Industrial Activity Geographic Location Locational Decisions in Manufacturing

Industrial Activity & Geographic Location

Locational Decisions in Manufacturing • Manufacturing involves the assembly and the processing of inputs and the distribution of outputs • Raises the question of where processing should take place • Multiple answers

Locational Decisions in Manufacturing • Must consider a wide range of industrial pulls and attractions • Influence of physical, political, economic, and cultural constraints • In practice and theory locational factors are complexly interrelated and change over time

Principles of Location • Principles that are assumed to operate under all economic systems • Can also be thought of as “ground rules” of a location; what is looked at when choosing where to locate

Principles of Location • Generalized statements about location tendencies of industries • Relative weight varies among industries and firms • Significance depends on how much purely economic considerations dictate location as opposed to political or environmental

Principles of Location – does a location have… • Spatially Fixed Costs: relatively unaffected in their amount or relative importance no matter where the industry is located within a regional or national setting

Principles of Location – does a location have… • Spatially Variable Costs: show significant differences from place to place • Will influence locational choices

Principles of Location Profit Maximization • Perfect Competition: the profit objective is achieved at the least total cost location • Imperfect Competition: sales and market may be more important than production costs

Principles of Location • Industrialists base the location decision with respect to the minimization of variable costs • Location determinant is typically the cost that is both an important component of total cost and spatially variant

Principles of Location • Transportation Charges: the accumulation of inputs and distribution of outputs are high variable costs • May become the locational determinant

Principles of Location • Individual establishments rarely stand alone • Interdependence increases as the complexity of industrial processes increases • Creation of industrial agglomerations

• Agglomeration – Occurs when certain conditions are met: 1) When a cluster of activities create enough demand for support services 2) Activities needing access to information & control tend to concentrate (e. g. face-toface is better, no matter how rapid other forms of comm. are (e-mail, phone, …) 3) When cultural institutions (schools, hospitals, …) are attracted to the area Deglomeration = too many activities (of the wrong type); traffic, pollution, capital shortages, inc. land prices, …

Basic Assumptions in Location Decision-Making • People are economically rational • Producers and sellers are intent on maximizing profit • Best economic decisions result from market mechanisms: – Price of land, labor, raw materials, energy, transportation – Price is a function of supply and demand

Factors of Industrial Location – what factors decide where an industry locates? Raw Materials • Very few industries use raw materials • Most manufacturing is based on the further processing and shaping of materials already treated in some fashion • Transportation costs affect industry location

Power Supply (Energy) • Power supplies that are immobile or of low transferability may attract activities dependent on them • Current technology made less important • Industries requiring large amounts of energy still situated near the power source

Labor • Spatial variable affecting location decisions and industrial development • 3 major traditional considerations – price, skill, and amount • Labor Flexibility: highly educated workers able to apply themselves to a wide variety of tasks and functions

Market • Goods are produced to supply a market demand • Size, nature, and distribution or markets is important in industrial location decisions • Ubiquitous industries

Transportation • Unifying thread of all factors of industrial location • Modern industry is immediately tied to transportation • Use many different forms of transportation

• The Location Decision – Primary industries – located near raw materials – Secondary industries – less dependent on resource location, but transportation costs may affect decision – Tertiary industries – location of workers and customers often most important

– Economic models assume: • 1) People will try to maximize their advantages over competitors, • 2) They will want to make as much profit as possible, • 3) They will take into account variable costs – energy, transportation, labor, … – Friction of distance – the increase in time and cost that usually comes w/ increasing distance – Distance decay – the impact of a function or activity will decline as one

Alfred Weber • Created the classical model of industrial location theory: Least. Cost Theory (1909) • Explains the optimum location of a manufacturing establishment in terms of minimizing three basic expenses – Transportation cost, labor, agglomeration – Owners of manufacturing plants try to

Least-Cost Theory • Transportation costs are the major consideration • However, labor and agglomeration can greatly alter the locational cost of production

5 Controlling Assumptions 1. Area is uniform physically, culturally, and technologically • Uniform or Isotropic plain assumption

5 Controlling Assumptions 2. Manufacturing involves a single product to be shipped to a single market whose location is known 3. Inputs involve raw materials from more than one known source location

5 Controlling Assumptions 4. Labor is infinitely available but immobile in location 5. Transportation routes connect origin and destination by the shortest path and directly reflect the weight of the items shipped and distance moved

Least-Cost Theory • Model attempts to diagram the consequences of fixed locations of materials and market and of movement in any direction given weight of commodity • Searching for the optimum point of production

