66 1 67

THE QUANTITATIVE STUDY OF FACTORS
DETERMINING BUSINESS DECISIONS
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By GEORGE KATONA AND JAMES N. MORGAN
I. Personal interviews with a representative sample of business executives,

67; sampling, 69; interviewing, 70. — II. Study of industrial mobility, 72;
advantages of Michigan location, 72; disadvantages of Michigan location, 76;
qualitative information, 78; conclusions, 81. — III. Study of investment
decisions, 82; the direct question of why, 83; correlation analysis, 86; detailed
analysis of correlation cells, 88; summary, 89.
I. PERSONAL INTERVIEWS WITH A REPRESENTATIVE SAMPLE

OF BUSINESS EXECUTIVES
Empirical research intended to clarify the factors influencing

business decisions may proceed in several ways. One may determine
the opinion of experts — economists or businessmen — who usually
rely on a combination of casual observation and deduction from
theoretical (e.g., profit-maximizing) models. Or one may analyze
data collected and published for practical or legal purposes; these
are most commonly aggregate data of annual or quarterly sales,
profits, inventories, capital outlays, etc., of all firms or certain kinds
of firms, and occasionally historical data relating to sales, profits, etc.,
of individual firms. One may make use of case studies of one or a
few firms with which the investigator has established close contact
so as to be in a position to recognize factors relevant in decision
making. Finally, one may collect from a representative sample of
firms information not previously available.
The first method appears useful only as a source of hypotheses
to be tested. In reply to a question about the factors which in their
opinion are most influential in making, say, capital investments,
businessmen frequently discuss considerations they feel ought to be
taken into account instead of describing their own experiences. The
great advantage of the second method is that it may yield extensive
time series and correlations over time between certain developments
(e.g., size of capital outlays) and enabling factors (e.g., profits or
assets). Yet the value of the method is limited inasmuch as the
definition of the variables for which data are available may not coin-
cide with the definition needed for economic research and certain
relevant data may not be available. The case study approach does
not yield information on the frequency of occurrence of different
67
68 QUARTERLY JOURNAL OF ECONOMICS
variables. The sample survey method, on the other hand, may allow
us to assess the relative importance of each of a variety of factors
by relating them to specific decisions of individual firms, provided
the required information can be obtained. The sample survey method
has the further advantage that it can be combined with the other

methods. It may make use of hypotheses derived from economic
theory, case studies, or casual observation, and its results may be
tested against statistical-historical records.
Attempts to obtain quantitative measurements of factors asso-
ciated with specific business decisions through contacting business
executives encounter difficulties which usually loom so large as to
discourage research workers. First, there are difficulties involved in
drawing a representative sample of firms belonging to different
branches of industry and having different sizes and locations. Secondly,
it is not easy to know whom to contact in the firms sampled or to
contact the persons selected. Thirdly, great problems are involved
in any attempt to obtain and to quantify all relevant information
(which may differ from firm to firm) and to do that by making use
of uniform, non-suggestive methods of interviewing and classifying.
Aided by its past experience in interviewing businessmen, the
Survey Research Center of the University of Michigan conducted
in the summer of 1950 a survey of manufacturers in which attempts
were made to overcome the difficulties mentioned. This article will
describe, in its first part, the methods used in collecting quantitative
data on factors associated with certain business decisions.
The primary purpose of the survey was to analyze factors asso-
ciated with the mobility of manufacturing plants or, in other words,
to shed light on industrial location decisions. If we collect informa-
tion directly from business executives who make the location decisions,
it is not necessary to assume in advance that certain economic con-
siderations, such as the effect of location on costs, are the only relevant
variables. It is possible to determine which economic factors influence
location and mobility, and also which factors, if any, not traditionally
considered to be economic are effective. This method is meant to
supplement, not to supplant, the traditional method of location
studies. It hardly needs to be said that analysis of the effects of
cost factors, or of technological considerations, on location is of great
value. Possibly, however, some businessmen make business decisions
on the basis of other considerations and are successful in spite of
doing what, according to theory, they ought not to do.
The second part of this paper discusses findings relating to
location decisions, while the third part is concerned with investment
FACTORS DETERMINING BUSINESS DECISIONS 69
decisions by business firms. The second kind of decision is closely

connected with the first because — as revealed by preliminary studies
and confirmed by findings of the survey — industrial mobility does
not consist exclusively, or even primarily, of moving a plant from
one site to another. Expansion of facilities involves location deci-

sions. If the decision is made to add to a firm's capacity, the question
arises as to whether the new capacity should consist of an addition
to an existing plant, or of a new plant built at the same site or in the
same town, or of a new plant in another town. Thus the study of
industrial mobility had to encompass investment decisions, and the
investigation of factors associated with these decisions was included
among the objectives of the survey.
Sampling
Manufacturers located in Michigan were selected as the universe
of the survey. Therefore, although the methods used would be
applicable to nationwide surveys, the findings refer only to this one
highly industrialized state. The manufacturing plant rather than
the firm was taken as the sampling unit. This decision helped in
restricting the study to Michigan, in selecting the respondents (see
below), and in limiting the discussion to location factors affecting a
more nearly homogeneous production process. Excluded from the
universe, of course, were public utilities and mining firms. Among
manufacturing plants those with less than 12 employees and those
of the large automobile manufacturers (with their complex adminis-
trative structure) were likewise excluded. A large part of the sample
was made up of three industries predominant in Michigan: metal
products including machinery, furniture, and chemicals. The remain-
der of the sample was distributed among ten other industry groups
by appropriate selection of a sampling rate for each industry. In
addition to the over-all analysis of all manufacturing sampled, sepa-
rate studies were also made of the three branches of industry men-
tioned above. The sampling rates in different branches of industry
were not equal and weights — proportional to reciprocals of sampling
rates — were used to obtain data representative of all industries
included in the sample.
A simple random selection of plants would have yielded many
more small than large plants because of the skewed distribution of
plants by size. In order to obtain a sample representative of the
economic importance of Michigan manufacturing plants, rather than
a random sample of plants, selection proportionate to size was
required. The criterion of size used was the number of employees of
each plant, made available from up-to-date lists of the Michigan

