in Chapter 5.
Tackling the problem
The ODPM (2003a) report states that promoting inclusion through accessibility will involve
improvements to the planning and delivery of local transport and the location of employment and key
services in accessible locations. Existing planning policy guidelines are designed to promote the
location of employment in accessible areas by ensuring that new business developments that employ
large numbers of people are located in urban centres and/or near public transport interchanges.
A number of micro-level studies have sought to evaluate specific investments in addressing social
inclusion. Grant (2001) examines the role of transport in combating exclusion in Liverpool. He argues
that because of the specific nature of transport demands by each community, transport planning must
involve early engagement with the community to ensure that such demands can be properly examined
and realistic aspirations established. He also notes that due to the complexity of journey demands,
investment in smaller-scale community-based transport projects may be the most effective solution to
transport exclusion. He gives the example of flexible demand-responsive transport at below taxi cost,
running alongside main line services.
Other evidence comes from Goldenberg et al. (1998) as mentioned above, who found that in several
demonstration projects, the transportation services provided through the initiative enabled individuals
to get a job or to increase work to a full-time basis. Zenou (2000) used a theoretical model based on
the residence of workers relative to employment in a monocentric city and found that improving
transport by subsidising commuting costs of all workers reduces urban unemployment, but increases
inequality, whereas a policy of subsidising transport for only the unemployed reduces inequality but
increases unemployment. Hine and Mitchell (2001) argued that improvements to transport services
The Importance of Transport in Business' Location Decisions
52
can help promote social inclusion, particularly among the elderly, those without a car who live in
peripheral estates, low income groups, bus users and women.
Grants for driving lessons and even towards the cost of a car have been used in the UK to reduce
social exclusion caused by lack of accessibility. Stafford et al. (1999) found that possession of a
driving licence increased the chance of finding work among men and women aged 18-24 in a UK.
This may be because of travel-to-work issues, but also because a driving licence is often an essential
part of an employer's person specification and/or is seen as a proxy for motivation.
Around the UK, regional airports are seen as a potential focus for local economic development and
regeneration and can help to boost previously rundown areas as part of wider regeneration strategies.
Airports can facilitate the generation of business clustering and help to attract inward investment and
boost tourism. While the presence and growth of an airport near deprived areas is only one of a whole
host of fact that can contribute to regeneration, it is nevertheless an important one for improving
employment prospects and promoting economic growth in local communities. The inward investment
and tourism that airports attract can also help to regenerate areas, as with the new McCausland hotel
(formerly a derelict warehouse), the Hilton and Posthouse Hotels that have recently opened in the
heart of Belfast.
It has been estimated that around 180,000 people are employed directly by the aviation sector in the
UK and a further 200,000 indirect jobs are supported by the sector (OEF, 1999). The study estimates
that, on average, 1.3 indirect jobs are created for every direct job in the aviation sector in the UK,
although this will vary from airport to airport and with circumstances. Induced employment
multipliers for regional airports have been produced by ECOTEC (2001). These estimate jobs not
directly related to the aviation industry that are generated by the aviation sector. The multiplier varies
between regions and airports, but evidence points to an average figure of around 0.3 induced jobs
created for every direct job at UK regional airports.
There is also evidence to suggest that Information and Communication Technology (ICT) may be of
use in order to overcome problems of social exclusion caused by lack of mobility. Examples include
SACTRA (1999), which reported that telematics could substitute for journeys, facilitate initiatives
such as community car clubs, provide 'on demand' special transport and improve information on
public transport routes and times. Grieco et al. (2000) argued that ICT may be able to enhance the
mobility of excluded people through: quality information and timetabling; intelligent and in-home
reservation systems; on demand transport for those working unsociable hours; expanding the role of
the third sector through private car use where deregulated bus services fall short of service
requirements; and through the extension of car clubs to cover low income areas. In addition, Carter
and Grieco (2000) note that ICT provides possibilities for breaking down gender, class and racial
boundaries, assisting in delivery of the New Deal and improving the transport environment.
