Selecting a region for setting up an enterprise is dependent on the following factors:

Availability of raw materials

The availability of good quality raw materials in required quantity at close hand is very crucial for the success of a new enterprise. The region must have abundant supplies of atleast the chief raw material required by the firm. Such a location helps to ensure continuity of production and reduces the transport costs. Few raw materials such as minerals, perishable food, cotton etc. play a vital role in influencing the location of the plant. For e.g, paper manufacturing plants require a regular supply of a large quantity of pure water and are, therefore, generally located near river banks.

Supply of Labour

The availability of the required grade of labour i.e. skilled, semi-skilled or unskilled is an important factor influencing the location of the industry. Besides, the cost and productivity of labour, attitude of trade unions and the state of industrial relations in a particular region are also important. This also explains concentration of certain industries in certain states.

Proximity to the Product Market

An industry should ideally be located close to the market for the product produced by the firm. This on one hand reduces the cost of transporting the finished product to the market. On the other hand it ensures maximization of profits by selling the goods at a competitive price. Generally, in case of the industries having national and international markets, plants are spread over wide geographical areas to have close proximity to all markets. In case of regional demand, plants are located near to the immediate market.

Availability of transport facilities

A factory requires transport facilities both for getting its raw materials as well as for reaching its finished products to the market. Hence, location is to be chosen in such a way that its total transport cost is the lowest. Of the two elements of transport cost, which one will have a decisive influence on the decision of location will depend on the characteristics of the raw materials and the nature of the manufacturing process. If the factory requires bulky commodities like iron ore, limestone, etc., it should be situated nearer to the source of these raw material. But, if the manufacturing process is such that the raw materials loose a substantial part of its weight like in the case of the chemical and pharmaceutical products, the factory should be located nearer to the market. Therefore, a region which provides adequate transport facilities attracts industrialists.

(For details, please refer to 'Infrastructure' section.)

Supply of Power

With increased mechanisation, a location which ensures a regular and adequate supply of power and fuel for the business has become an indispensable requirement.

(For details, please refer to the 'Infrastructure' section.)

Climatic factors

Certain types of industries require a particular type of climate. E.g. flour mills need a dry climate while cotton mills require a humid climate. Natural factors are particularly important in extractive industries like plantations, fishing, agriculture, etc. Climate influences even the capacity to work on the part of the workers. But, the technological advancements like, artificial humidification and air conditioning have reduced the importance of climate as a factor.

Government Regulations and Policies

Central Government and the State Governments have made several policy announcements from time to time in order to encourage development of industries. Various incentive schemes have been provided to attract investment especially in backward areas. All this has become an important factor while selecting a suitable location. (For details, please refer to the 'Investment Opportunities and Incentives' section.)

Law and Order

Every entrepreneur is concerned about law and order as well as the political stability of the area around which he wants to set up his industry. It is only natural for every entrepreneur to locate his unit in those areas which are not subject to riots and political disturbances. No industrialist can ignore such national and strategic considerations while selecting the location of the industry.

Existence of complementary and competitive industries

Such a location on one hand provides backward and forward linkages for the industries and on the other hand it provides a competitive environment for them. It increases the supply of the required raw materials and enhances the demand for the goods produced. It improves the labour market by attracting both skilled and unskilled manpower. It also improves the banking, credit and communication facilities in the area. It brings into existence various commercial services like warehousing, packing, forwarding, grading, appraising, advertising, etc which helps in the growth and expansion of all the business firms in the particular area.

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