Unemployment Compensation Commission. The probability of
selecting a plant was made proportionate to the number of its employ-
ees. As a result of this procedure all "large" plants were included
in the sample, as well as many "small" ones. Altogether, the respond-

ents included executives of 188 plants, of which 53 employed more
than 1,000 and 50 employed less than 100 workers.' The survey
findings can thus be expressed in percentages of employment in the
industries included in the sample. 2
When the head office of a firm, a plant of which was selected,
was located in Michigan, the top executive of the firm (president,
senior partner, owner) was designated as respondent; when the head
office was not located in Michigan, the top executive of the plant was
so designated. Introductory letters were sent to the respondents.
In the majority of cases interviews were obtained with the selected
top executives (often together with other executives drawn into the
discussion); in a minority of cases the interviewer was referred to a
vice-president or treasurer.'
Interviewing
Sending questionnaires to respondents by mail is a much less
expensive method of obtaining information than personal interview-
ing (and therefore makes it possible to obtain data from a larger
number of respondents). But the response-rate to mail questionnaires
1. A simple random sample of plants would have given only 12 per cent
employing more than 100 people, yet more than 80 per cent of the employees in
Michigan are in plants employing more than 100 people. From a comparison of
these proportions of plants with the proportions of plants whose executives were
interviewed (see the text above), it is clear that the number of interviews was
not strictly proportionate to employment. This is the case because a sampling
rate which was adequate to secure the desired number of interviews would select
some very large plants more than once. Of course, only one interview was taken
in each of these plants, and additional weight was given such interviews.
2. For a detailed presentation of the sampling procedure, as well as for
the results obtained with reference to location factors in Michigan industry, the
reader is referred to the booklet, Industrial Mobility in Michigan, Institute for
Social Research, University of Michigan, December 1950. Interviews were not
obtained with four per cent of the sampled plants, primarily because field work
was restricted to a period of one month. A few other minor deviations from
strictly random sampling principles are reported in the booklet. The survey was
sponsored by a Task Committee appointed by the Michigan Industrial Develop-
ment Commission. The authors wish to express their gratitude to the Task
Committee and to their colleagues at the Survey Research Center, especially to
Harold W. Guthrie, for their helpful participation in the survey.
3. Because of the exploratory nature of this brief paper, we abstain from
presenting further details of the sampling procedure as well as information on
the size of sampling errors. Needless to say, the sampling errors are substantial
in view of the small sample used.
is always much lower than to personal interviews, and substantial

non-response may bias the results. Secondly, mail questionnaires
addressed to business firms are usually not answered by the top
executives who make policy decisions. Thirdly, the scope of a per-
sonal interview may be much more extensive and more detailed than

that of a mail questionnaire. The latter must usually be limited to
a few simple questions which respondents can answer in a few words
or by making check marks. Suggestive influences of check lists and
prestige-directed generalizations by respondents can be avoided by
the use of detailed personal interviews in which respondents are led
to tell their own experiences in their own words. Misunderstandings
and misinterpretations can then be cleared up on the spot.
The personal interview to obtain information on factors asso-
ciated with business decisions must be of a special type. It must be
conversational, not resembling a cross-examination or compelling the
respondent to make up his mind. Such interviews take time — the
average interview in the survey here discussed lasted longer than
one hour. 4 Questions which the respondent is required to answer by
yes or no, or by selecting from alternatives presented to him, may
be used (provided they are not suggestive) after and not before he
has freely expressed his opinions in reply to "open-ended" questions.
Carefully selected and trained interviewers must be used and close
rapport achieved between the respondent and the interviewer. The
questions must be prepared in advance and read by the interviewer
in a fixed sequence. Without uniform interviewing, quantification
of answers obtained from different respondents is not possible. The
quantification of long replies, taken down verbatim or nearly ver-
batim by the interviewer, will cause problems and difficulties in any
case. How this problem is overcome by the process known as
"coding" will be illustrated when the survey findings are presented
in this paper.
Several different questions were used in an attempt to shed light
on the same problem. The multi-question approach may be illus-
trated by the endeavor to estimate the extent of the probable out-
movement of plants from Michigan. Questions were asked about
the presence or absence of plans to move operations out of the state
and about the reasons for such plans. These queries were supple-
mented by others about expansion plans entertained by the firms and
the probable location of such expansions. Yet actual plans of out-
4. For many important economic purposes even these relatively lengthy
interviews are insufficient. Personal interviews are subject to time limitations,
although to a much lesser extent than mail questionnaires.
movement may understate the magnitude of the problem. Hence

information was obtained about satisfaction or dissatisfaction with
the present location. Inquiries were made about the effect of present
location on costs, as well as about the advantages or disadvantages
the present location is believed to give over that of competitors.

Finally, a small special sample of firms which have recently moved
into Michigan or out of Michigan was also interviewed.
Only two studies that we know of have used detailed personal
interviews to study location factors. These valuable studies were
based, however, on purposive samples of restricted populations, one
on a sample of firms which had moved to or established branch plants
in the South, and one on new plants or new branches in New England.'
II. STUDY OF INDUSTRIAL MOBILITY

In reporting the survey findings as to factors influencing indus-
trial location, the attractions and advantages business executives see
in Michigan as an industrial location will be examined first. Then
will be considered the disadvantages of the state, the factors which
tend to drive industry out or to prevent it from coming to Michigan.
In each case an effort will be made to get at the relevant location
factors from as many different approaches as possible. The evidence
for the major findings of the study will be used as a framework within
which to discuss broader problems of methodology.
Advantages of Michigan Location

Michigan's major advantage is proximity to markets, with labor
factors and closeness to materials as important secondary advantages.
5. Glenn E. McLaughlin and Stefan Robock, Why Industry Moves South;
A Study of Factors Influencing the Recent Location of Manufacturing Plants in the
South; Published by Committee of the South, National Planning Associa-
tion, as Report No. 3, Kingsport Press, Kingsport, Tennessee, 1949. (Interviews
with executives who had moved plants South or established branch plants in the
South.) George Ellis, Postwar Industrial Location in New England, Ph.D. Thesis,
Harvard, 1950. (Interview study of new plants, new branches, and relocated
plants in New England.) These populations are restricted in the sense that they
cover only those people who have made a certain type of decision — for example,
to erect a plant in the South or in New England — and do not include people who
have decided not to move or not to build a plant in a particular region. On
methods of business interviewing and the discussion of business surveys not
connected with location factors, see George Katona, Psychological Analysis of
Economic Behavior (New York, 1951), Part 5.
More recently, a small scale study of business investment decisions and
capital budgeting was conducted by Arthur Upgren, Frank Boddy, Carl Nelson,
and Walter Heller with some interesting results; see The Minneapolis Project
(Investors Diversified Services, Inc., Minneapolis, Minnesota, 1950).

