Industrial Activity & Geographic Location

1. Industrial Activity & Geographic Location

2. 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

3. 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

4. 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

5. 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

6. 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

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

8. 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

9. 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

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

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

12. 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-to-face 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,…

13. 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

14. 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

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

16. 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

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

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

20. The Location Decision • Primary industries – located near raw materials • Secondary industries – less dependent on resource location

21. 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 moves away from its point of origin

22. 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 minimize these costs

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

24. 5 Controlling Assumptions • Area is uniform physically, culturally, and technologically • Uniform or Isotropic plain assumption

25. 5 Controlling Assumptions • Manufacturing involves a single product to be shipped to a single market whose location is known • Inputs involve raw materials from more than one known source location

26. 5 Controlling Assumptions • Labor is infinitely available but immobile in location • Transportation routes connect origin and destination by the shortest path and directly reflect the weight of the items shipped and distance moved

27. 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

28. 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

29. 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

30. 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

31. Weber’s Theory of Location Transport costs: • 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

32. Weber’s Theory of Location 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

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

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

35. 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 certain costs can offset increases in others

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

37. 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.

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

39. Ullman’s Conceptual Frame: • Forms a basis for understanding the volume & timing of the flows of goods between locations; 3 main concepts: • 1) Complementarily – 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 Mine

40. 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)

41. 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)

42. 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

43. Factors of Industrial • Location (review) • 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 services,… Open-air laundry in Mumbai, India

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

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

46. World Cities: John Friedmann (1980s) • Dominant in terms of their global-political economy; centers of control of the world economy, not the largest in terms of pop. or ind. • Examples: N.Y.C., London, Tokyo, Sao Paolo,…