Industrial Location Theories

Supply & Demand, Market Mechanism

• Price is determined by the market as a function of supply and demand.– Elastic goods = price affects demand

• Cars, iPods, coffee, restaurant meals

– Inelastic goods = demand unaffected by price• Milk, medicine, salt

• For goods whose prices are elastic– Supply reduces prices– Demand increases prices– Market equilibrium = price at which supply

equals demand and satisfies consumers and producers

Principles of Location

• Some costs are spatially fixed– Unaffected by changes in location. Ex: national

min. wage.• Some are spatially variable

– Location changes the costs. Ex: land rent• Goal is to maximize profits by finding the least total

cost location– In some situations, sales/market play a role

• Location decisions are based on spatially variable costs

• Transportation costs are highly variable and therefore determine orientation– Characteristics of raw material are important

• Interdependence between factories increases with the complexity of industrial processes– Agglomeration reduces costs

Fixed and Variable Costs Influence the Optimum Location for Economic Activity

Classical economic geography models focus

mainly on the variable cost of transportation

Factors Influencing Location

• Raw materials– Weight-loss industries = reduce

waste/impure material; final product transportation cost is lower

– Weight-gain industries = final stage of production nearest to the market; transportation cost is higher

• Labor (price, skill, amount)– Some jobs need cheap, abundant labor– Others need highly skilled labor

• Market– Size, nature and distribution of markets play

key role in location decisions

Raw Material OrientedTendency for industry to locate near its

source of raw materials in order to save on transport costs

Usually occurs when raw materials lose “weight” in the production process (e.g.,

paper, steel)

Transportation Cost Minimization

Where is the best location for a steel manufacturing plant?

Recipe for steel (traditional)

Coal = 2 to 3 tons (+ energy*)

Iron ore = 1½ to 2 tons

Limestone = ¼ to ½ ton

Mix all solid ingredients. Heat at about 600º F until thoroughly melted.*

Pour molten blend into molds. Cool and serve. Makes one ton of finished steel.

The recipe for making steel has changed (new technology) How has this affected the location of

modern steel-producing areas?

Market OrientedTendency for industry to locate near

population centers in order to save on transport costs

Occurs when final product is more costly to transport than raw materials (e.g., soda,

glass)

Transportation Cost Minimization

Consider transport costs of a car’s components. Where’s a good place to locate

your assembly plant?

Maquiladoras – foreign-owned assembly plants in

Mexico (mostly textiles and consumer electronics)

Over 11,500 maquiladoras along

border with U.S.; employ 2 million+ Mexicans

Revenues from maquiladoras, exceed make up 85% of trade

between Mexico and U.S.

Minimizing Labor Cost

Average work week is 60-70 hours; wages about $5.75 per

day. Women are 70% of maquiladora workforce.

Since 2000, some maquiladoras have closed as corporations move assembly-line jobs to even lower-wage

countries, mainly China.

Sources: PBS & Ingolf Vogeler

Factors Influencing Location

• Transportation– Costs reflect freight rates

• Terminal costs = associated with loading, packing and unloading

• Line-haul costs = vary with individual shipments, distance and equipment used

– Break-of-bulk points• Sites where goods must be transferred or

transshipped; change in mode of transportation

• Result in additional terminal costs• Creates orientation near the BoB point.

Break-of-Bulk OrientedLocation between sources of raw materials and markets – for products that must be

divided and shipped from a central point of entry

Intermodal transportation – e.g., moving from rails to trucks or ships to trucks, or ports to

pipelines

Transportation Cost Minimization

Least-Cost Location Theory

Developed by Alfred Weber

Optimum location Depends on the minimization of three expenses:

•Relative transportation costs * major consideration!

•Labor costs•Agglomeration costs

Can be found where the costs of transporting raw materials to the factory and finished goods to the market are lowest.

Agglomeration

• Clustering of productive activities and people for mutual advantage– Infrastructure (transportation, water)– Set of activities (schools, government)– People (urban centers, labor market)

• Can create “diseconomies” due to competition• Higher rents and/or wages (ex: Silicon Valley)

• Examples:– Shopping centers (auto squares, malls)– Silicon Valley– Financial Districts

Weber Assumptions

• Uniform area– “Isotropic” assumption

• Single product shipped to single market• Inputs require raw materials from multiple source

locations• Labor is infinitely available• Transportation routes connect by shortest path• Transportation costs reflect the weight of the items and

the distance

Weber’s Locational Triangle

S1 S2

M

$1

$1$1

• Used to locate the optimum point of production where the distance involved in production & distribution is minimal

• Diagram of the cost consequences of fixed locations of materials and market and movement in any direction of a given weight of commodity at a uniform cost per unit of distance.

Weber Triangle• Three factors:

– Transport costs– Labor costs– Agglomeration

• Transport costs:– One market and two

sources:• Equal distance and

shipping costs dictates a market location

• Two weight-losing materials results in an intermediate location

S1 S2

M

$2

$2$2

P

Determining the best location for a mfg. plant with raw materials in Minnesota, Florida, and Texas & the market in New York

(but with differing amounts of raw mat’s needed)

Locational Interdependence Theory

• Developed by Harold Hotelling

• Optimum location – Locational decision influenced by locations chosen by

competitors– Competing firms (similar product and cost

structures) will try to establish a “spatial monopoly” and avoid yielding locational advantage to their competitor

This solution maximizes profits but does not minimize costs. It applies primarily to inelastic goods (ex: ice cream).

