The Influence of Location upon Profitability and Employment Change in Small Companies

Abstract

This paper examines the hypothesis that firms located in large urban areas suffer from location diseconomies which significantly reduce their profitability and propensity to create employment. This hypothesis is tested on a sample of companies located within a single region, the north of England, over the period 1974-81. The empirical results suggest that neither trading profits nor employment change are significantly influenced by location. However, the amount taken out of the business in the form of directors' remuneration, which on average swallowed up 61.5 per cent of trading profits, is significantly negatively related to employment change. This suggests that, with respect to employment creation, public policy should focus on influencing the size of directors' remuneration rather than on directly increasing trading profits. Fiscal policies may not be effective in this context, however, with the result that significantly influencing the behaviour of small firm directors may be a policy role best fitted to pro-active local economic development agencies.