A DISCRETE CHOICE MODEL FOR FIRM LOCATION DECISION

Where to locate? It is one of the most important question in locating a business in a city. In the city center, business or firms are functioning as a dominant attractor of employment and also employment locations which linked the land use and transportation system. The objective of this paper is to describe the location model of firms in Kuala Lumpur area. Two important determinants of location choice model in this study are the accessibility measures and the suitability analysis indicators. The model focuses on the statistical technique for analyzing discrete choice data by using econometric and Geographic Information System software. The findings in this paper show that agriculture, mining, electricity, gas and water, transport and finance firms' type are mostly located outside of Kuala Lumpur's Central Business District area. Meanwhile, manufacturing, construction and wholesale firms' type are located in the Central Business District area. The result of this study will highlight the use of discrete choice models in the analysis of firm location decisions which will be a foundation to facilitate town planners and decision makers to understand the firm location decisions in their region. Keyword: Discrete Choice Modeling, Central Business District, Firm Location Decision INTRODUCTION Many factors influence the location of firms or businesses. Leitham et al (2000) among others identified business characteristics, the locality and the type of production. Other scholars suggested that firm location choice is based on (i) labour cost and quality; (ii) market and transportation access; (iii) interests of the pro-business community (Dipasqualea and Wheaton, 1996); (iv) economies of scale and (v) the economies of agglomeration (Li, 2007). Although these are not the only factors that influence the location choice, the importance of these factors varies by business sector and city. Locating firms in the Central Business District (CBD) are important, especially in a capital city. The CBD is an area that is relatively easy to access and convenient for workers and customers/clients because of its function as a hub for all major modes of private and public transportation. The CBD area also has access to a full range of public amenities which includes services, shops, restaurants and entertainment. For this study, the urban economy of two distinct locations was considered. The two locations are Kuala Lumpur Central Business District area and the rest of Kuala Lumpur which is its metropolitan area. The model which considers 2 locations is denoted by j= 0, 1. In the study period, 1990-2007, the entry and exit of firms was examined. We Noordini Che’Man & Harry Timmerman A Discrete Choice Model for Firm Location Decision © 2016 by MIP 274 can observe the growth and survival of a firm within the process. A firm might choose to locate in the city center where transportation cost is minimized but rents are high. Alternatively a firm also might choose to locate away from the city center where rents might be slightly lower but the transportation costs could be high. This research will give an account of discrete choice analysis of firm location decision for the Kuala Lumpur area. DISCRETE CHOICE ANALYSIS A discrete choice model is an econometric model in which the actors are presumed to have made a choice from a discrete set (Parson, 2004). Their decision is modelled as endogenous. Discrete Choice Analysis is used as a group of statistical techniques to model the way in which people choose between different alternatives, such as a transportation mode. The basic concept used is that each alternative has a total utility to the decisionmaker, which is the combination of the weighted utilities of all the attributes of the desired option; for example, if a university, then the quality of the university teachers, the course content, the entry requirements, distance from home, and local living costs. It is then possible to calculate the possibility,P, of choosing one out of j alternatives on the basis of the equation: