How do firms operating in China, India and Brazil make choices about where to locate their business? While capital cities are always attractive, the advantages of other cities are determined by labour relations, economic geography and size. Since urban development promotes economic growth, it is important to understand the factors that determine firm location.

The economies of China, India and Brazil are having major effects on the global economy. The rise of these countries will have profound implications for international governance not only in the economic sphere but politically and socially as well. According to research from the National Institute of Public Finance and Policy, in India, and the World Institute for Development Economics Research of the United Nations University, in Finland, given the significance of industrial growth in these economies, it is critical to understand the factors that will determine the choice of where firms locate their businesses.

Firm location can have long-lasting impacts on the sustainability of employment in cities. The location of domestic firms also shows prospective multinational corporations that the area is a good place for businesses, employees and their families.

• In India and China, labour-intensive firms tend not to locate in medium or large cities, perhaps due to higher wage and training costs.
• Labour regulations deter firms from locating in the larger cities in India and China but not in Brazil. Exporter firms prefer large cities in India and China but not in Brazil.
• While the size of a firm has no impact on its location decision in China, large firms in India prefer the largest cities.
• Closeness to raw materials and other inputs in the city have a positive impact on firm location. However, availability of raw materials in the same state does not have an impact on firm location in India or Brazil.
• The firms in post-reform China tend to locate in large cities whereas in post-reform India, firms avoid medium and large cities.
• While China has reconstructed city centres and created science parks, India has been less successful in creating an environment favourable to business due to infrastructure and bureaucratic constraints.

The findings have important policy implications for urban governance in these countries. City governments should try to attract firms that are relevant to the economic geography of their region. For instance, f an iron ore mine exists nearby they should attract a manufacturing plant,not a software or high-tech firm. In such cases, they do not need to offer extra incentives.

Further policy implications include:

• Capital cities do not need to provide incentives for firms to locate in them.
• Large cities in China and India need to increase skilled labour to narrow the gap in labour costs between large and small cities.
• Governments need to reform labour regulations to make hiring and firing easier.
• In Brazil, logistics, infrastructure and port efficiency must be improved.
• Small cities in China and India need to do more to attract efficient firms in order to counter the effects of limited market size and higher transportation costs.

Source(s):
‘Firm Location Choice in Cities, Evidence from China, India, and Brazil’, UNU-WIDER Research Paper No. 2007/56, UNU-WIDER: Finland by Kala Seetharam Sridhar and Guanghua Wan, 2007 (PDF) Full document.

Funded by: UNU-WIDER; The governments of Denmark (Royal Ministry of Foreign Affairs), Finland (Ministry for Foreign Affairs), Norway (Royal Ministry of Foreign Affairs), Sweden (Swedish International Development Cooperation Agency—Sida) and the United Kingdom (Department for International Development).

id21 Research Highlight: 13 August 2008

Further Information:
Kala Seetharam Sridhar
Public Affairs Centre
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Bommasandra-Jigani Link Road
Hennagara Post
Bangalore 562 106
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Tel: +91 9972585708
Fax: +91 80 27839920/19/18
Contact the contributor: kalaseetharam@gmail.com

Public Affairs Centre, India

Guanghua Wan
Asian Development Bank
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Mandaluyong City
1550 Metro Manila
Philippines

Tel: +63 2 6326157
Fax: +63 2 6362444
Contact the contributor: gwan@adb.org

Asian Developement Bank, Philippines

UNU World Institute for Development Economics Research

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