Choosing the business location is one of the early strategic decisions by entrepreneurs that is to some extent irreversible and has long-lasting effects on the performance of a new business.
A suitable location can help a business in several ways: First, A tax-friendly location helps to re-invest a higher profit margin into the business rather than giving it away to the government (think about california vs Texas).
Second, proximity to knowledge sources can help to explore novel ideas as well as finding capable human resource.
Thirdly, a carefully-chosen location can reduce the logistics and transportation costs of raw materials, products, etc.
Now, keeping these points in mind where should you locate your business to take advantage of all or most of these aspects?
1. Tax-friendliness and technological access
One obvious answer is to choose a country (or state) that is tax-friendly and technologically advanced enough to provide you with the infrastructure needed to scale up your business in the future.
A country like Switzerland or perhaps Ireland have these characteristics in Europe with very low corporate tax rates.
In the US, Delaware seems to be the right candidate for the business location. Delaware is considered a tax heaven because there is no state tax if you incorporate your business there regardless of whether a company’s physical location is in the state or not. Moreover, Delaware has no personal property tax for individuals.
You can read more about the benefits of incorporation in Delaware here.
But is this the single most important factors to consider? And, more importantly, can you freely decide where your business can be incorporated? I believe the answer to both questions is “No”.
2. Proximity to prospective customers
My argument, in line with this article, is that you could consider a region (or country) where the business clients/customers are located, particularly if your idea involves physical products or materials, as this will save you some fees and complexities.
In order to validate your idea and product in the early stages of the business, you need customer proximity to test your idea and get extensive customer feedback. Customers are one of the most important stakeholders you have (next to investors) so having your business location near them makes sense.
This proximity also helps to spread the message and grow the business in very early stages as you mostly rely on your community to talk about your idea and vision.
In addition, it helps to reduce transportation costs and increases customers’ confidence and trust in your services.
3. Urban versus rural area
But where exactly in the region should you locate your business?
There are several indications for the business location. First, locating in an urban area according to a research paper by Figueiredo et al. shows that locations near urban centers help to learn about novel business opportunities as you are more likely to meet other fellow entrepreneurs and exchange knowledge and opinions.
In addition, when you are locating your business in the urban area, you are more likely to be closer to your customers as an important stakeholder of your business. Thus, it would be easier to learn from them and incorporate their opinion into your product.
But what about high costs of urban centers especially for entrepreneurs with little money?
Here is the catch. It is important to have a “business location”, doesn’t really matter small or big, in urban centers. So even a small office or a desk can be fine as long as you can meet and have small group meetings.
Nowadays, there are many co-working spaces in good locations in cities, or rather cheap small offices in great locations near city centers.
Of course it depends on geographical locations and cities but renting a small office should be fine. You can always rent your warehouse outside the town where it is cheaper.
4. Knowledge sharing and learning
Another important aspect of location is advanced by Baptista and Mendonça. They suggest due to knowledge transfer and learning factor that happens whenever a firm shares knowledge with other bodies performing research and development such as other firms, universities and government institutions, proximity to knowledge sources is important.
They assert that “If information about new technologies, goods and processes, flows locally more easily than over great distances, than establishing direct contact with entities that can produce knowledge which is valuable for a firm’s activity should be one of the main driving forces leading to the geographic concentration of both production and innovative activities.”
In fact, concentrated areas like urban centers and accelerators help entrepreneurs to exchange their ideas in a “market for ideas” where they regularly meet investors, customers and other entrepreneurs and receive feedback on their fledgling ventures.
Bottom line
In sum, there are five factors that reflect the goodness of a location: corporate and income tax rates, local communities, set-up costs, urban centers and proximity to knowledge sources like universities.
It would be impossible to excel in all these factors though . So it is up to you to decide what factors are crucial for your business.
The key message of this article is before you automatically decide on locating the business close to where you live, think again about the dynamics of the above-mentioned factors.
What do you think about choosing a business location? I’d love to hear your opinion!
