SOFT FACTORS AND THEIR IMPORTANCE IN LOCATION SELECTION
Eberhard Büttner
UnternehmerBerater - Generalist mit unternehmerischem Denken und Ingenieurbackground.
Location Selection: More Than Just Costs - When choosing a new location for production or development, many companies initially consider countries in Central and Eastern Europe - mainly for cost reasons. But are labor costs the most crucial decision criterion? The article "Der Preis des Standorts" from WELT AM SONNTAG, dated August 25, 2024, highlights: Costs are important, but they are not everything. Often, "soft factors" are decisive for the success of a location. Factors like legal certainty and a stable political environment significantly influence a location's attractiveness - whether in Germany or elsewhere.
Germany may face disadvantages in some areas, such as energy costs, but it stands out with its stable political environment, a well-functioning legal system, and an excellent reputation for its engineers. These soft factors are also significant in Central and Eastern Europe and other regions when selecting a location.
Why Soft Factors Matter - Considering factors like legal certainty and low corruption is vital for companies with a long-term vision. A stable legal system builds trust and protects investments, while low corruption ensures stability and transparency in business processes. These factors are essential for attracting talent, convincing international investors, and achieving sustainable growth.
Soft Factors in Comparison: The Numbers that Count - Choosing a location involves more than just hard facts like costs; it also requires attention to often underestimated "soft factors." Legal certainty and corruption play a critical role in a company's success and stability. Some countries offer a stable environment for long-term investments, while others demonstrate weaknesses due to higher levels of corruption, which can undermine international investor confidence. Companies need to look closely.
A Closer Look at Legal Certainty and Stability - Beyond corruption, "soft factors" like legal certainty, state stability, and the reliability of administration are crucial in selecting a location. The "Fragile States Index" (FSI) plays a significant role in this context. Developed by the US think tank "Fund for Peace," it assesses countries based on their susceptibility to political, economic, or social collapse, using indicators such as social inequality, economic pressure, and state legitimacy.
Even within the EU, the index reveals significant differences in political and legal stability. The Fragile States Index chart shows that even within the EU, substantial disparities exist that companies should consider when choosing a location.
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EU Countries Compared: Which Locations Stand Out? - The analysis of the Fragile States Index shows a noticeable gap between countries: Some EU members are distinguished by high legal certainty and political stability, while others display weaknesses in areas such as state legitimacy or the quality of public services. Therefore, choosing a location goes far beyond cost considerations - the political and legal environment is crucial.
Why Legal Certainty Counts - A reliable legal system fosters trust, protects investments, and ensures that contracts are enforceable, and property rights are upheld. Efficient authorities and transparent processes simplify business operations and reduce administrative costs. These aspects are critical in attracting international talent and investors. Conversely, an uncertain legal environment can shake investor confidence and lead to the rejection of a location.
How Companies Find the Right Location - IBG Management Consulting GmbH utilizes a range of reliable sources to evaluate the most relevant criteria for location selection, including national statistical offices, Eurostat, and NGOs like Transparency International. This thorough approach helps our clients find the optimal location for a new production facility, development center, or business support center.
Conclusion: Finding the Right Balance - Choosing a location should not be based solely on costs. "Soft factors" such as legal certainty, political stability, and administrative reliability are vital for a company's long-term success. Indices like the Fragile States Index help identify potential risks and make well-informed decisions. Even in a globalized world, stability and reliability remain the foundation for sustainable growth.
Eberhard Büttner
Managing Partner & Location Assessment Expert
FACTORY LOCATION SCOUT
4moBalance is the right approach. You need to consider lots of thinks to make the right decision. And every company needs to find its own balance. Private equity investors might weight costs with 60% while more conservative industries weight costs only with 20%. For some it is important that the country is a stable liberal democracy, for others it might be enough that property rights are secured. Because it is complex and individual, standard approaches do not work. Talk to a site selection consultant like Eberhard Büttner! He can definitely define the right model for your case.