The evidence for this statement comes from several sources. During
the interview, this question was asked:
Now, comparing Michigan with each of the other states or areas in which
other producers of your type are, we would like to know about Michigan's
advantages and disadvantages as a place to locate a plant of your type. First,

what would you say are the major advantages of Michigan compared to
? (Each of the states or areas previously mentioned by the
respondents as places in which "competitors" were located.)
The weight of the answers was heavily concentrated on such

economic factors as markets (Table I).
TABLE I
EXECUTIVES' OPINIONS ON ADVANTAGES OF MICHIGAN LOCATION
Advantages Mentioned Percentages of Employment
Represented'
Proximity to Markets ....................... 64

Favorable Labor Situation ................... 34
Proximity to Materials ...................... 16
Favorable Transportation Facilities (Did not
Specify whether for Materials, Products, or
Both) ................................... 9
Other Advantages .......................... 9
1 In this and the following tables, "percentages of employment" are percentages of total
employment in the industries included in the sample.
'Percentages add to more than 100 because some manufacturers mentioned more than one
advantage.
Proximity to markets — to the automobile manufacturing plants as

well as to the large consumption centers — is seen as the major
advantage by the majority of manufacturers. But there are sub-
stantial differences among businessmen located in the Detroit area,
in other large cities, and in small towns, as to the advantages of their
location (Table II).
TABLE II
OPINIONS OF EXECUTIVES IN DIFFERENT LOCALITIES
ON ADVANTAGES OF MICHIGAN LOCATION
Percentages of Employment Represented
Advantages Mentioned Metropolitan Other Large Small
Detroit Cities Towns
Proximity to Markets ............. 70 58 57

Favorable Labor Situation......... 34 46 18
Proximity to Materials ............ 12 11 34
Favorable Transportation Facilities. 1 15 23
Other Advantages ................ 4 13 16
i r i
Percentages add to more than 100 because some respondents mentioned more than one
advantage.
Manufacturers were also asked whether it would be feasible for

them to locate in another state. The most frequent reason given for
a negative answer was that at their present location they were close
to their markets. Likewise, when inquiry was made as to whether
their location had made their costs higher or lower than those of

their competitors, the most frequent reason given for having lower
costs was again proximity to markets.
After they had discussed in general Michigan's advantages and
disadvantages, manufacturers were shown a check-list of location
factors and were asked what they would think of each of them as a
factor to be considered in locating a plant of their type, if they were
choosing among several possible locations.
In analyzing their replies, the advantages of detailed interviewing
were apparent. A mere indication as to whether or not each factor
was important in location would have been of little value. "Impor-
tant" may mean that some minimum quality or quantity of a factor,
such as water, or available manpower is essential. If this is the case,
the factor has economic importance, or importance in a location
decision, only if the minimum is so high that only few locations could
satisfy the condition. "Important" may also mean, however, that
the factor is an important part of total costs and varies from place
to place, so that an attempt must be made to locate in a place as
favorable as possible with respect to it. If this is the case, it must be
determined whether the variation is by large geographic areas or by
some distinction such as size of town within each area. In the latter
case, the factor is relevant mainly in the selection of a particular site
within an area. This distinction between site and area factors in
location was stressed by McLaughlin and Robock in their pioneer
study cited above. While the site considerations are of much less
economic significance than the area considerations, the two have
proved rather difficult to separate.
In the order of the proportions of industry considering them
"important" in the second sense, the major location factors of
Michigan manufacturing were found to be:
1. Distance to markets
2. Distance to materials
3. Prevailing wage rates
4. Productivity of workers
The detailed verbatim statements relating to each factor in the
check-list made this ranking possible. If the method used had not
separated instances of "minimum conditions," such factors as "water
supply, available power," or "space for plant, available buildings,"

would have appeared the most important factors. It was not possible
to separate area and site factors completely in this check-list; the
next in order after "productivity of workers" was "attitude of the
community" which is probably a site factor.

Early in the interview, in talking about the history of the plant,
this question was asked:
How did your firm happen to locate this plant in Michigan rather than
in some other state?
Since this question frequently referred to events in the distant past,
precise information was not expected. Further, since in most cases
the decision had been to start a business, not move one, the major
explanations referred to personal reasons of the founders. However,
the only economic factor which received much attention was again
markets (Table III).
TABLE III
EXECUTIVES' REASONS FOR LOCATING IN MICHIGAN
Reasons for Locating in Michigan Percentages of Employment
Represented
Personal Reasons ............................... 51

To Be Near Markets ............................ 33
Enabling Factors, such as Availability of Plants or
Plant Sites, or Opportunity to Buy or Rent at a
Favorable Price .............................. 12
To Be Near Materials ........................... 8
Availability of Suitable Manpower or Skills ......... 6
Assistance or Encouragement by Local Groups ...... 2
Miscellaneous Reasons .......................... 5
Reason Unknown ............................... 5
1 Percentages add to more than 100 because some respondents mentioned more than one
reason.
Finally, among those in the representative sample who had

moved into Michigan from another state, and also among a few firms
purposely interviewed because they were known to have moved into
Michigan in recent years, the majority said that they moved in to
be closer to markets. Yet, it should be noted that when asked why
they left their previous location, these executives mentioned primarily
lack of space for expansion, and in some cases unsatisfactory labor
and tax situations. In discussing why they moved, many also men-
tioned personal preferences for Michigan and personal contacts with
local representatives. These findings would seem to indicate (a) that
it required some rather serious difficulties in the old location to over-

come inertia and bring about a decision to move at all, (b) that the
decision to move to Michigan was market-influenced in many cases,
and (c) that in choosing the particular site, personal considerations
were important. Detailed answers also revealed that personal con-

siderations were relevant in the decision to move to Michigan on the
part of several firms for which location was not very important.
Disadvantages of Michigan Location
The major disadvantages of Michigan, and the forces driving
plants out, center around labor and around steel shortages. As
already indicated, the availability of production-minded labor and
of skilled labor are seen as advantages by many Michigan manu-
facturers. In some cases they even offset the high wages prevalent
in the state. On the other hand, when manufacturers were asked
about the disadvantages of Michigan location, the largest proportion
(more than one-half) mentioned labor factors (Table IV).
TABLE IV
OPINIONS OF EXECUTIVES IN DIFFERENT LOCALITIES
ON DISADVANTAGES OF MICHIGAN LOCATION
Percentages of Employment Represented

