Community and Economic Development

During periods of significant administrative transition and policy changes at the national level along with ongoing geopolitical unrest, and uncertainty about the global economy, it is important to understand how business location and investment decisions might be affected by such volatility. For example, major shifts in trade policy such as imposing tariffs on imported goods and stricter immigration enforcement create a substantially different environment to which businesses must adapt. It is useful to consider relevant theoretical and practical perspectives on what location factors matter for businesses and how a changing landscape may shape those considerations. 

What Drives Business Location Decisions

Classical location theory with its foundations in the work of German economists such as Alfred Weber (1909), August Lösch (1940), Johann Heinrich von Thünen (1826) emphasized cost minimization and profit maximization as the most important drivers of where businesses choose to locate. Transportation costs, in particular, figured prominently among the traditional business location factors thought to be critical. Simply stated, the idea is that businesses facing high shipping and transport costs for raw material inputs will tend to locate closer to those input sources. Firms with high transport costs for their end products will seek to lower those costs by being proximate to markets and end-users.[1] According to the classical view, the optimal business location balances trade-offs among the costs of transporting raw material inputs and end-product outputs relative to labor costs. The cost savings and other advantages (e.g., specialized labor pools, supplier networks, knowledge spillovers, etc.) that firms enjoy by locating near each other due to agglomeration effects are another aspect of early location theory.[2]       

Extensions of traditional location theory have incorporated additional factors into the contemporary business location equation such as the cost and availability of labor, land, buildings, financial capital, utilities, and public services as well as qualitative aspects like quality-of-life amenities and business climate.[3] Financial considerations related to state and local taxes and business incentives also play a role in varying degrees.

Traditional location factors such as production costs continue to matter, especially for certain types of firms, sectors and product lines. It is also true that other factors have increased in relative importance in recent years as the U.S. economy has shifted to services and technology-intensive industries. The challenge is to understand what location factors matter most for which types of businesses and where in the site selection process they carry the most weight.             

The Site Selection Process

Site selection is the systematic process companies use to find an optimal location for a new or expanding facility, plant, headquarters, distribution hub, or other operations. The corporate location decision is an important one that seeks to match a firm’s strategic objectives, operational issues, and financial considerations with state and local/community factors. The reasons for initiating a location search may be related to new product lines or services, market expansion, business climate, facility/building capacity, and/or workforce/talent needs. Each location/expansion project is somewhat unique and will vary with respect to its requirements for a site, building, transportation access, utilities, workforce, operating costs, and financing.[4] In many instances, a company will conduct the location search on its own with a team of in-house executives. For other major industrial or headquarters projects, a larger corporation may hire a site selection consultant to conduct the search on its behalf. Site selection consultancy and location advisory services have evolved into an influential and specialized niche with providers operating in exclusive boutique enterprises, major accounting firms, and some large law, construction, and commercial real estate firms.           

A typical site selection project plays out in three phases.[5] In the first phase, the company or consultant will review the responses to the request for information (RFI) from communities in the designated search areas (countries, states, regions) to identify locations that meet the project criteria and eliminate those that do not. Phase 1 may start with hundreds of communities under consideration and may end with 10-15 or so that remain viable after screening for macro factors such as business climate, labor market characteristics, proximity to markets, and transportation access, etc. and other project requirements. In the second phase, the remaining locations undergo a more detailed review with a focus on community level data (workforce, utilities, taxes, etc.) and the specific criteria for a site and building. Phase 2 of the process often involves a comparative analysis of locations/sites, financial modeling of operating and capital costs, and site visits to narrow the candidate locations even further resulting in 3-5 finalists. In the third phase, the company seeks to close the deal with one of the finalist locations based on additional cost modeling and return-on-investment (ROI) analysis. During Phase 3, incentive negotiations occur as the company makes a final location decision.       

What Location Factors Matter Most

The term site selection is somewhat of a misnomer as the process involves multiple rounds of elimination to pare down the list of candidate locations. As such, it helps to understand the relative importance of the various locations factors that get considered in the site selection process. Area Development conducts annual surveys of both site selection consultants and corporate executives that provide interesting insights about which location factors matter most.

