The strategic importance of location: Location decisions and the effects of firm location on innovation and knowledge acquisition

1. Introduction – what guides location decisions?
Classical and neoclassical location theory prescribes the choice of firm location to be guided by cost factors and infrastructure in the region. These cost reducing factors may lead firms to localize close to main costumers or suppliers thus reducing cost of inter-firm transactions by this proximity. Another parameter may be that co-locating firms may benefit from access to shared resources like infrastructure, and a local, specialized labour market. Location of traditional production activities might to a large extent still be determined by cost factors and other traditional location factors, such as mentioned above, as well as in the paper by Doeringer et al. in this issue. The recent trend of outsourcing production to low cost Asian countries, especially China, is an indication of this. Additionally, it has been argued that although logistics and transportation technologies have improved immensely, the complexity of logistics has increased, as has the demand for speedy and frequent deliveries (McCann and Sheppard, 2003). Just-in-time manufacturing and distribution accentuates this. There is empirical evidence showing that at the aggregate level transportation costs as a share of total output have truly decreased substantially. But disaggregating the data shows that the fall in costs is accounted for by industries where frequencies of transactions have remained constant over time, typically mature industries like raw materials, agricultural products and some manufacturing products (Hummels, 1999; Glaeser, 1998). This indicates that there is still a role to play for traditional location theory in explaining how firms locate especially in these types of industries. Within industries different activities may have different requirements in terms of location –expanding thus line of thought, Doeringer et al. in this issue break new ground by proposing that different management practices may also lead to different location requirements. The distinction between activities in relation to location can be dated back to Hymer (1979), who stated that the higher one goes in the hierarchy within a corporation, and the less standardised are the operations to be carried out, the greater the need for lateral communication. This implies that whereas activities at the lowest level, concerned with keeping activities going within the established framework, may spread themselves over the globe according to the pull of manpower, markets and raw materials, “[a]t the highest levels, continuous face to face contact and a large measure of common understanding are necessary” (Hymer, 1979, p. 237). Therefore these high-level activities tend to be far more geographically concentrated that lower level activities. Innovative activities, also within traditional industries, can be considered high level activities, and should therefore, following Hymer, largely remain outside the trend of outsourcing production. Furthermore such activities are often based upon intangibles, therefore not adequately analysed with traditional location theories (see Feldman (1999) for a review of empirical studies of location and innovation).