Conclusions
What We Know
Evidence suggests that both changes to business location and improvements to transport can help
to increase social inclusion.
Poor accessibility can act to reinforce exclusion by limiting access to employment to those
already most disadvantaged.
Particular groups, such as those without access to private transport, the low skilled and the low
paid are more at risk.
Moves to increase accessibility are most likely to be effective if addressed at community level.
Successful measures have included improvements to local public transport and grants for driving
lessons.
The Importance of Transport in Business' Location Decisions
53
Business relocation to suburban and other decentralised areas creates accessibility problems and
makes retrospective public transport provision more difficult.
Large-scale business relocation appears to induce population movement, whereas small-scale
relocation often follows population movement.
Take-up of Government Travel Plans has been successful in the public sector, but less so in the
private sector. Increased financial support from Central Government may help to improve this.
Investment in air transport can address inclusion, particularly through creation in indirect jobs
from inward investment and tourism development.
Investment in 'transport telematic' technology can help improve accessibility, for example through
Demand Responsive Transport and improved timetabling information.
What We Don't Know
How do the factors of transport improvements, improved planning regulations and suitable
development policies effectively and efficiently interact?
What employment potential do major developments such as airports offer to excluded groups,
especially as they are not centrally located and often have poor public transport links to relevant
housing areas?
Is the urban to ex-urban shift of business caused by: agglomeration of firms in these areas; by
reduced demand for a large pool of labour; or is it following population shifts? Or are other
factors responsible?
The Importance of Transport in Business' Location Decisions
54
4.4 Influence of Transport Varies by Spatial Scale
The Importance of Transport in Business' Location Decisions
55
Summary
Air Transport and Infrastructure
Airports and air services are important at a regional level by encouraging inward investment and
industry clusters. Air services improve access to markets and suppliers and links to capital/central
regions, therefore increasing the viability of peripheral regions as business locations.
The development of regional airports can create job displacement within a region, leading to a
smaller net impact.
Air transport, and connection to it, is particularly important to the City of London due to the
concentration of business service and multinational firms, but is also important for regional
centres.
Strategic Networks
Research has shown that businesses regard transport costs as less important than other factors
such as marketing, skilled labour, broadband connectivity, property market, tax/exchange rates
and image when making international location decisions.
Where transport is a factor, research has shown that reliability is more generally important than
speed or cost.
Research has shown that peripheral nations and regions in Europe are not perceived to have
higher transport costs than the 'core' and that businesses located there do not face substantially
higher costs. However, this research requires updating and it is important to distinguish real and
perceived costs.
The majority of foreign investment decisions take place through mergers and acquisition rather
than the desire for physical (re)location. This inherently limits the potential for transport to
influence total investment flows.
Where supra-national authorities (such as the EU) have influence, transport infrastructures tend to
be of a higher quality, reflecting economic integration. Guidelines on business transport policies
are also enforced by these authorities, resulting in less national divergence.
There is a lack of consensus on the role of transport in influencing inter-regional location
decisions. Some research indicates this is marginal, others that specific infrastructure can be
beneficial.
Specifically, much research shows motorway development to be related to regional economic
development and that road improvements can increase location values to light industrial and
commercial business.
However, other research shows that transport infrastructure can only boost business investment if
strategic land use planning and other required characteristics, such as a quality workforce,
entrepreneurial culture and business linkages are in place. Evidence suggests that it is difficult or
impossible to replicate the success of some regions through transport measures alone.
Localised Networks
There is stronger evidence to suggest that transport may be able to influence business location
decisions at a local level.
Good transport infrastructure is more likely to influence intra-regional than inter-regional location
decisions.
Some research has found intra-regional difference in transport costs to be negligible in the UK.
However, perceived differences in transport cost can still influence location.
