Understanding Location Quotient: Location Quotient Formula, What Is It, and Why It’s Important

Location Quotient

Every economy in the world is unique in terms of strengths. If you even dive deeper, you will discover that the same economies across countries exhibit unique strengths and weaknesses. When making investment or expansion decisions, it’s crucial to be able to see the full picture. 

That’s where the location quotient comes in. Given that this is a complex subject, we will take it one step at a time. First, let’s see what the location quotient is, then move on to the Location Quotient formula, how it can benefit your organization, and what data you need to calculate it. 

What is the Location Quotient 

Every regional economy is specific in terms of industries and occupations. Location Quotient, or simply LQ, provides you with the means to discover the concentration of employment in an industry or community in a given region in relation to the average national metrics. 

What is the location quotient? LQ is a mathematical method that helps you pinpoint strong and weak regional industries. If you would like to simplify your research and take a shortcut, LQ would be a great way to do it, simply because it helps you instantly identify the advantages of every given region. 

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Now, we’ve said that LQ is a mathematical method. It implies that there is a formula. Location Quotient Formula 

Businesses often have reservations about basing their decision on the results of mathematical formulas, which usually implies the need for analytics software and complex calculations. It’s quite the opposite when implementing and using the Location Quotient formula. 

It’s relatively simple to understand. Here it goes:

Location Quotient = Regional employment rate / National employment rate 

It doesn’t get any simpler than that. All you have to do to calculate the location quotient is to divide regional with national employment rate. There is no need for advanced analytics software or a team of data scientists to do it and interpret the results. 

Let’s put the location quotient formula to action. Here is an example to understand it better. Example: 

Let’s say you are in the information technologies and services sector and you want to discover the details about the IT & services economy in New York. For example, let’s take the IT & Services share in the New York employment rates, which is 8%. Meanwhile, the IT & Services sector contributes to 2% of all national jobs. 

Let’s apply the Location Quotient formula now – 0,008 / 0,002 = 4. What does the LQ of 4 tell us? It simply tells us the concentration of IT & Services in New York compared to the national average. In our example, IT & services are four times more concentrated in the New York economy than the overall national economy. 

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How to improve your Location Quotient Calculations? 

To base your investment or expansion decisions on LQ, you need access to up-to-date and accurate data. The data set should include all the companies in the given sector and specific locations. You also need to know the national average for the economy. Plus, you need to know precisely how many employees those companies have on the payroll. 

As you can see, obtaining such specific data can be pretty challenging. However, you need complete and accurate data to be able to do proper calculations and facilitate a data-driven decision-making process. Now you can start collecting the data on your own. 

You can create a survey and send it to relevant companies in the local economy. The problem is that the chances of getting the complete data are slim because businesses don’t lightly share details about their operations. 

The other option is to buy the data from relevant data-providing companies. These companies specialize in this sort of thing. The name of the data you are after is firmographics or firmographic data. It includes everything you need to improve your LQ calculations ranging from the company name and industry type to location and number of employees. 

How knowing the Location Quotient can help your business? 

Why go through all this trouble of getting the data and doing LQ calculations, you may ask? To answer your question, we have to go through the benefits of basing your business decisions on LQ. Here’s what you need to know.

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Discover Industries with a Competitive Advantage 

Every specific economy is distinctive, but you cannot know which one of the economies is distinctive or to what extent. LQ is the final piece of the puzzle to tell which industry stands out from other industries in a specific region. An industry with a competitive advantage will have a higher LQ. 

Easily Align with Successful Businesses 

LQ also enables you to pinpoint a specific economy within a region suitable for investment. Local industries with a high LQ are a great place to start. Aligning with successful businesses can help you create great partnerships and easily source capital, goods, and technology

Identify Export and Import Businesses in an economy 

Finally, LQ can help you distinguish between exporting and importing industries. High LQ is often connected with organizations exporting many goods or services. Import industries with low LQ are often great investment opportunities if you can supply relevant resources. 

Conclusion 

The location quotient formula is straightforward, but it can tell you a lot about local communities and economies. With access to the right data, you can improve your LQ calculations and get valuable insights into industries relevant to your business so that you can improve your financial activities.

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