Upfront: The Costliest Places To Run a Business

When determining where to locate international operations, companies concerned about costs will see Canada as a good choice, according to a recent study by KPMG LLP. On the other end of the spectrum, Japan and Germany rated as the most expensive places to run a business among the 11 industrialized countries in North America, Asia Pacific and Europe that KPMG considered.

The United Kingdom scored as the least-costly European nation, followed by Italy, France and Luxembourg. Costs of doing business in those countries are 1 percent to 2.5 percent lower than equivalent expenses in the United States. However, the United States -- which ranked fifth most expensive -- has seen the greatest improvement in its cost-competitiveness since KPMG's 2002 study. That's because the most important factor affecting international competitiveness in the past two years has been the decline of the U.S. dollar relative to other major world currencies.

Among cities with populations of 2 million or more, Montreal ranked as the least costly, followed by Melbourne, Australia, and Toronto. Cities with the highest business costs are Yokohama, Japan; Frankfurt, Germany; and London. When medium-size cities are included in the analysis, Sherbrooke, Canada, emerges as the cheapest place to operate. Caserta, Italy, takes that honor for Europe.

The study's rankings are based on estimates of the after-tax cost of startup and operation for 12 types of business over a 10-year span; KPMG came up with these estimates by measuring 27 cost components (including labor, taxes and utilities) in 98 cities worldwide. The firm analyzed more than 1,000 individual business scenarios and more than 30,000 pieces of data.

Major differences in national competitiveness come to light when the type of business being established is taken into consideration. For example, Canada has an 18.2 percent cost advantage over Germany in manufacturing operations but a 55.7 percent cost advantage in corporate services. The United States is at a 2.5 percent cost disadvantage to the United Kingdom in manufacturing but enjoys a 16.9 percent advantage in corporate-services functions.

In the manufacturing sector, labor costs typically represent between 56 percent and 72 percent of the costs that vary based on the location of operations. That figure jumps to between 75 percent and 85 percent in nonmanufacturing businesses. Facility costs represent the second largest location-sensitive cost driver, accounting for 4 percent to 14 percent of these expenses in manufacturing and 12 percent to 24 percent in nonmanufacturing companies.

Taxes also make a difference, representing between 5 percent and 11 percent of location-sensitive costs for manufacturing and 3 percent to 8 percent for nonmanufacturing operations.