The location of factories

1. Sonja Pisarov LjiljanaZeljkovic The location of factories Location Conditions and Location Factors

2. Review Factory location Location conditions and changes in location conditions over time The nature of location factors

3. Firms assemble materials and services in factories in order to add value by the application of factors of production (labor, land, capital, entrepreneurship) and to ensure the distribution of the resulting output. The theory of the firm Any theoretical explanation of location must invoke a theory of the firm 3 different theories of the firm: NEOCLASSICAL Economic persons BEHAVIOURAL Satisificer Persons MANAGERIAL Managers or Technostructures

4. NEOCLASSICAL THEORY • Economically rational • Nature of economic landscape in terms of costs and revenues • Respond automatically to economic forces • Profit is beneficial so there is no conflict between firms and economy • In the long run, survive by adapting to laws of demand and supply • Avoid government intervention • Goal-Minimum costs, maximum profit

5. BEHAVIOURAL THEORY • Limited information, boundedly rational • Economic landscape interpreted as information flows which firms process through their “mental maps” • In the long run, survive by learning • Goal – aspiration levels or better

6. MANAGERIAL THEORY • Dominated by big corporations • Plan, develop strategies, seek to grow, make profits and reduce uncertainty • Operate within economic landscape of institutions interpreted in terms of “countervailing” powers • Bargaining strategies between business, government and labor • Goal - growth, security and profit Eclectism has blurred the boundaries between the theories. The distinction between neoclassical and managerial theory is of particular importance

7. Location conditions and location factors define characteristics which vary from place to place and affect viability of factories. LOCATION FACTORS LOCATION CONDITION • The specific interpretations made by individual firms of more general location or environmental conditions • The differences among locations that exist for all industries (while location factors refer to specific importance that is attached to such differences, by individual firms when choosing locations for factories)

8. Typology of location conditions What places offer industry • Places vary in terms of location conditions • 11 broad categories of location conditions are recognized Transportation facilities Materials Markets Labor External economies Energy 7. Community infrastructure 8. Capital 9. Land 10. Environment 11. Government policy

9. Characteristics of location conditions Complex – each compromises multifaced characteristics of tangible and non-tangible nature which is based on ease of quantification in terms of cost Hard to measure (common interval scale and ordinal scale categories) Caution in the interpretation of individual location conditions Not mutually exclusive (business climate) Non-tangible features of location conditions are real and important

10. Material, markets and transportation 1. Transportations costs comprise procurement costs and distribution costs Locational pull of markets and materials can be measured by transportation costs Transportation costs/“transfer costs” Transportation costs determined by distance, physical characteristics of goods, value, mode of transportation..

11. Material, markets and transportation • Important distinction between total transportation costs (increase with distance, weight, volume) and freight rates per unit (decrease) • The actual prices charged for transportation services may or may not strongly reflect the real costs of transportation • Free-on-board f.o.b. (the buyer pays for the good at the point of production and arranges the transportation) • Cost, insurance and freight c.i.f. and c.f. (sellers pay the cost, insurance and freight pricing of delivering goods to the consumer) • Uniform-delivered pricing system charge all consumer the same price regardless of location • Basing-point pricing system, transportation rates are charged from the designated basing point even if the goods are manufactured somewhere else. --- both are discriminatory!

12. Material, markets and transportation • Transportationhas important non-tangible features • All manufacturing activities use transport services to access input and distribute outputs. Location near inputs lower procurement cost and location near market lower distribution cost. • Reduced importance of the distribution of raw materials • 1950s and 1960s, marketas a location condition has become increasingly important. • Market potential tended to overlap closely with the centers of industrial concentration : US – New York and Manufacturing Belt; UK – London and Axial Belt; Europe - Ruhr and nearby areas • Association between distribution of industrial activity and market potential • Correlation between employment and market potential

13. LABOR 2. Labor costs comprise wages and non-wage benefits Vary by industry, union and non-union sector, gender and location and even among advanced countries wages and benefits can vary Hiring and recruitment costs for labor vary by location, depending of availability Lower in metropolitan labor markets Higher in isolated communities as well as voluntary labor turnover costs Unionization as intangible characteristic of labor – apart from potential implications for productivity and costs, it enhances labor power although this power vary geographically (German vs. North America)

14. Labor • Skill as another intangible characteristic of labor • Skill-specific to industries, firms and machines, involve senses, physical strength, endurance, ability to execute tasks in precise way • Some involve certification while others practical experience (skilled and unskilled workers) • Change radically thanks to technological change • Industrial Revolution – deskilling of the workers • But also – enskill (computerization) • Labor efficiency is enhanced through intellectual ability • Labor cost related to skill and productivity, while unionization raises issues of high wages, rigid work practice, and limits to managerial control

15. EXTERNAL ECONOMIES OF SCALE 3. Dichotomized as urbanization and localization (dis)economies of scale Essentially comprise a set of non-tangible characteristics which are themselves summarized as “positive” and “negative” externalities Externality – unintended consequence of decisions by firms on other firms (+ and -)

16. External economies of scale • Urbanization economies (+ and - externalities) • Localization economies • Non tangible characteristics: • An established reputation for goods • Highly skilled labor pool • Specialized services in marketing, R&D, worker training… • Local interdependencies (small firms supply highly specialized services) • Negative externalities (competition becomes cut-throat)