Transport developments have improved accessibility of suburban and ex-urban locations relative
to city centre locations. This has moved the accessibility to cost ratio in favour of out-of-town
business location.
There exists speculative evidence on negative impacts of schemes such as road user charging, bus
lanes and
p
edestrianisation schemes. However
,
studies have shown that these schemes are often
The Importance of Transport in Business' Location Decisions
56
Key References
Amin, A. and Malmberg, A. (1992) "Competing structural and institutional influences on the
geography of production in Europe" Environment and Planning A, Vol. 24, pp. 401-416
Blackburn, S. P. and Clay, J. W. (1991) Interstate 40 economic impact study: impacts of highway
bypasses on community businesses North Carolina University, Research Report
Core Cities (2002) Cities, regions and competitiveness, interim report from Core Cities Working
Group, Birmingham
Gillis, W. R. and Casavant, K. L. (1994) Linking transportation system improvements to new
business development in eastern Washington, Washington State Department of Transportation
Hall, P. Breheny, M. McQuaid, R. W. and Hart, D. (1987) Western Sunrise - The Genesis and Growth
of Britain's Major High-Tech Corridor. London: George Allen & Unwin
Linneker, B. J. Spence, N. A. (1996) "Road transport infrastructure and regional economic
development : the regional development effects of the M25 London orbital motorway" Journal of
Transport Geography, Vol. 2/4, pp. 77-92
McCann, P. (1998) The Economics of Industrial Location: A Logistics-Costs Approach, Springer,
Berlin
Pieda Consulting (1984) "Transport costs in peripheral areas" ESU Research paper No.9, Industry
Department for Scotland
Scottish Executive (2002a) Scotland: A Global Connections Strategy
4.4.1 Introduction
The geographic scale of analysis influences the apparent impact of transport and the significance of its
constituent elements. Similarly the role that transport plays in providing locational advantage differs
by spatial scale, type of company and time dependencies of product elements. SACTRA (1999) states
the case put forward by business for transport investment, that an efficient transport network is vital to
a strong economy at local, regional and national level, by providing access to labour, suppliers and
customers. Transport costs can therefore influence the location of economic activity between towns,
regions and countries. The needs and determinants of the relationship between business and transport
vary further by the nature of spatial distribution, whether in terms of upstream input supply,
distributed production or extent of the spatial distribution of consumers.
4.4.2 Linkages Between Spatial Scale and Transport
What Audretsch (1998) sees as a paradox - the importance of local proximity and geographic clusters
precisely at a time when globalisation seems to dominate economic activity - and highlights divergent
pressures on location of businesses influenced by and impacting upon transport facilities and use.
Transport, and its influence on business location, varies by the spatial scale of the markets of
production and supply. Significant are the distances required to source materials, the spatial
distribution of the business itself, and the distances required to transport products downstream to
customers.
Storper et al. (2002) identifies within trade and location theory, forces that could lead to locational
dispersion (comparative advantage) or locational concentration (scale economies) in the face of global
markets. Spatial scale impacts on the role and importance placed on transport in the choice of
The Importance of Transport in Business' Location Decisions
57
location, while access to infrastructure will in turn impact on the competitive advantage of the
location. Transport influences are addressed equally as contributors to locational advantage - a driver
of globalisation, and influenced by regional business location - a driver of comparative advantage.
Fujita (1999) provides the broad picture of linkages between both approach and discipline with
reference to the work of Walter Isard. An Economic Geography approach to location and spatial
economy (see: Isard, 1956, 1960, 1969) defines the theory of location and space-economy, as
embracing the total array of economic activities, with attention paid to the geographic distribution of
inputs and outputs and the geographical variations in prices and costs. The influence of space and
location are allied to the cost of locating, and implicitly the availability of transport facilities.
Cost elements are also explicit factors in the Lösch spatial equilibrium model (Paelinck and Kulkarni,
1999). The desire to minimise transport costs equates to profit maximising behaviour of the company.
