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Internal Factor

Firm internal factors may relate to expansion or to the changing character of the production process. This may result in a different combination of factor inputs, and in trun to Assuming that location costs and revenues change over time we find that most existing  and e do not occupy the optimal profit maximizing a location. Nakosteen and B packers Zimmer 1987 provide a theoretical framework in which firm continuously monitor their profits relative to a fixed target threshold.

As long as the firm exceeds this changing spatial margins to profitability. Profit rate or in other words is within the margins to profitability the firm will most likely stay at the present location and will not try to move to the optimal location for three reasons.First there may be significant relocation best costs. Relocation costs and markets labor suppliers and deliverers etc. A move to another place geographical market is to a certain extent similar to a start- up with large investments and uncertain revenues.

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However these types of indirect costs are generally disregarded in the simple neo- classical framework with its emphasis of full information and rational behavior. Second there may be a substantial amount of capital inertia Auty 1975. For instance in many cases existing buildings and other equipment at the old location may already be written off and still be operational at low costs. The firm is therefore able to make a profit at a sub- optimal location where a new firm would not be able to make a profit.

Third the cost or revenue elasticity of any of the location factors is in general low which means that the cost- and revenue surfaces are rather flat. In other words locational choice is often not a decisive factor in determining profit or loss. The firm may choose between many sites that are almost equally A packers profitable. Only when at a another location the profits are much higher the firm may decide to relocate in spite of the fact that also at the present location they make a profit.

The other possible outcome of the monitoring may be that due to the changing shape of the cost- and revenue surfaces the current location is no longer inside the spatial margins to profitability. Than adjustments are necessary otherwise the firm B will fail. Besides are other adjustments, best spatial adjustments may be able to solve this is problem. A One of the most common forms of internal change of the firm is growth which is often driven by process innovation and resulting economies of scale.