Disadvantages Mentioned Metropolitan Other
Detroit Cities Towns Total
Wage Rates and Labor in General ... 63 43 33 51

Pressure of Organized Labor....... 13 14 8 12
Distance from Materials........... 15 22 11 16
Distance from Markets ............ 5 18 16 11
Local Taxes ...................... 15 2 4 9
Power, Fuel, Utilities ............. 8 0 11 6
Other ........................... 7 12 25 12
None at All ...................... 20 25 39 25
1 I 1 1
1 Percentages add to more than 100 because some respondents mentioned two or three differ-
ent disadvantages. Most of those who mentioned the second (pressure from organized labor) also
mentioned the first. "Other" consists largely of severe winter climate and in a few cases of high
freight rates.
The frequency with which labor disadvantages were mentioned

did not vary much in different industries, but labor was reported as
a somewhat less important disadvantage for small plants with less
than 100 employees than for large plants. Note, however, that if a
random sample of plants had been taken, over 80 per cent of them
would have had less than 100 employees, and only some 35 per cent
of manufacturers would have been found to mention labor factors
as a disadvantage.
Table IV shows an even more important relation: labor appears

to be a more serious problem in Detroit than elsewhere in the state.
It may seem ambiguous that each factor is listed both as an
advantage and as a disadvantage, but examination shows that this
is not only true but also revealing. Labor skills and production-

mindedness are an advantage which is offset, however, and in some
cases more than offset, by high wages and union pressures. A con-
siderable number of manufacturers, in speaking either of disadvan-
tages or of reasons why their costs were higher than those of com-
petitors, mentioned high wage rates. But in the course of the discus-
sion a large proportion of them went on to indicate that workers in
Michigan were highly productive and that this advantage tended to
balance high wage rates.
Nearness to some materials — basic salt chemicals, tools and
dies, stampings and other parts — is an advantage, but distance from
sources of steel is a serious disadvantage. Nearness to markets —
the Detroit, Chicago, Toledo markets for industrial parts and supplies,
the Midwest market for consumer goods, and also the national market
for any goods when branch plants are not feasible — is an advantage.
However, where economies of scale are not enough to offset the costs
of distance, respondents talk of distance to markets as a disadvantage
and speak of plans to set up branch plants to serve certain markets
far from the Midwest.
Since each advantage and each disadvantage had several chances
to be mentioned in the interview, it was possible to strike a balance
in assessing their importance. The problem of inadequate steel, for
instance, while not mentioned by the largest number of respondents,
was mentioned as a reason for higher costs, as a disadvantage of
Michigan, and as a potential reason for moving out of Michigan.
An analysis solely in terms of Michigan's advantages and dis-
advantages could easily lead to an exaggeration of the possible loss
of industry. A few major advantages can offset many irritations and
grievances, particularly since there is considerable evidence of a
powerful inertia resisting plant movements. However, the possi-
bilities of loss of industry can also be assessed on a more conservative
basis by studying the proportion of Michigan's manufacturing employ-
ment represented by plants where the executives entertain plans to
move out or to expand outside Michigan (Table V).
In view of the fact that many of those in the third and fourth
categories of Table V will not move out, and the fact that other plants
are being established in or moving into Michigan, Table V would
seem to indicate very little difficulty likely from loss of industry.
On the other hand, the findings reported in Table V (obtained in

the summer of 1950 before the "national emergency") may understate
the problems confronting the state. Things which are, at a given
time, irritations and difficulties, may later result in decisions to move
or to expand elsewhere.

In looking at those who are considering moving out of the state,
or expanding outside the state, and at the reasons they give, four
reasons seem to be almost equally important: (a) labor considerations,
(b) desire to be near materials, particularly steel, (c) need to be near
TABLE V
EXECUTIVES' PLANS FOR LEAVING MICHIGAN
Executives' Plans Percentages of Employment

Represented
Might Move Away Part or All of Their Operations.

. 6
Were Considering Expansion Outside Michigan..... 6
Might Move Out Under Certain Circumstances, Have
Not Considered Where ........................ 4
Are Considering Expansion, Don't Know Where.... 9
Do Not Plan to Move or to Expand Outside Michigan 75
100
markets, and (d) desire for good transport facilities and low transport
costs.
Qualitative Information
Quantification of factors influencing business decisions is thus
seen to be valuable and necessary. Although the variables, the
frequency of which has been measured, were established on the basis
of verbatim recorded detailed information, unavoidably factors and
attitudes were lumped together which are not homogeneous, as seen
most clearly when we examine individual cases and look at the
verbatim statements made by the respondents. Equal proportions
of industry may mention some one factor, e.g., distance to raw
materials, as an advantage and as a disadvantage. Closer examination
-
shows not only which aspects are advantageous or disadvantageous,

and why, but also whether those who see certain aspects as advanta-
geous feel more or less strongly about them than those who see them
as disadvantages. In addition, the importance of inertia, or of per-
sonal attachments to a place, can best be appreciated when studied
in individual instances. In order to show how an approach resembling
case studies may supplement this first, necessarily simplified, quanti-
fication, we reproduce here some illustrative statements. Although

proximity to markets was one of the factors most frequently discussed
by executives, no quotations will be presented regarding this con-
sideration; the straightforward way in which many manufacturers
spoke of the need to be close to auto plants or large consumption

centers does not seem to convey much additional information.
(a) Transportation Costs

