What does a business weigh up when deciding where to locate, and why is the best site different for a factory than for a shop?
Explain the main factors affecting the location decision of a business, including markets, costs, labour, infrastructure and government influence, for different types of business
A focused answer to the O-Level Business Studies outcome on location. The factors affecting where a business locates - markets, costs, labour, raw materials, infrastructure and government influence - and why the best location differs by type of business.
Reviewed by: AI editorial process; not yet individually human-reviewed
Have a quick question? Jump to the Q&A page
Jump to a section
What this dot point is asking
This outcome wants you to explain the factors that affect where a business chooses to locate, and to show that the most important factor differs by type of business. The central idea is that a firm weighs up costs, access to its market, labour, materials, infrastructure and government influence, and that the right balance depends on what the business does.
The answer
The main location factors
When choosing where to locate, a business considers:
- Nearness to the market (customers). Vital for shops and services that rely on passing trade and footfall.
- Nearness to raw materials. Important for businesses using heavy or bulky materials (for example, a steelworks near iron ore or a port).
- Cost of the site. Land and rent are cheaper outside city centres, which matters for businesses needing lots of space.
- Availability and cost of labour. The firm needs enough workers with the right skills nearby, at an affordable wage.
- Infrastructure. Good roads, ports, rail, reliable power, water and internet let the business operate and transport goods efficiently.
- Government influence. Grants, tax incentives, enterprise zones or, conversely, planning restrictions can attract or block a business.
- Room to expand. A growing firm needs a site that can get bigger.
Why the most important factor varies
The factor that matters most depends on the type of business:
- A retailer (shop, restaurant) prioritises nearness to customers and footfall, even if rent is high.
- A manufacturer prioritises low-cost land, transport links and access to materials and labour, often locating outside city centres.
- A service business that deals with customers online may have great locational freedom, choosing wherever costs and labour suit.
The trade-off
Location decisions usually involve a trade-off: a busy city-centre site brings customers but high rent; a cheap out-of-town site cuts costs but may be far from customers. The firm balances cost against access to its market and inputs.
Examples in context
Example 1. A fast-food outlet in a busy mall. A fast-food chain pays high rent to locate in a crowded shopping mall or transport hub because the constant flow of people passing by generates the sales it needs. Here nearness to the market outweighs the high cost of the site, showing why retailers accept expensive locations to capture footfall.
Example 2. A logistics warehouse near the port and expressway. A distribution company locates its warehouse on cheaper land near a port and major expressway, prioritising transport links and low rent over footfall, since customers never visit and goods must move in and out cheaply and quickly. This illustrates how a business handling bulky goods values infrastructure and cost far more than a city-centre presence.
Try this
Q1. State two factors a business considers when choosing a location. [2 marks]
- Cue. Any two of: nearness to the market (customers), nearness to raw materials, cost of the site (land/rent), availability and cost of labour, infrastructure (transport, power), government influence (grants, planning rules), or room to expand.
Q2. Explain why a shop is more likely than a factory to prioritise nearness to customers. [3 marks]
- Cue. A shop relies on passing trade and footfall, so being where many potential customers pass by directly drives its sales, justifying a busy, higher-rent location. A factory's customers do not visit it; its goods are transported out, so it prioritises cheap land, transport links and access to materials instead, making nearness to customers far less important than for a shop.
Q3. Analyse how government influence might affect a manufacturer's location decision. [4 marks]
- Cue. A government may offer grants, tax incentives or cheaper sites in enterprise zones to attract firms to areas needing jobs, which can lower the manufacturer's costs and pull it to that location. Conversely, planning restrictions, high local taxes or rules on pollution may make some sites unavailable or costly, pushing the firm elsewhere. So government policy can both attract a manufacturer through incentives and block it through restrictions, making it an important factor in the final choice.
Exam-style practice questions
Practice questions written in the style of SEAB exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
Original4 marksA clothes shop and a steel factory are each choosing a location. Explain why the most important location factor is likely to be different for each.Show worked answer →
For the clothes shop: the most important factor is likely to be nearness to the market (customers). A shop relies on passing trade and footfall, so it needs a busy location such as a shopping centre or high street where many potential customers pass by.
For the steel factory: the most important factor is likely to be costs and access to raw materials and transport. Steel-making is heavy and uses bulky materials, so the factory needs cheap land, good transport links (port, road or rail) and proximity to raw materials or to where heavy goods can be moved cheaply, rather than passing customers.
Markers reward identifying nearness to market for the shop and cost/raw materials/transport for the factory, with reasons linked to the nature of each business.
Original6 marksExplain three factors, other than nearness to the market, that a manufacturer should consider when choosing where to locate a new factory.Show worked answer →
Any three developed factors, for example:
Costs of the site: the price of land and rent varies by location; cheaper sites (often outside city centres) reduce fixed costs, which matters for a large factory needing lots of space.
Availability and cost of labour: the factory needs enough workers with the right skills nearby, and lower local wage levels reduce costs.
Infrastructure and transport: good roads, ports, rail and reliable power and water let the factory receive materials and send out goods cheaply and reliably.
(Other acceptable factors: nearness to raw materials, government grants or restrictions, and room to expand.)
Markers reward three clearly explained factors developed beyond a list, each linked to the needs of a manufacturer.
Related dot points
- Compare the main forms of private-sector business organisation - sole trader, partnership, private limited company and public limited company - and their advantages and disadvantages
A focused answer to the O-Level Business Studies outcome on business ownership. Sole traders, partnerships, private limited companies and public limited companies, with their advantages, disadvantages and how to choose between them.
- Distinguish the private and public sectors, explain the role and objectives of public-sector organisations, and compare them with private-sector firms
A focused answer to the O-Level Business Studies outcome on the public and private sectors. The difference between the two sectors, the objectives of public-sector organisations, why the state provides some services, and how private and public bodies differ.
- Explain the methods of production - job, batch and flow - and the factors a business considers when choosing between them
A focused answer to the O-Level Business Studies outcome on production methods. Job, batch and flow production, their advantages and disadvantages, and the factors that decide which method a business should use.
- Explain the main government economic objectives and how fiscal and monetary policy, and legislation, affect business activity
A focused answer to the O-Level Business Studies outcome on government and the economy. The main economic objectives, fiscal and monetary policy, the effect of legislation, and how all three influence a business.