Scale is significant to cost and contributory to benefits in production. The needs and determinants of
the relationship vary both by company complexity and geographical scale. This varies further by the
nature of spatial distribution, whether in terms of upstream input supply, distributed production or
extent of the spatial distribution of consumers/customers.
It is not, however, appropriate to seek a general equilibrium of production (Fujita, 1999). The
prevailing concepts of general equilibrium in the tradition of Walras, Pareto, and Hicks fail to
consider spatial dimensions explicitly. More importantly, the framework of such a general equilibrium
analysis based on perfect competition is not comprehensive enough to incorporate the particular
effects of transport and spatial costs on the distribution of economic activities in space. As the scale of
production is increased, complexity of transport, and its costs increase. Extended transport chains
contain monopolistic elements, reduced choice of transhipment locations, access to airports etc.
Transport supply and effective performance of the differing modes is significantly affected by the
scale and distances being covered. International travel that necessarily crosses oceans necessitates
particular forms of transport services, air or sea rely on the efficiencies of the port and transfer
facilities typical of those transport modes, while land based international, national and regional scales
are influenced by more localised factors. The following sections examine these points in more detail.
4.4.2a International Scale
Dimitrios et al. (2002) provides an extensive analysis of the location decisions across national
boundaries. International trade issues and spatial modelling were examined by several studies,
including Benson and Hartigan (1983, 1984, 1987), Stegman (1983), Porter (1984) Hatzipanayotu
(1991), and Herander (1997) who employ Hotelling-type spatial models. (Spatial models recognise
that distance separates households and firms and incorporate a cost in economic transactions among
them.) These models add a geographical dimension to economic activity both within and across
national borders in order to provide a convenient mean to examine the issue at hand. Factors that are
likely to impact upon the cost and efficiency of the operation include the following.
Availability of air and sea routes
Transport Costs and extent/impact of competition in transport market
Efficiencies of interchange points, perceived and actual delay
Efficiencies of routes taken, non-stop, direct and 'hubbed' services
The role of transport
The Pieda (1984) study, reported the findings of a major survey of manufacturing businesses in three
peripheral regions of Europe (Scotland, Northern Ireland and the Republic of Ireland) and one central
location (the Ruhr in Germany). The study examined the role of transport costs on business location
decisions and sought to determine what, if any, disadvantages were faced by peripheral regions
seeking to attract business investment. The research produced a number of interesting findings.
The Importance of Transport in Business' Location Decisions
58
Businesses in peripheral regions did not face substantially higher transport costs.
Most businesses did not regard transport costs as a major factor in location decisions.
Most businesses regarded transport costs as relatively unimportant to competitiveness compared
with other factors, e.g. marketing
Where transport was mentioned, the most important factors were reliability, with speed and cost
less important.
Peripheral areas were not generally perceived to have higher transport costs than the central
region.
Where transport was mentioned as a significant factor, potential shipment distance was the main
determinant of businesses perceptions of transport costs.
Table 4.4.1 below shows a detailed breakdown of the reported transport costs as a percentage of
turnover and the number of businesses reporting that distribution costs were the most important
barrier to trade.
Table 4.4.1: Transport Cost As A Percentage Of Company Turnover
Companies Quoting High Distribution
Costs As Most Important Barrier To
Trade
% % All
German
Co's
% All
Scottish
Co's
% All
RoI
Co's
% All
NI Co's
% All
NI Core
Co's
% All
NI
Perip.