We'd probably be better off in Chicago than we are here — we could get
steel easier. Or in Pittsburgh for the same reason. Steel is our big problem
today. There was a time when the steel companies equalized the freight rates
to all parts of the country but the Government jumped on them about that and
now we have to pay by distance, which means we've got to buy from the nearest
mill to save on cost. This is a big industrial area and it keeps the steel mills too
busy to supply everybody — we can't all buy out of Chicago, and the steel mills
there will sell to the nearest plants first because they know perfectly well those
are the plants they'll keep when the demand loosens up. (Medium-sized metal
products plant.)
We must be near our materials because we are heavy manufacturers, and
distance from source can raise our costs to the point where we cannot compete.
We've just opened the plant (near Pittsburgh) with that idea in mind.
We're right at the door of the mines and the steel mills. We have a minimum
trucking charge. And we gain in another way too. We can deliver all our scrap
and shavings right back to the steel mills very cheaply. That's important to us.
We pay heavy haulage charges on that from Detroit back to the mills. (Large
producer of metal products.)
In some cases, manufacturers are convinced that transport in

particular, or location in general, are not important problems:
Perhaps mostly because our product is a precision product, and low in
weight, freight costs aren't so much a factor as they would be in a bulky product.
(Large metals products plant.)
We can ship a chair, say, selling wholesale for $45 to any part of the United
States for about $1.50. It's not a big problem getting our goods to the customer.
(Small furniture company.)
Well, I don't think location or plant site has much to do with the whole
thing. The reason we are leaders in our field is directly due to the fact that we
can out-engineer and out-sell all our competitors. Takes good handling from the
top to do that, and we've got it. We could get along pretty much anywhere.
(Large metals products plant.)
(b) Labor Costs

Wages are high for woodworking — the present rate being $1.56 per hour —
while the average wage rate for wood production in the Southern states is $1.15
an hour. That competition with the South is very hard to overcome — so much
so that we are considering moving our wood products to the South. (Large
furniture producer.)
We can't run more than two shifts here because the union shuts down on
the third shift. But we can and do run three shifts in Alabama, which gives us
more production out of our machines. (Middle-sized textile plant.)
The only disadvantage I can think of in Michigan is the high wage rate.
Michigan people are a little spoiled. There have been plenty of jobs, and com-
panies have competed with each other until today our prevailing wage rates are

very high. (How does this compare with other states?) You can't really compare
that. We know that we are paying big wages, but we also know that we have
available some of the most highly trained and skilled workers in the country.
That's valuable to us. Suppose we went into a state and found it necessary to
train our workers. It would cost us almost as much, probably, regardless of the
lower wage rates. (Large metals products plant.)
It is a strange thing, we have higher wage rates but the actual cost per
pound of our product is less than others in the division. (Why is that?) Because
the productivity of the men here is so good that pounds per man hour are higher,
and also we have more modern equipment here. (Large primary metals producer.)
(c) Area and Site Considerations

The distinction between area and site decisions was also apparent:
(In discussing the check-list factor: "Housing, schools, playgrounds, etc.")
That's important. I made quite a survey of towns up and down the West
Coast when we were looking for a location in that area. (Large producer of miscel-
laneous products, largely plastic.)
(In discussing "Attitude of community and of businessmen toward prospect
of new plant"):
That's very important. After deciding on a location for our new plant in
the South, we settled on South Carolina because of the extremely good help from
the Development Board, the banks, and the men of influence in the town. (Small
furniture plant.)
Well, the Southern states are certainly going to town on that (local con-
cessions). One state offered us a good sized plant for $25,000 if we'd go in there.
We weren't interested in that area, but if we had been we'd have snapped up the
offer. It was a good inducement. (Large metals products plant.)
(d) Personal Preferences

Certain personal attitudes appear to be important in location,
as well as general inertia which seems to be both economic and non-
economic. This can be shown through quoting some statements
made by respondents:
I wouldn't want to move far away from my home town. In fact, I wouldn't
want to move out of it at all. I spent 20 years in and was glad to get
back home to . But we would certainly not consider moving out of
Michigan. We'd all have personal reasons against that. We all prefer to work
in this state and preferably in . (Small producer of metal products.)
Well, one thing I think would enter into a decision would be the fact that
my father founded the firm here. I've lived here all my life and my people back
a hundred years or more. You don't just brush those things off and move without
some very serious reasons. (Small furniture plant.)
Our real money (chief owner) wouldn't leave Detroit. He'd rather live in
a satisfactory community than make money. (Middle-sized metals producer.)
Our business is established here. We've been here 113 years. We can't
throw that away and go where we're unknown. (Small chemical company.)
In some cases the inertia was at least partly an assessment of
economic costs and of risk:

It's a lot cheaper if you can find new products within your scope than to
pick up a plant and move it. You have no guarantee you'd be better if you
moved. (Large furniture company.)
I feel it costs money to move a plant away, much more than is originally
estimated, every time. If you can hold it intact and keep the key people, they
can produce a new product economically. (Small furniture company.)
(Would it be feasible for you to locate in some other state?) It could be
done but there would be certain disadvantages. The cost of moving all our
machinery to another state would be terrific. It's not feasible as long as you're
established to pick up and move. (Medium-sized metals products plant.)
Conclusions
Studies of the factors influencing location decisions indicate the
great complexity of the problem. There are hardly any manufacturers
who are located in just the "right" place. Practically all are aware
of both advantages and disadvantages of their location. Decisions
to move or to expand elsewhere are not made easily. Because of
inertia, personal attachments, the cost of moving, and the uncertain-
ties about other locations, very strong incentives have to be present
in order for grievances and irritations to lead to action. What really
counts is the net result of perceived disadvantages of the old and
attractions of a new location, that is, the vector of the motivational
field. When a decision to move is thus arrived at, several new areas
may appear equally advantageous, and the specific location decision
may not be based on purely "economic" considerations but may be
determined by personal preferences.
It might be argued that the final locational distribution of plants
will follow a simple pattern which maximizes profits, since the plants
with lowest cost locations will survive and prosper. However, it is
also true that in some plants the production process is such that
location, within wide limits, is economically unimportant. Or it may
be that customers or allied producers have located around a pioneer
enterprise so as to form an efficient economic agglomeration. Or a
firm may be able to out-engineer and outsell its competitors from a
wide variety of possible locations.
The survey here reported represents a first approach to the
quantitative empirical study of industrial mobility. It indicates that
through detailed interviewing of a representative sample of business
executives, it is possible to assess the importance of different factors,

and through verbatim reports of replies it is possible to clarify the
meaning of the forces motivating businessmen. In this presentation,
emphasis has been put on the advantages of interviewing surveys,
as well as on their pitfalls, particularly if brief answers are relied upon

