Legal Factors & Location (Edexcel IGCSE Business)

The Impact of Law on Business Location

• Laws are rules created by the government of a country with the aim of regulating the actions of its citizens and businesses

  • Regulation is the process of enforcing the laws that have been created and ensuring that businesses abide by them

• Governments and local authorities can incentivise businesses to locate in particular areas

  • In areas of high unemployment or industrial decline grants or reduced tax rates may be offered to businesses that create jobs or improve communities

• In some cases, businesses are deterred from locating in particular areas

  • E.g. In areas of outstanding natural beauty, strict bylaws or city ordinances may regulate the type of business activity that is permitted

  • E.g. A country with strict environmental laws might not be an attractive location for a manufacturing company that produces a lot of waste

• The presence or absence of laws can affect a businesses choice of location in two ways

1. Less economically developed countries 

• Less economically developed countries often have fewer laws and less enforcement of their existing laws, which is likely to be attractive to some businesses 

  • Businesses enjoy lower costs as they have to meet fewer legal requirements, such as safe handling of waste material

  • Labour can be paid very low rates as no minimum wages exists

  • Employees and customers have less opportunity to pursue legal action

2. More economically developed countries

• Developed economies with extensive laws can be attractive to businesses who desire to locate in region with

  • Good infrastructure

  • Highly-skilled workers

  • High standards of living

Laws and their Impact on Location

The Influence of Trade Blocs on Business Location

• A trading bloc is a group of countries that come together and agree to reduce or eliminate any barriers to trade that exist between them

  • There are different levels of economic integration ranging from relatively low integration in a bilateral agreement to high integration in a monetary union, e.g. the Eurozone

  • Globally, there were more than 420 regional trade agreements in effect in 2022

  • Each subsequent type of trading bloc has increased levels of economic integration

• Examples of trade blocs include the EU (European Union), NAFTA (North American Free Trade Agreement) and ASEAN (Association of Southeast Asian Nations)

Diagram: Major Trade Blocs in 2023

Major trade blocs include the EU, ASEAN and NAFTA
 

• A free trade area is a bloc in which countries agree to abolish trade restrictions between themselves but maintain their own restrictions with other countries, e.g Canada – United States – Mexico Agreement (CUSMA)

Diagram: How a Free Trade Area Trading Bloc Works

Mexico, Canada and the USA have a free trade agreement but can deal individually with Cuba as they see fit

• In the diagram above, Mexico, Canada and the USA have reduced or eliminated many trade restrictions between themselves

  • The USA refuses to trade with Cuba and has placed a complete ban on all exports/imports to Cuba

  • Canada trades with Cuba but imposes tariffs on all imports

  • Mexico trades freely with Cuba

• Businesses may look to locate their operations in a trade bloc country in order to avoid paying tariffs or other restrictions such as quotas