Least Cost Theory (1909): A manufacturer will locate at the source or the market – – Weight-losing case: final product weighs less than raw materials; location = source Weight-gaining case: final product weighs more (or takes more space) than raw materials (e. g. addition of water); location = market

Weber’s Theory of Location (Least Cost Theory) • Alfred Weber, German economist • General theory (1909) is applicable to any economic, political or cultural system. • Goal is minimum cost location • Three categories of variable costs: – Transportation – Labor – Agglomeration

Weber’s Theory of Location • 5 Assumptions: – Isotropic plain: uniform topography, climate, technology, and economic system. – One finished product with one market – Fixed location of raw materials and market site – Labor is fixed, but available in unlimited quantities at production site – Transport is uniform and costs are a function of weight and distance

Weber’s Theory of Location Transport costs: Ø Single market and single source: • Ubiquitous material results in location at the market • Pure material allows processing at market, source, or an intermediate location • Weight-losing material will be processed at the source to avoid transporting waste material

Weber’s Theory of Location Transport costs: Ø One market and two sources: • Equal distance and shipping costs dictates a market location • Two weight-losing materials results in an intermediate location

Weber’s Theory of Location Labor Costs: Ø Location chosen always has least combined costs • A location may have higher transport costs, but less expensive labor

Weber’s Theory of Location Agglomeration: Ø Weber recognized that clustering will result in a per unit savings • Shared benefits • • • Facilities Labor force Infrastructure Services Raw materials

Weber’s Theory of Location Limitations of the Theory: • There are geographic variations in market demand • There are terminal costs • Transport costs are becoming less of a factor • Labor is mobile and does not exist in unlimited quantities • Plants often produce a variety of outputs for many markets • Some argue Weber’s model doesn’t adequately account for variations in costs over time (e. g. taxation, consumer demand) • Substitution principle – decreases in

Weber’s Theory of Location Additional Contemporary Considerations • Access to capital • Access to technology • Friendly regulatory environment • Political stability • Land cost • Inertia

Location Theory – Key Terms • Material-oriented manufacturing – Weight loss or perishability • Market-oriented manufacturing – Weight gain or perishability • Footloose – Industry that can be sited in any of a number of places, often because transport costs are unimportant. Such industries may have raw materials that are commonly available, for example a bakery, or use components from a wide range of suppliers, for example the electronics industry. High-tech industries, needing a highly qualified workforce, may appear footloose, but in practice they tend to locate close to universities, research establishments, and motorways • Industrial inertia – the continuing presence of industry in an area, or at a location, after the initial locational factors have ceased to apply.

Review What is Weber’s theory of location? • What are three factors of location? • What are the assumptions of Weber’s theory? • Explain how the three factors relate to theory. • Are there any drawbacks to theory?

Ullman’s Conceptual Frame: • • Forms a basis for understanding the volume & timing of the flows of goods between locations; 3 main concepts: 1) Complementarity – refers to the needs of one region matching the products of another (copper from AK to manufacturing cities) 2) Intervening opportunity – reduces attractiveness of more distant locations 3) Transferability – refers to the ease w/ which products can be moved Kennicott Copper

Harold Hotelling Model (2 dimensional) – Locational interdependence – the location of industries can’t be understood without reference to the location of other industries of like kind – Two vendors located on pts. A & C, eventually gravitate toward pt. B (moving from this pt. will only hurt profitability) – A third vendor complicates this (spatially)

Christaller’s Central Place Theory • • • Distance affects the marketing strategies of enterprises Businesses identify one location, possess a monopoly Hexagons display a nesting pattern; Christaller’s theory is not as accurate today (diminishing specialization)

• August Lösch – Profit-maximization: firms will identify a zone of profitability (not just a point) – Other businesses can come in and change the configuration of that zone – Agglomeration can give the entire area a competitive advantage

Factors of Industrial Location (review) • • • Open-air laundry in Mumbai, Raw Materials-e. g. Japan has few, but grew into an ind. giant b/c of skilled labor & low wages Labor-e. g. 1994 – wages in Shanghai’s Pudong dist. = 1/40 Japan, 1/30 Taiwan Infrastructure-banks, transportation, communication, social

Late 20 th Century & Beyond: New industrial locations Pusan, South Korea – “Four Tigers”: South Korea (Seoul), Taiwan (Taipei), Hong Kong, Singapore (industrial powers) – China – rapidly growing in influence – Japan is losing its

- N. Hemisphere Ind. Zone: U. S. – Europe – Former USSR – E. Asia Secondary Regions – Mexico, Brazil, S. Africa, Egypt, India, Australia, …

– World Cities: John Friedmann (1980 s) – Dominant in terms of their global-political economy; centers of control of the world economy, not the largest in terms of pop. or ind.