exclusively.
In some respects this methodology fell short and should be
improved in future studies. More serious effort toward separating
area and site decisions might have been worth the extra questioning
involved. More attention to past expansions by the firm in other
areas would have rounded out the picture somewhat. With more
time, it might have been possible to obtain information on the actual
level of transportation costs, in spite of the fact that many manufac-
turers buy at delivered prices or sell F.O.B. This prpblem might
be approached not by asking for cost percentages, since some of the
transport costs are not a part of the total costs in the accounting sense,
but by questions about possible savings if the plant were located
closer to materials or markets. An attempt was made to study the
problem of whether product mobility is a substitute for geographic
mobility but none of the results is presented here because the con-
jectural nature of the question, involving a choice which has seldom
been faced, makes it difficult to evaluate the findings. Finally, of
course, parallel information from other regions or states would add
to the usefulness of this study. For instance, the results of this study
suggest the possibility that plants using steel will move to Pittsburgh
rather than steel capacity moving out. A survey of plants in the
Pittsburgh region might be rewarding.
III. STUDY OF INVESTMENT DECISIONS
In the survey discussed in this paper, two approaches were used
in order to shed light on the factors associated with investment
decisions. One approach was that of the direct question of why.
Executives of firms which had expanded their plant or equipment
in the recent past, or which entertained such plans for the near
future, were asked to relate the considerations that led to their
decisions.' The second approach was that of the correlation analysis.
6. The wording of the questions, which were asked after kind and timing of
expansion were determined, was as follows: "Could you tell me what the consider-
ations were which led you to decide to expand this plant?" and also, "Why did
you expand at that particular time?" Similar questions were asked concerning
the considerations leading to contemplated expansion. The questions were fol-
lowed, when necessary, by "non-directive probes" that yielded detailed answers
taken down nearly verbatim by trained interviewers. The length of the answers
varied from two to twenty-five typewritten lines.
At the beginning of the interview, before the problem of investment

was raised, information was obtained concerning a number of factual
and attitudinal variables. Then the association between these
variables and the firms' investment plans was studied. This paper
is restricted to discussing the relation between certain attitudinal

variables and investment plans.'
The Direct Question of Why

It was found that 103 respondents had expanded their plants or
equipment during the last few years prior to the interview (not count-
ing replacement of old machinery). Furthermore, 89 manufacturers
were planning or considering future expansion and explained their
plans. Of these two groups, 57 answers came from the same executives.
The task of classifying the detailed explanations given by the
respondents for past or contemplated expansion into a few categories
was relatively simple, since certain references occurred over and over
again in the answers. Yet, as shall be seen, the real meaning of some
of the terms used by the respondents is not easy to discern.
The following are examples of answers which were repeated with
the greatest frequency:
"The demand for our product was growing."
"To take care of increased business."
"We needed space to fill demand for our product."
"To take care of orders."
"To keep up with orders."
These and similar answers are classified in Table VI under the

heading "Current Demand and Current Orders." Although mention
of future developments or of expectations are not included in this
category, there can be, of course, no assurance that the respondents
referred only to past demand. Possibly the fact that demand increased
in the past made the business executives think that it will also increase
in the future. Similarly, the term "orders," even if orders received
or orders on hand are meant, refers to the future.
No instruction was given the interviewers to clarify the meaning
of such statements because any attempt for clarification was deemed
highly suggestive. (This would be the case if respondents were
7. It is not possible to obtain reliable information about expectations or
other attitudes that have prevailed much earlier than the time of the interview.
If in July 1950 executives of a firm are interviewed who decided to build a new
plant in the summer of 1949, it is of little value to ask questions about sales and
profit prospects in the summer of 1949; as reinterview studies have shown, subse-
quent developments may falsify the recollection.
asked, "Did you have in mind an increase in business before you

made the expansion or an expected increase in business after that
time?") Yet it appears quite clear that some of the respondents who
spoke of "increase in business" did not refer to their own spontaneous
desire to increase their business volume. Rather it would seem that

the increase in business often took place first and induced the firms
to build new plants or acquire new machinery.
In a few instances this sequence of events has been spontaneously
described. One manufacturer said: "It was not a planned proposition;
it followed behind an increase in our sales." Another said: "The
TABLE VI
QUANTIFICATION OF REASONS GIVEN
FOR EXPANSION OF MANUFACTURING PLANT
Percentage Distribution of Firms'

Motivating Factors Recent Contemplated
Past Expansion Expansion
Current Demand and Current Orders......... 61 45

Policy of Expanding ........................ 4 14
Cost or Efficiency Considerations. ............ 17 20
Future Demand ............................ 8 13
Change of Product .......................... 10 8
100 100
Number of Firms ....................... 103 89
1 While the tables presented in Part II of this paper refer to the proportion of total employ-
ment in the industries sampled, this and the next two tables refer to the proportion of firms
sampled. The sampling selection was partly but not fully representative of the proportions of
employment in the state (therefore weights were used in the tables of Part II). The less represent-
ative method of presentation was chosen here in order to give a clear indication of the number of
cases in each "cell."
demand for our product was growing; it compelled us to acquire more

space." Others explained the subjective feeling of compulsion with
reference to their competitive position: "To protect our present
position we have to expand."
That the businessman's own initiative plays a small role in some
expansion decisions is illustrated by such statements as the following:
"If you have a five-year-old boy, why does he grow? The chemical
industry is constantly growing, and we have to expand our facilities
every year." Or: "Well, it was sort of a Topsy proposition; it just
grew."
A second classification used in Table VI is similar to the first
one in so far as it also includes references to increased sales. Yet, it
is presented separately because it contains a reference to an apparently
conscious decision taken well in advance of the actual expansion.
Some firms reported that they made the decision after the war to
expand their facilities and are doing something every year, 8 the limits
being determined in some cases by available funds. ("We take it
slow enough so we don't have to borrow to do it.") 9 Expansion plans
contemplated at the time of the interview were explained more fre-