Area Development’s 21^st Annual Consultant’s Survey includes responses for the full year 2024 in retrospect. The top location factors that site selection consultants rated as either very important or important are (See Table 1 for complete results):

• Skilled labor (100%)
• Available land (98%)
• Responsive state and local government (98%)
• State and local incentives (98%)
• Energy availability (97.9%)

Other high priority factors for consultants include energy costs (93.9%), proximity to suppliers (89.9%), highway access (89.8%), labor costs (87.8%), environmental regulations (85.7%) and water availability (85.7%). Consultants cited proximity to markets (83.7%), expedited permitting (81.6%), and available buildings (81.6%) as being moderately important. 

The 2024 results from Area Development’s 39^th Annual Corporate Survey show that executive decision makers within companies rated the following location factors as being most important (See Table 2 for complete results):

• Energy availability (100%)
• Quality of life (98%)
• IT/Communications infrastructure (98%)
• Construction costs (98%)
• Labor costs (97.9%)

The next highest priority issues for corporate executives are: responsive state and local government (93.9%), skilled labor (89.8%), property tax (89.8%), state and local incentives (87.8%), highway access (85.7%), and available buildings (85.7%). Corporate tax rate (83.7%), energy costs (81.6%), and available land (81.6%) are moderately important concerns for corporate decision makers.

The 2024 survey results reveal some similarities and discrepancies in the perspectives of site selection consultants and corporate executives about what matters most in business location decisions. Consultants and corporate executives alike place a premium on the availability of energy infrastructure. This may reflect the growing demand for AI data center projects and the desire for enhanced power grid reliability. Both groups of survey respondents view the role of government as being vital in terms of responsiveness and incentives though consultants rated these somewhat higher than corporate executives did. As previously noted, incentives are a focal point in Phase 3 of the site selection process and can help sway the final decision at that stage. A skilled workforce is the single most important location factor for consultants. Corporate decision makers also rated it as a high priority, though not to the same degree. Consistent with location theory, cost factors (construction and labor) are top of mind for corporate executives while energy costs are a major concern for consultants.

The most significant area of divergence between the perspectives of site selection consultants and corporate executives has to do with IT/broadband infrastructure. While 98 percent of corporate survey respondents cited that location factor as a top priority, only 55 percent of consultants did so. Another substantial perception gap is apparent with respect to quality of life—98 percent of corporate respondents rated it as very important or important compared to only 59 percent of consultants. Proximity to suppliers ranked much higher in relative importance for the 2024 consultant survey respondents (89.8%) than it did for corporate survey respondents (58.4%). Site selection consultants also placed greater weight on proximity to markets (83.7%) as a location factor when compared to corporate executives (63.3%).                

Looking Ahead

More research and analysis are needed to ascertain why site selection consultants and corporate executives may differ to some extent in what they perceive to be the most important factors driving business location decisions. It remains to be seen how the major federal policy changes currently underway in the U.S. will alter the site selection calculus going forward. Trends in post-pandemic remote working arrangements, the pace of AI adoption in various sectors, and corporate prioritization of issues such as climate resilience and global risk mitigation need to be closely monitored. It may be possible that a paradigm shift is occurring in site selection such that:

“Today, companies are looking beyond cost. They are prioritizing capability—the ability of a location to support innovation, resilience, digital infrastructure, sustainability, and long-term talent development. The shift is not merely cosmetic. It reflects a broader transformation in how companies align location strategy with business strategy in a fast-changing global environment.”[6]         

Table 1.

21^st Annual Consultants Survey, 2024

(Percent Rating Very Important or Important)

Source: Area Development, 21^st Annual Consultants Survey.

Table 2.

39^th Annual Corporate Survey, 2024

(Percent Rating Very Important or Important)

Source: Area Development, 39^th Annual Corporate Survey.

[1] John P. Blair and Michael C. Carroll. Local Economic Development: Analysis, Practices, and Globalization, SAGE Publications, Incorporated, 2009 p. 43.

[2] Edgar M. Hoover. The Location of Economic Activity. McGraw-Hill, 1948.

[3] Emil E. Malizia, Edward Feser, Henry Renski, and Joshua Drucker. Understanding Local Economic Development. Routledge, 2021, p. 138.

[4] Mark L. Williams. Corporate Site Selection and Economic Development: A 30-Year Perspective. 2021, pp. 69-75.

[5] Pittman, Robert H. “Location, Location, Location: Winning Site Selection Proposals.” Management Quarterly 47, no. 1 (Spring, 2006): 12-25

[6] From Cost to Capability: The Evolving Metrics Driving Site Selection in 2025.