Location Quotient
Also known as: LQ, Coefficient of Localization, Regional Specialization Ratio
The location quotient (LQ) is a simple descriptive index that measures how concentrated an industry is in a region relative to a larger reference area, usually the nation. It is the ratio of the industry's share of local employment (or output) to its share of national employment. An LQ above one means the region is more specialized in that industry than the nation as a whole; an LQ below one means it is under-represented.
Key highlights
- Extremely simple to compute and interpret — a single dimensionless number per industry and region.
- Requires only sectoral employment or output shares for a region and a benchmark, which are widely available.
- Comparable across industries and across regions because it is normalized by the reference area.
- Provides a fast screen for industrial clusters, candidate export sectors, and the inputs to economic base and regional input-output methods.
Intuition
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How it works
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When to use it
Use the location quotient as a quick, low-cost first measure of regional industrial specialization or concentration when you have sectoral counts for a region and a reference area. It is standard in regional and urban economics for identifying clusters, candidate export industries, and structural differences across places, and it feeds economic base analysis and the regionalization of national input-output coefficients. It is a descriptive ratio, not a model: it does not establish causation, account for cross-hauling (a region simultaneously importing and exporting the same good), or capture supply-chain linkages, so it is best used for screening and description rather than precise estimation.
Strengths & limitations
- Extremely simple to compute and interpret — a single dimensionless number per industry and region.
- Requires only sectoral employment or output shares for a region and a benchmark, which are widely available.
- Comparable across industries and across regions because it is normalized by the reference area.
- Provides a fast screen for industrial clusters, candidate export sectors, and the inputs to economic base and regional input-output methods.
- Purely descriptive: it identifies relative concentration but says nothing about causes, efficiency, or competitiveness.
- The simple LQ assumes the reference area neither imports nor exports the good and ignores cross-hauling, biasing economic-base estimates.
- Highly sensitive to the level of sectoral aggregation and the choice of reference area, which can flip conclusions.
- Treats industries in isolation and captures no inter-industry linkages, unlike input-output or SAM frameworks.
Common pitfalls
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Applications
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Frequently asked
What does a location quotient of exactly 1 mean?
It means the industry accounts for the same share of employment in the region as it does in the reference area — the region is neither more nor less specialized in that industry than the benchmark. Values above 1 indicate relative concentration (often interpreted as a potential export industry), and values below 1 indicate the industry is under-represented locally relative to the national norm.
Why does the simple location quotient overstate regional self-sufficiency when used in input-output models?
The simple LQ adjusts only the supplying industry's relative size and assumes that if a region is at least as concentrated in an industry as the nation it meets all its own demand for that good. It ignores cross-hauling and the size and structure of the purchasing industries, so it tends to set regional purchase coefficients too high. Cross-industry location quotients and the Flegg location quotient (FLQ) were introduced to dampen this self-sufficiency bias.
How does the location quotient relate to shift-share analysis?
Both are descriptive regional tools that compare a region to a reference area using sectoral data. The location quotient is a static, single-period measure of how specialized a region is in each industry, whereas shift-share analysis decomposes the change in a regional variable over time into national, industry-mix, and competitive components. LQ describes structure at a point in time; shift-share explains growth between two points.
Sources
- 1.Isard, W. (1960). Methods of Regional Analysis: An Introduction to Regional Science. Cambridge, MA: MIT Press.ISBN 9780262090032
- 2.Miller, R. E., & Blair, P. D. (2009). Input-Output Analysis: Foundations and Extensions (2nd ed.). Cambridge University Press.ISBN 9780521739023
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Cite this page
ScholarGate. (2026, June 22). Location Quotient. ScholarGate. https://scholargate.app/economics/location-quotient