quently than past expansions by reference to a policy of constantly
expanding facilities. ("These building plans represent a continuation
of our policy.") References to policy were also made by those who
have not expanded: "We are big enough, have no desire or wish to
expand." "We follow a policy of self-containment."
Although the majority of cases is grouped in the first two classi-
fications, available information does not permit us to make quanti-
tative statements. All that can be said is that in some cases plant
expansion is not a proposition governed by definite and carefully
scrutinized expectations but a quasi-automatic response to certain
circumstances, or a habitual action.
There are, however, other instances of expansion too. Some
manufacturers explained past as well as contemplated expansion as
measures leading to reduced costs of operations or greater efficiency
in operations. In some cases it was clear that this was a carefully
planned proposition ("We felt that the savings resulting from
increased efficiency will help us keep the lead in the market"), while
in others the respondents said that they were compelled to expand
because their competitors had cut their costs by building new, more
efficient plants.
The fourth category in Table VI includes those cases in which
the manufacturers spontaneously referred to future developments:
"We built the plant because we expected demand to increase" or
"We want our sales to increase and therefore we shall acquire more
space and more machinery." Whether such cases were quite rare
because manufacturers are not used to expressing their thoughts in
these terms remains to be seen.
Finally, in several instances manufacturers explained their past
or contemplated expansion by referring to the introduction of a new
line of business, or the production of a new product. From their
8. "We are constantly expanding. We've done something every year since
the war. After the war ended we were faced with a decision. We knew that we
had to sink a lot of money in this plant or had to give up. We're not going to
give up. We had to buy new equipment. We had to introduce new ideas. We
are doing something every year."
9. The role of financial considerations in making investments will not be
discussed in this paper. It may suffice to report that the desire to finance expan-
sion out of available liquid funds was expressed frequently.
explanation of changes in products or the search for high-margin

products it is clear that concern with future sales or profits has
played a role in such decisions.
In conclusion, it appears from the answers received to the direct
question of why, that both genuine decision-making based on definite

expectations and also habitual, quasi-automatic action do occur in
the field of new capital outlays. The question is not sufficient to
distinguish between the two types sharply. It contributes to the
analysis of decision formation but must be supplemented by other
methods of investigation.
Correlation Analysis
The analysis of the relation of expansion plans to opinions about
business conditions is hampered by the small number of cases avail-
able in certain important cells of tabulation. Executives were asked
the following questions: "How would you say things are going in
your business these days? Are they good, poor, or what?" and
"What would you say are the prospects over the next five years or so
in your line of business?" In the summer of 1950 the overwhelming
majority of manufacturers described their business situation as either
"very good" (saying that business is excellent, or better than ever,
or using other expressions denoting great satisfaction) or as "good"
(expressing satisfaction but using no emotionally colored adjectives).
There were only 14 manufacturers who were classified as occupying
a "middle position" ("In some lines of business it is good, in others
it is not so good"), and there were 13 who complained that business
was bad. Even if the two categories are put together there are only
27 cases, and the results must be interpreted with caution. Never-
theless, it is clear from Table VII that among those who characterized
their business conditions as very good there were many more who
plan to build new plants or additions to plants than among the others.
Regarding expected developments in one's business, some manu-
facturers expressed the opinion that their business will be better
during the next few years than it was in the summer of 1950. Others
said that they did not expect any change, and it appears that prac-
tically all of these were satisfied with current conditions. A relatively
large group failed to give a clear answer regarding the expected trend
of their business (Table VIII). Some — 22 respondents in our sample
— flatly said that they did not know. Others, classified in the same
group, said that future business depends on the international situation
1. Both questions were supplemented by probes such as "Why do you think
so?"

(war, priorities, curtailment of civilian production, etc.), or on price

developments, the business cycle, and so forth. 2 Finally, there were
14 firms the executives of which expected their business prospects to
worsen. (These 14 are presented separately, although the cell is far
too small to give any results of significance.)

TABLE VII
RELATION BETWEEN EXPANSION PLANS
AND THE EVALUATION OF CURRENT BUSINESS CONDITIONS
Percentage Distribution of Firma
According to Executives' Opinions
Expansion Plans of Current Business Conditions
Middle Position
Very Good Good Bad
To Build New Plants or Additions to Plants 45 18 22

To Add New Machinery ................ 19 20 11
Uncertain or Not Ascertained ........... 10 9 4
Will Not Expand ...................... 26 53 63
100 100 100

Number of Firms .................. 80 77 27
Again, as indicated in Table VIII, there appears to be a cor-

relation between expected business trends and investment plans.
Among those who expected business to improve there were more
firms which planned to build new plants than among the others. It
TABLE VIII
RELATION BETWEEN EXPANSION PLANS
AND THE EVALUATION OF BUSINESS PROSPECTS
Percentage Distribution of Firms According to
Executives' Opinions of Business Prospects
Expansion Plans Pro-con,
About the Depends,
Better Samel Don't Know Worse
To Build New Plants or Additions

to Plants .................... 49 27 25 21
To Add New Machinery......... 11 23 17 16
Uncertain or Not Ascertained ..... 6 9 8 6
Will Not Expand ............... 34 41 50 57
100 100 100 100

Number of Firms ........... 35 74 60 14
1 And current situation "good" or "very good."
2. Surveys in which trained interviewers establish rapport with the respond-
ents and ask "open-ended," non-suggestive questions reveal again and again
that it is not true that businessmen have definite expectations about all relevant
trends at all times. The frequency of "don't know" and "depends-on" answers
to questions regarding sales, profits and price expectations represent important
indicators of prevailing attitudes.
is also worth noting that only plans to build new plants or additions
to plants, and not plans to purchase additional machinery, appear
to be associated with a favorable evaluation of current or prospective
conditions in one's business.
On the other hand, it is important to note that the correlations

are far from perfect. Plans to build new plants or to add machinery
were being made by firms which believed that their current business
conditions were not satisfactory, or which were uncertain about their
business prospects, and even some which expected their business
prospects to worsen. Furthermore, while this correlation analysis
is a step forward, it does not give, of course, any indication as to
cause and effect.
Detailed Analysis of Correlation Cells
A third method of analysis is available and may shed light on
the problems encountered with the first two methods. Instead of
studying the answers to the direct questions of why alone, or using
correlation data alone, the two methods may be used in conjunction
with each other. Specifically, the answers to the question of why
can be studied separately under different conditions. How do the
explanations of businessmen who are planning to expand differ when
they consider their business prospects favorable or unfavorable?
Again only preliminary and rudimentary findings can be presented
because of the relatively small number of cases available.
First, those cases may be examined where expansion plans are
revealed and yet executives expect their situation to deteriorate or
regard it as uncertain. These instances are found to fall, predomi-
nantly, in either of two categories: Some expansion plans represent
parts of continuous programs decided upon some time ago; others
are entertained because, as the executives say, circumstances — for
instance, actions by competitors — compel the firm to expand.
In studying those firms with expansion plans the executives of
which regard their current situation as not good, the executives are
found to argue in most instances that they will expand their facilities
— or will introduce new products or new designs, or purchase cost-
cutting equipment — in order to improve their situation or com-
petitive position. In certain instances, then, it is not an improvement
of one's business prospects but rather deterioration of business trends
which provides the incentive for investment decisions. In these
instances, according to available evidence, the decisions have been
carefully considered and alternative courses of action explored. The
business executives felt that they made a choice rather than that
they were compelled to act.
An entirely different psychological situation was revealed from
a study of the description of investment plans by some of those firms
which characterized their situation as "very good" and their prospects