The Hotelling Beach

1. Market split evenly; vendor at center of each market

2. A moves into B to increase market share; both move closer to center

3. Equilibrium; both locate at the edge of their markets (agglomeration)

Profit-Maximization

• Satisfying location = where net profit is greatest– Substitution principle:

• Replace a declining amount of one input with an increase of another (ex: new steel recipe)

• Increase transportation costs while reducing land rent (ex: maquiladoras)

Ubiquitous and Footloose Industries

• Ubiquitous Industry• Examples: Newspapers, bakeries, dairies

– In large cities, one cannot separate city dwellers as labor or market

– Widely available industries producing highly perishable items for immediate consumption

• Footloose Industry• Examples: Diamonds, computer chips

– No market OR resource orientation– Transport costs are negligible – Raw material and finished product are

equally valuable and lightweight.

Shipbreaking industry,

Bangladesh

Shipbreaking yards in Bangladesh alone dismantle about 90 giant ships a year, mostly oil tankers, generating millions in revenue, employing tens of thousands, and providing a significant proportion of the iron and steel used by local industry. However, there is a dark side to the industry in which the workers must toil in extremely hazardous conditions that frequently lead to death or serious injury and which is tremendously harmful to the environment. ... A majority of ships are built in South Korea and China, filling orders placed by Japan, the UK, the US, Norway, Singapore and Denmark. Until the 1970s, shipbreaking was done in the countries of origin, using heavy machinery on salvage decks. But increasing environmental regulations and labour costs resulted in the transfer of this work -- first to Korea and Taiwan, and then to South Asia after the Asian Tigers upgraded away from this work.

Source: www.sos-arsenic.net

Fordism

• Traditional manufacturing– Traditional assembly

line production; specialized labor

– Identical commodities produced in batches, delivered before need

– Lots of materials and supplies stored in advantage

– Savings in transportation costs & ordering charges

– Higher storage and inventory costs

Agglomeration Economies

• Spatial Concentration of people and activities for mutual benefit

– Savings from shared INFRASTRUCTURE– Pools of labor and capital– Market created by industries and population

•Links as customers and suppliers• Multiplier Effect

– Each new firm leads to further development– Expansion of labor pool through urban

growth• Deglomeration

– Relocation of firms to non-metro locations– Caused by diseconomies:

• High land value, pollution, etc.

Diseconomy:

Forces that cause governments and firms to produce at a higher per-unit cost.

Post-Fordism

• Post-Fordism (Flexible manufacturing)– Smaller production runs for niche (specialized)

markets– More flexible labor (ex: telecommuting)– Reponsive to market fluctuations– Lower transportation costs (cost-time versus cost-

distance)– Just-in-Time (JIT) manufacturing

• Frequent ordering of small lots of goods• Requires rapid, precise timing for delivery• Reinforces agglomeration

– Flexibility made possible by technology

Comparative Advantage

• Areas & countries can best improve their economies though specialization and trade– Each place produces that in which it has the greatest

relative advantage over other areas, and imports the rest

• Outsourcing– Manufacturing relocated from higher-cost

market locations to lower-cost production sites– Subcontracting production and service sector

work to outside domestic companies– Key component of JIT

• Logistics companies handle packaging and movement

Outsourcing Examples

• Car manufacturing– Traditionally

• Located near raw materials (Rust Belt)• Self-contained (everything made in factory)

– Since 1990’s• Components made by different suppliers in

different parts of the country• Final assembly done in house

– Assembly may also be handled by outside companies

• Maquiladoras– Tax-free assembly plants– Made possible by NAFTA

Comparative Advantage (Cont’d)

• Offshoring– Hiring foreign workers, or contracting foreign third-

party service providers to run business services• Call centers• Accounting/billing• Made possible by ease of Internet use, as well as

increase of skilled, educated population in developing countries

• New International Division of Labor (NIDL)– MDCs no longer base economies on manufacturing;

focus on quaternary and quinary sectors– Some LDCs still produce raw materials, others handle

manufacturing and services– System benefits TRANSNATIONAL CORPORATIONS

The cost of transporting data has declined to near zero

Source: Probe Research, Inc., Telcordia (Bellcore); Progressive Policy Institute.

Low transmission costs, plus ability to digitize data, revolutionized the location choices for high-tech industry

Transnational Corporations (TNCs)

• AKA Multinational: Private firms with branch operations in multiple countries

• Almost all engaged in secondary activities• Division of labor (exploit competitive

advantage)– Tertiary-Quinary processes: core countries– Secondary, some tertiary: semi-periphery– Primary: primarily periphery

• Foreign Direct Investment:– Purchase of infrastructure by TNCs– Focused primarily in South/East Asia, and

Latin America.• Most of the money goes toward the rich in

those countries, and to their governments