Theory of the Firm 3

The government may therefore encourage the development of firms in some areas by offering concessions to industrialists such as:

a) Offering free or cheap land

b) Reduction of taxes

c) Offering subsidies

d) Offering direct financial assistance

e) Improvement of infrastructure

Other factors:

Proximity to source of credit: Some firms that need credit to finance their operations from time to time might require locating near a reliable source for such funds.

Availability of security services: This is an important consideration when deciding where a firm will be located as this has implications in almost all factors of production.

Firms will tend to avoid locations that do not have adequate security.

Social amenities: Some firms take into account various activities and institutions that will benefit their employees.

Such will include hospitals,schools, social halls or studios.

Availability for ample room for expansion: Businesses will tend to prefer locations that can provide ample room for expansion in future.

This will eliminate the need for relocation when the firm experiences expansion Climate:

This is an important factor for agro-based businesses (such as floriculture, horticulture, dairy farming e.t.c) which have to seek locations with suitable climatic conditions.

Localisation and Delocalization of Firms
Localisation of Firms

Localisation of firms means the concentration of similar firms in one particular area/regieron.
Subsidiary industries usually develop around the main industries, either to use the by-products of the main industries or to supply them with component parts.

The factors which encourage localization of firms include:

i) A well developed infrastructure in an area which attracts firms into that area.

ii) Availability of large population which may provide both labour and market

iii) Interdependence among various firms in areas such as training of personnel.

iv) Government policy requiring firms to be located in a certain area.

v) Availability of raw materials in a certain area.

vi) Availability of ancillary services such as banking, insurance and warehousing.

Advantages of localization

Service industries/Ancillary services: It encourages the establishment of support business enterprises e.g.

if many firms are located in one region, institutions such as banks, insurance companies and distributors are likely to set up businesses in the area to offer services required
Creation of pool of labour:When industries are concentrated in one area, people tend to migrate to that region in search of employment thus
encouraging creation of a pool of labour force.

This enables firms to meet their labour force requirements. Creation of subsidiary industries:

Localised firms are likely to attract others
which use the finished products of the established firms as raw materials or selling raw materials to the existing firms.

Disposal of waste:

Localised firms are able to easily dispose off their waste by either selling them to other firms for recycling or by jointly undertaking waste disposal projects.

Creation of employment:

It encourages creation of employment opportunities in the region (it creates interests in the type of labour required thereby leading to creation of employment opportunities.

Development of infrastructure: Concentration of firms in one area encourages development of the necessary infrastructure such as water systems, roads, communication network, health and education facilities in the region.

Economies of scale: Firms can combine to employ benefits of large-scale production for the benefits of consumers.

Reduction in costs:

Firms that depend on each other for inputs or disposal of outputs are able to save on transport costs when they are located near each other.

Disadvantages of localization

Adverse environmental problems: Concentration of firms in one region may have a negative impact on environment in that region e.g. emissions from
factories may cause both air and water pollution; there may also be noise pollution and poor disposal of refuse.

Unbalanced regional development: Localisation of firms may lead to regional imbalance in development.

For instance, areas of industrial concentration tend to enjoy provision of social amenities in terms of roads,schools, hospitals and other facilities while other regions suffer.

This may cause dissatisfaction among the citizens and disturb national cohesion and

Rural-urban migration:

Localisation of industries contributes to rural-urban migration.

People migrate from rural to urban regions in search of employment and better living conditions.

Such movements may cause;

i) Open unemployment in towns while in rural areas they
may cause labour deficiency.

ii) Increased population in the areas of industrial concentration sparking a series of problems such as congestion, increased rate of crime, poor living conditions, spread of diseases e.g. HIV and housing problems.

Possible massive unemployment:

A fall in demand of products produced by localized firms would result into a widespread unemployment in the affected area.

Strategic reasons:

The concentration of firms in one area is risky for a country especially in times of war or terrorism activities as such are easy targets for attack.

This may destroy the country’s industrial base/capability which may take many years to rebuild.


Localisation of firms in one area creates an over-dependence on the products of a single industry. In case of a calamity, the supply of the product from the firms may be disrupted, resulting in serious shortages.

Delocalization of firms

Delocalization refers to establishment of firms in different parts of the country as opposed to localization where firms are concentrated in one area.

Delocalization is usually a deliberate government policy of encouraging establishment of firms in various parts of the country, and is applicable under the following circumstances:

- where there is need to curb migration to certain towns

- Due to need to reduce the rate of urban unemployment

- In order to achieve balanced economic development

- As a measure of reducing pollution and social evils in certain urban areas.

Advantages of delocalization

Employment creation in many parts of the country: it provides employment opportunities to people living in rural areas thereby improving
the peoples living standards and reducing rural-urban migration.

Balanced economic development/balanced regional development:

economic development is initiated for many, if not all parts of the country.

This promotes national cohesion and unity; and also reduces rural-urban migration.

Market for raw materials: delocalisation creates market for locally produced raw materials thereby creating employment and earning producers income.

This accelerates the rate of urbanizing in many parts of the country, especially to the rural areas.

Service delivery to rural areas/Development of social amenities: It encourages the growth of both social amenities such as hospitals, schools and security firms and infrastructure.

Reduces the effects caused by occurrence of war, terrorism attacks or earthquakes.


a) Difficulty of attracting requisite personnel;

This is mainly in the remote or rural areas where the delocalisation may be done.

These areas do not usually have the comfort of social amenities of the urban areas, hence are
less appealing to highly qualified personnel.

b) Difficulty of accessing certain assential services;

These are services that may not be in the rural areas where delocalisation is done e.g. banks,insurance co’s e.t.c.

c) Spread of pollution,

congestion and social evils; These vices spread to various parts of the country.

d) Tax burden;

The incentives which are provided by the government to promote smooth relocation are expensive and are an extra burden to the tax

e) Security;

This maybe a problem in some areas.

b) A failure of a product in one part of the market may be offset by the success of the same product in another part of the market.

- Large scale firms are also able to obtain supplies from alternative sources so that failure in one does not significantly affect the activities of the firm.

iv) Managerial economies/staff economies
Large firms are able to hire/employ specialized staff and management.

This increases the firms efficiency and productivity i.e.

a) The staff is able to make viable decisions that can go along way in increasing the firms output.

b) The firm/management is also able to put in place better organizational structures which allow for departmentalization and subsequent division of labour.

Division of labour leads to specialization and hence the overall increase in the firms output.

- the costs of hiring/employing the specialized staff/management are spread over a large number of units of output of variable cost of production.

Thus,the cost of labour is minimized when production increases leading to increased profits.

Theory of the Firm 1 | Theory of the Firm 2 |
Theory of the Firm 3 | Theory of the Firm 4 |
Theory of the Firm 5 | Theory of the Firm 6 |

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