as favorable. References to "constant growth" or to "always adding
to facilities" recur in such instances, as well as such explanations as
"In order to keep one's share in the market one has to expand."
These findings, of course, do not imply that plant expansion is always
an habitual form of behavior when the business situation is satis-
factory and is expected to improve. First, even in such situations
there occurs what psychologically must be characterized as genuine
decision-making. Secondly, as Tables VII and VIII reveal, a sub-
stantial number of firms do not entertain expansion plans although
their executives evaluate their situation and prospects in a very
favorable light. Some of these firms have completed extensive expan-
sion programs before the date of the interview, and others may have
insufficient funds for expanding. The position of still other firms
should have been studied more carefully than in this survey in order
to test the hypothesis, derived from certain psychological studies,
that breaking with past habits (abstaining from applying traditional
rules of thumb) requires deliberate decisions.
Summary
It must be emphasized again that the present study of considera-
tions relevant to investment decisions has been planned as a first step
toward exploring the complex problems involved. The conclusions
of the study must therefore be formulated with utmost caution. But
it is worth noting that the following conclusions are in agreement with
(a) psychological principles and experiences, (b) findings obtained
concerning household decisions, and (c) findings obtained concerning
price and output decisions by business firms. 3
3. Reference should be made, regarding household decisions, to the "Surveys
of Consumer Finances" conducted by the Survey Research Center of the Uni-
versity of Michigan for the Federal Reserve Board and reported in the Federal
Reserve Bulletin, and regarding business decisions to the wartime survey conducted
by the Cowles Commission for Research in Economics at the University of Chicago
(see George Katona, Price Control and Business, Bloomington, Indiana, 1945 and
George Katona, "Psychological Analysis of Business Decisions and Expectations,"
American Economic Review, Vol. 36, 1946). The psychological considerations
referred to here are discussed extensively in George Katona, Psychological Analysis
of Economic Behavior (McGraw-Hill, New York, 1951), which book was finished
prior to the analysis of the survey reported in this paper.
1. Through detailed personal interviews with representative

samples of businessmen, it is possible to obtain information on rele-
vant financial as well as psychological variables which prevail at the
time of decision-making. Analysis of the correlation between various
factors (e.g., different kinds of expectations) and decisions may be

supplemented by direct questions in which business executives are
asked why certain decisions have been made.'
2. Certain investment decisions are routine or habitual. Typical
examples are decisions determined by previous actions, the carrying
out of a standard policy, or the utilization of available funds in a
customary manner. In these instances businessmen are not conscious
of having made a choice, and expectations concerning future develop-
ments play hardly any role. The same may be the case in related
instances in which businessmen feel that they were compelled to
invest, primarily by action taken by competitors. There are, how-
ever, investment decisions which are based on definite expectations
and on careful weighing of alternatives. To make such decisions,
strong motivational forces are required.
Again it has to be pointed out that much work remains to be
done. This small-scale study was restricted to a discussion of the
variety of factors that are influential in certain business decisions.
The relative frequency of each factor among manufacturing firms was
studied, but the investigation did not cover the amounts of invest-
ment affected by decisions of different kinds. Attempts to make
quantitative predictions of investment, or to quantify the relations
between specific factors and investment (or plant location), require
transition from the microeconomic distributions discussed in this
paper to aggregative relations prevailing in our economy.
GEORGE KATONA
JAMES N. MORGAN.
UNIVEBSTY OF MICHIGAN
4. That factors influencing investment decisions may be studied fruitfully

by other methods, too, is not denied here. The Commerce Department, in con-
junction with the University of Illinois, has studied the factors responsible for
differences between anticipated and actual capital outlays by means of the mail
questionnaire and the check-list approach (see Irwin Friend and Jean Bronfen-
brenner, "Business Investment Programs and their Realization," Survey of
Current Business, December, 1950).

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THE QUANTITATIVE STUDY OF FACTORS

DETERMINING BUSINESS DECISIONS

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I. Personal interviews with a representative sample of business executives,

I. PERSONAL INTERVIEWS WITH A REPRESENTATIVE SAMPLE

Empirical research intended to clarify the factors influencing

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decisions by business firms. The second kind of decision is closely

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each plant, made available from up-to-date lists of the Michigan

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is always much lower than to personal interviews, and substantial

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movement may understate the magnitude of the problem. Hence

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II. STUDY OF INDUSTRIAL MOBILITY

Advantages of Michigan Location

FACTORS DETERMINING BUSINESS DECISIONS 73

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The weight of the answers was heavily concentrated on such

Proximity to Markets ....................... 64

Proximity to markets — to the automobile manufacturing plants as

Proximity to Markets ............. 70 58 57

Manufacturers were also asked whether it would be feasible for

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supply, available power," or "space for plant, available buildings,"

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Personal Reasons ............................... 51

Finally, among those in the representative sample who had

it required some rather serious difficulties in the old location to over-

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Percentages of Employment Represented

Wage Rates and Labor in General ... 63 43 33 51

The frequency with which labor disadvantages were mentioned

Table IV shows an even more important relation: labor appears

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On the other hand, the findings reported in Table V (obtained in

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Executives' Plans Percentages of Employment

Might Move Away Part or All of Their Operations.

shows not only which aspects are advantageous or disadvantageous,

fication, we reproduce here some illustrative statements. Although

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(a) Transportation Costs

In some cases, manufacturers are convinced that transport in

(b) Labor Costs

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(c) Area and Site Considerations

(d) Personal Preferences

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executives, it is possible to assess the importance of different factors,

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At the beginning of the interview, before the problem of investment

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The Direct Question of Why

These and similar answers are classified in Table VI under the

asked, "Did you have in mind an increase in business before you

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Percentage Distribution of Firms'

Current Demand and Current Orders......... 61 45

demand for our product was growing; it compelled us to acquire more

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explanation of changes in products or the search for high-margin