Site Selection: Finding Your Ideal State

Site Selection: Finding Your Ideal State

The rise of ubiquitous information has made selecting the ideal site for a plant or distribution center easier yet more complex. With the ability to look at more variables comes the responsibility to do so. Here’s how it can be done state by state.

Many professionals are responsible for analyzing the myriad factors influencing manufacturing and distribution location decisions. In the private sector, site location consultants abound, helping guide potential plant location decisions to places that best fit their needs. Research into firm location decisions are a stock in trade of economists and regional scientists in universities and think tanks. Policymakers at the Federal, state and local level keep a keen eye on factors they believe influence the choice to locate or expand manufacturing firms.

These analysts take into account many factors, but local ones are key. They include the quality and availability of the labor force, transportation infrastructure, non-wage labor costs, access to innovative technologies and the cost of doing business. With these factors in mind, Ball State University’s Center for Business and Economic Research crafted the Manufacturing Scorecard. This work was sponsored by Conexus, and developed in close relationship with their staff.

Conexus is an initiative of the Central Indiana Corporate Partnership designed to capitalize on emerging opportunities in advanced manufacturing and logistics. The Manufacturing Scorecard is part of that initiative.

The Scorecard ranks each state in nine broad areas, with over 30 different data series. These variables were selected based upon two criteria. First, did the data appear in an academic business location study, or second, was it part of a site selection study of firm location? The intent is to provide a snapshot of the performance of each state in these categories, so each state receives a letter grade based on a strict curve.

There are an equal number of A’s as F’s. The data sources include the U.S. Department of the Census, the Department of Commerce, Department of Labor, Department of Transportation, Department of Education, Department of Health and Human Services and other publicly available sources. Let’s look at each category.

Manufacturing Sector Strength

To measure manufacturing we include three variables: the share of total income earned by manufacturing employees in each state, the wage premium paid to manufacturing workers relative to the other state’s employees and the share of manufacturing employment per capita.

Logistics Strength

The movement of goods is of central importance to the production of goods. Without a robust logistics industry, manufacturing and commodity production will not occur. Logistics comprises not merely the capacity to move goods, but to store inventory and manage the distribution and processing of manufactured goods. Logistics firms depend upon many of the same factors as manufacturing firms in their location decision, but there is a more complex interplay between local conditions and the existing or planned transportation networks of roads, rail, waterborne traffic and air.

To measure the logistics industry we include the share of total logistics industry income as a share of total state income, and the employment per capita. We also include commodity flows data by both rail and road. To this we measure infrastructure spending as the per capita expenditure on highway construction.

Human Capital

No factor matters more to businesses than the quality and availability of labor. Workers represent the largest single cost of doing business, but more importantly are the source of most innovation and process improvements that distinguish successful firms from those that are not successful. Specific human capital concerns matter to manufacturing and logistics firms. Produced goods have a high degree of value dependent on each individual worker in a production line or transportation leg or hub. These workers must possess the ability to understand increasingly complex production processes which are today almost uniformly managed by computers with specialized software.

The factories, rail yards, distribution facilities and machine shops of today are complex, highly technical and almost uniformly dependent on workers who can work successfully in this environment. Human capital, which in the United States depends almost entirely on the quality of educational background, is the most important factor in firm location decisions.

Our human capital measurements include rankings of educational attainment at the high school and collegiate level, the first year retention rate of adults in community and technical colleges, the number of associates degrees awarded annually on a per capita basis and the share of adults (25 years and older) enrolled in adult basic education.

Benefit Costs

Non-wage labor costs represent and increasingly important part of total business costs. These are affected by local and state public policy as well as worker demographics, health, and industry and firm performance. Benefits range from a variety of health care issues, to liability and casualty insurance, workers’ compensation and other costs such as retirement and other fringe benefits.

To measure benefits costs, we include data on health care premiums and long term health care costs, workers’ compensation costs per worker and fringe benefits of all kinds as a share of worker costs.

Global Position

The level of international trade – both in exports and imports – is a robust measure of the region’s competitiveness in the production, movement and distribution of consumer durable and non-durable goods. Both firms and regional governments focus considerable effort on improving ties with foreign firms.

To measure global reach we include the export related measures of per capita exported manufacturing goods and the growth of manufacturing exports and the foreign direct investment measures of the amount of manufacturing income received annually from foreign owned firms in a state as well as the reach of foreign direct investment – which is simply the variance or spread of foreign direct investments from different regions of the world.

Productivity and Innovation

The value of manufactured goods per worker – productivity – as well as firm access to inventions and innovations is critical to the long-term performance of a firm and the industry as a whole. To measure productivity and innovation we use manufacturing productivity growth, industry research and development expenditures on a per capita basis, the per capita number of patents issued annually and the expenditures by venture capital firms in each state adjusted to a per capita basis.

Tax Climate

Few factors garner as much policy interest as do state and local taxes. For firms which may operate virtually anywhere, tax rates – along with the quality of local public goods – matter a great deal in location decisions. Taxes on the business, individual income taxes (both on workers and small business), sales unemployment insurance and property taxes all play a role in assessing regions for a potential employer location. To measure the tax climate we use data on corporate taxes, income and sales and use taxes, property and unemployment insurance tax data collected by the Tax Foundation.

Manufacturing Diversification

States which have a high proportion of manufacturing activity in a single sector typically suffer higher volatility in employment and incomes over a business cycle. Less diversified regions are also more likely to experience greater effects of structural changes to the economy which involve a single sector. For these regions, state and local policymakers often focus on attracting and retaining more diverse economic activity within every group. One potential benefit of low levels of economic diversification is that specialization and the resulting agglomeration economies often emerge in these highly specialized regions. As a consequence, policies which seek to diversify the economy are typically pursued in concert with efforts to strengthen the supply chain of existing industries.

In this section we measure the diversification of manufacturing activity in each state using the well known Herfindahl-Hirschman Index at the 2- digit level of the North American Industrial Classification System.

Venture Capital

Access to venture capital is a key step for nascent business expansion efforts. This seed money is offered by a small segment of financial service providers interested in high yield activities, typically involving technology or high end intellectual property. Venture capital activities rely on deep industry research and analysis as well as a bridge of expertise in potential markets. The presence of available venture capital is widely felt to be a key indicator of the maturity of the region’s commercialization networks and is a widely used indicator of the health of innovation and creativity.

Dr. Michael Hicks is an associate professor of economics and director of Ball State University’s Center for Business and Economic Research. This Manufacturing Scorecard is designed to offer a snapshot of factors that guide firm location and expansion decisions at the state level. It can be seen in an interactive website at www.bsu.edu/cber

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