Co's German Scottish RoI NI
6% + 15.4 15.7 26.4 16.4 4.0 26.7 25.0 6.3 42.9
4-6% 11.5 7.8 32.1 18.2 12.0 23.3 12.6 37.5 21.4
2-4% 46.2 43.1 30.2 30.9 48.0 16.6 100.0 50.0 12.5 14.3
0-2% 26.9 33.3 11.3 34.5 36.0 33.4 12.5 43.8 21.4
100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Source: Pieda (1984)
Further evidence for the factors determining international location decisions includes Core Cities
(2002) which seeks to identify factors which influence the location decisions of international business
and concludes that London and the South East attract investment due to investor perceptions about a
highly skilled workforce, broadband connectivity, a superior business property market and London's
reputation as a business and lifestyle location. The report highlights factors that place UK regional
cities at a disadvantage compared with their Continental counterparts:
strength of the knowledge based economy;
cosmopolitanism and culture;
social polarisation;
environmental sustainability and;
fragmentation of governance and resource allocation.
Notable from the above list is the absence of any factors related directly to transport, although
environmental sustainability could be seen as depending partly on an adequate public transport
network.
As a cautionary note, it should also be recognised that the dominant proportion of FDI flows (e.g.
over 80% to Scotland in 1999) are accounted for by non-contestable (in location terms) mergers and
The Importance of Transport in Business' Location Decisions
59
acquisitions (Scottish Executive, 2002) and therefore transport factors are likely to be able to
influence a maximum of around 20% of capital inflow decisions. In other words, the majority of
inward investment decisions are triggered by factors other than the desire to physically relocate
operations; therefore the potential of transport to attract FDI is limited. This does not mean that
transport has no role in attracting FDI, just that the impact of transport investments is likely to be
small when measured as a percentage of total FDI into a country.
4.4.2b Supra-National Scale
The supra-national scale is applied to groups of countries operating free trade areas, or with multi-
national agreements for free movement within specified areas. These included the EU, EEA and North
American Free Trade areas. Combesa and Linnemer (2000) observe that the development of free trade
areas have impacted on the location of businesses and (partially as a result of this) led to the
development of new transport priorities. "...better infrastructures are typically developed when
economic integration increases. The European Union offers a good example."
Influence from supra national authorities, such as the Commission of the European Communities may
also impact on the direction and influence of transport within the EU. The commission already
provide guidance through 'Good Practice in freight transport' Such practices are seen as universal -
'...all of these approaches can be implemented by small and medium-sized enterprises (SMEs) as well
as by large national and multi-national operations' and include the following.
Reducing the impact of each mode through cleaner engines, cleaner fuels, new fuels and in the
case of road freight, energy efficient truck design
Action on Driver training and behaviour
Switching to environmentally friendly modes of transport, e.g. rail, coastal shipping, waterways
and any of these in combination with road transport
Reducing the actual number of vehicles running, vehicle kilometres and tonne kilometres by
increasing load factors (reducing empty or partly loaded running of lorries), and
Improving routing, utilising new information technology to maximise backloading, consolidate
deliveries, sharing loads and pick-up deliveries with other companies
Examples of development of schemes under these goals include City Logistics, a co-ordinated freight
transport scheme for urban conurbations. These partnerships (known as City Logistik companies in
Germany) are in operation in Berlin, Bremen, Ulm, Kassel and Freiburg. The Freiburg example has
several pointers to the future shape of freight transport in urban areas. The Freiburg scheme has
reduced total journey times from 566 hours to 168 hours (per month), the monthly number of truck
operations from 440 to 295 (a 33% reduction) and the time spent by lorries in the city from 612 hours
to 317 hours (per month). The number of customers supplied or shipments made has remained the
same. The Kassel scheme showed a reduction of vehicle kilometres travelled by 70% and the number
of delivering trucks by 11%. This has reduced the costs of all the companies involved and increased
the amount of work that can be done by each vehicle/driver combination.
4.4.2c National and Inter-regional Scale
Transport factors may influence the location of businesses within a nation state, in other words
between regions of a country. Factors likely to influence location decisions include the following.
Extent and nature of competition in transport market
Efficiencies of interchange points
Efficiencies of modes
Policy impacts on transport operations
The Importance of Transport in Business' Location Decisions
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The influence of transport costs
There has been a wide body of rese