17. ENERGY 4. Declined in importance since Industrial Revolution Water power, steam power, electrical power, oil, nuclear power – transmitted over long distances Hydropower sites remain relatively cheap General tendency – importance of energy to decline as a location condition

18. COMMUNITY INFRASTRUCTURE 5. All manufacturing activities require access to it ( EOC and SOC), sine qua non for manufacturing investment Expensive to build, existing stock provides physical restrictions on location possibilities “industry parks”, “industrial estates”, provide ready-made infrastructure (industrial land, buildings and access to existing population centers) Innovation or science and technology parks Developing countries – special economic zones (SEZ) Infrastructure does not “cause” industry to occur Amenities (even more important as location condition)

19. CAPITAL 6. Physical capital (buildings, equipment) Measured by cost of construction and related design cost Can be rented, purchased, converted or expanded Financial capital Highly mobile Interest rates vary by location “ The cost of financial capital is not very influential in location choice in the modern industrial state” – A. Smith In the last two decades there has been substantial growth in venture capital for high risk developments (high-tech fields)

20. LAND 7. The cost of land varies among countries Highest cost recorded in the larger metropolitan areas Industrially zoned land is lower priced than if zoned for commercial and residential uses non-tangible features – vary in terms of size, shape, accessibility and whether or not it is serviced, with or without buildings Land can be provided with or without buildings in terms of size, design and layout

21. ENVIRONMENT 8. Rises two distinct sets of issues – Spatial variations in : Environmental amenitie Environmental policies and regulations 1. Ulman- environmental amenity is associated with outdoor pursuits and weather conditions; all regions offer some sort of amenity 2. Growing interest in the role of environment regulations (especially air and water pollution) “clean air” and “clean water” policies introduced after WWII Require reduction of pollution and new technology

22. GOVERNMENT 9. Explicit spatial policy implemented by national or supranational governments seek to stimulate industrialization in “designed” regions by incentive or subsidy also known as regional policy discarded or at least reduced in scale and profile reason: conservative politics, unemployment problems, balance of payments

23. Government • Implicit spatial policy • conceived in national terms, such as trade and tariff policies, defence policies have regional effects that may or may not be intended • defence policies can generate regionally discriminatory effects • implications not easy to identify • Derived spatial polices • occur whenever regional and local governments pursue industrial policies • variation among local governments to seek manufacturing investment • this variation related to the idea of local “business climate”

24. THE NATURE OF LOCATION FACTORS Location factors express how firms assess places Firms may assess the same location condition in different ways depending on which tangible or non-tangible features are considered important Location factors are influenced by the organizational constraints, value systems and preferences of individual/group decision-makers In order to identify location factors, surveys have been conducted (partial, general survey) – not easy to summarize “wide range of factors” influencing location – product cycle model

25. The Product Cycle Model • Vernon, 1960, developed to explain international investments • As products are researched, developed, standardized the optimal bundle of location conditions shifts from high wage regions to low wage regions • Form of “filtering down” theory • Products evolve through various lifecycle stages • As products evolve, the underlying input conditions change which lead to shifts in location conditions and factors

26. The Product Cycle Model • R&D stage- optimal location conditions are found in locations that provide access to scientists, engineers skilled labor • when the product is standardized competition encourages firms to seek lower costs • firms replace skilled labor with relatively unskilled one • still operates with proven and sophisticated technology • Criticized for technological determinism • Oversimplifies the range of location factors affecting branch plants

27. Control functions • Single-plant firms – owner managers (one location) • Multi-plant firms – professional managers (geographically separate) • Head-office location factors • Located in major metropolitan centers, downtown cores or central business districts. • Advantages in largely intangible features, facilitating person to person contact • R&D location factors • According to survey, management’s ideal location – “environmental quality” and “quality of public education” to attract employees • “cost of housing” most important factor in the ideal location of employees • Both R&D management and employees – “community business attitudes” “economic growth potential” “proximity to university” important

28. Innovative manufacturing • American and Canadian studies • High-tech activities associated with the early stages of product lifecycle, which emphasizes the importance of access to skilled scientific, engineering and factory workers and to external economies • Important location factors - labor skills, labor costs, wage levels • Influence of “proximity to universities” as location factor, providing high-tech companies with professionals • Birthplace, established place of residence significant influence on location of high-tech companies

29. Branch plants • Branch plants controlled by head-offices based outside of the region • The survey confirmed a wide range of factors relevant – labor factors are the most important • Branch plants give emphasis to locations with low labor costs, low level of unionization, right to work laws, availability of labor especially unskilled and semi-skilled, high levels of labor productivity

30. Factory closure • Products life cycles imply that old products will be replaced with new ones • Product life cycles speeded up over time • The obsolescence and death of product does not mean factory closure • De-industrialization of many cities and regions meant factory closures • Cessation closures and selective closures • Area and plant level factors relate to features of plants and local area • Closure factors related to site features, number of production activities, age of building, labor relations and size of plant

31. As a conclusion… The results from location surveys not easy to interpret in precise ways But, there are many factors which influence factory locations and many of these factors are of subjective nature The product cycle model which predicts branch plants to seek cheap labor does over-simplify (other factors have to be taken into account) Location conditions and especially location factors convey subjective meanings which are difficult to measure and interpret

32. THANK YOU!