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Topic 5 – Location Theory

Topic 5 – Location Theory. A – Factors of Location B – Scale and Organization C – Business and Product Cycles. A – Factors of Location. Labor Land Capital The Weberian Representation. Factors Affecting Location Decisions. 1. Labor. Factor One of the most important cost factors.

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Topic 5 – Location Theory

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  1. Topic 5 – Location Theory A – Factors of Location B – Scale and Organization C – Business and Product Cycles

  2. A – Factors of Location Labor Land Capital The Weberian Representation

  3. Factors Affecting Location Decisions

  4. 1. Labor • Factor • One of the most important cost factors. • Geography of labor: • Availability. • Productivity. • Skills. • Militancy. • Labor demand: • Large variations by type of activity. • Labor intensive versus capital intensive. • A shift towards capital intensiveness in most industries.

  5. 1. Labor • Labor supply: • High birth rates involve high supply and low wages. • Low birth rates involve low supply and higher wage. • Inciting to shift towards capital intensiveness. • Labor mobility: • Attractiveness of high wage areas. • Immigration control on labor mobility. • Cost of living impacts (e.g. housing and food). • A shift towards an equilibrium. • Relative inertia. • Labor productivity: • Human capital. • Skill level.

  6. Hourly Compensation in Manufacturing, 1997-2010 ($US)

  7. 2. Land • Most important local location factor • Activity and size specific: • Some activities seeking low land costs (e.g. manufacturing). • Some activities seeking high land costs (e.g. retailing). • Accessibility (transport) most determining element in land cost. • Trade-off between land and transport costs. Land cost Suburbanization / Offshoring Transport cost

  8. Land Rent and Land Use 2 – Overlay of bid rent curves 1 – Bid rent curves Rent B- Industry/ commercial A- Retailing Distance City limits C - Apartments D - Single houses 3- Land use

  9. 3. Capital • Capital • Fixed capital (infrastructure and equipment). • Financial capital (savings and other mobile forms of capital). • Many activities require large amounts of fixed capital to operate, maintain and be expanded. • Requires investment capital (banks, funds, stocks, bonds). • The challenge of securing capital: • Available surplus. • Interest rates. • Confidence.

  10. 3. Capital • Capital intensification • Substitute capital for labor (often involves job losses). • Linked with technological innovations. • Increase in productivity. • Cope with labor scarcity. Labor per unit of output Mechanization Capital per unit of output

  11. 4. The Weberian Representation • Classic location theory • Firms will chose a location to minimize their costs. • Transportation costs the most significant factor: • Linear function of distance. • Material and market oriented industries: • Heavy industries oriented towards raw material sources. • Market industries (e.g. soft drinks) oriented towards main consumption markets.

  12. Weber’s Location Triangle w(M) M d(M) P d(S2) w(S2) S2 d(S1) S1 w(S1)

  13. Transport Costs Surfaces and Location 3,000 $ M 4,000 $ 2,000 $ 3,000 $ 1,000 $ 1,000 $ P S2 2,000 $ S1 2,000 $ 1,000 $

  14. 4. The Weberian Representation • Contemporary relevance • Decline in transport costs: • More locational flexibility. • Terminal costs and non-linear transport costs function. • Importance of intermediary (load break) locations. • Level of dematerialization of the economy: • Smaller and lighter products. • More added value. • Inertia and cluster formation: • Real world decisions are not the outcome of optimization. • Accumulation of related firms.

  15. Share of Transport Costs in Product Prices and Average Haul Length

  16. B – Scale and Organization Scale Economies Agglomeration Economies Vertical and Horizontal Integration

  17. 1. Scale Economies • A Fundamental Principle • The division of labor favors productivity (easier to train workers to perform a single task). • The division of labor incites a higher scale of operation. • Reduction in production costs in relation to the increase of outputs. A- Small industry (restaurants, personal services) B- Large industry (banks, manufacturing) C- Very large industry (aircraft manufacturer, refinery) Cost per unit B A C Plant size

  18. Cost and Production of Ford Vehicles, 1908-1924

  19. 1. Scale Economies • Diseconomies of scale • Size level after which the cost per unit increases. • Often linked with growing complexity and difficulties to manage. • The ideal firm size is when diseconomies of scale start to emerge.

  20. 2. Agglomeration Economies • Agglomeration of firms • Clustering of firms creates advantages: • Positive external economies of scale. • Production linkages: • Reduction of input costs through proximity and common purchase of input. • Share similar materials and parts. • Service linkages: • Specialized services. • Creates an environment prone to innovation.

  21. 2. Agglomeration Economies • Types of agglomeration economies • Urbanization economies: • Agglomeration of population, namely common infrastructures (e.g. utilities or public transit), the availability and diversity of labor and market size. • Industrialization economies: • Agglomeration of industrial activities, such as being their respective suppliers or customers. • This favors the emergence of industrial clusters. • Localization economies: • Agglomeration of a set of activities near a specific facility. • A transport terminal (logistics parks), a seat of government (lobbying, consulting, law) or a large university (technology parks).

  22. Transport and Co-Location Co-Location Zone Activity Terminal

  23. 3. Vertical and Horizontal Integration Activity Coal Extraction Iron Ore Corporation C Corporation B Corporation A Corporation Steel Making Metallic Products Mechanical Products

  24. Main Types of Economies in Production, Distribution and Consumption Production Distribution Consumption Lower unit costs through accessibility to suppliers and customers Lower unit distribution costs through transport chains management Lower unit output costs through accessibility to suppliers and customers Economies of transportation Economies of scale Lower unit costs with larger plants Lower unit transport costs through larger modes and terminals Lower unit costs with larger retail outlets Economies of scope Lower unit output costs with more product types Lower transport costs with bundling of different loads Product diversification attracts more customers Economies of agglomeration Lower input costs with clustering of distribution activities Industrial and service linkages with manufacturing clusters Lower input costs with clustering of retail activities Economies of density Lower unit distribution costs with higher densities Increased accessibility to goods and services with higher densities Increased accessibility to labor (skills) with higher densities

  25. C – Business and Product Cycles Geographic Organization of Corporations The Product Cycle

  26. 1. Geographic Organization of Corporations • Location in a real world context • Firms have several location factors. • Several locations are suitable. • Costs and advantages cannot be readily calculated / evaluated. • The importance of inertia (unwilling to change existing behavior). • Impact of public policy / incentives (taxes, loans, subsidies).

  27. 1. Geographic Organization of Corporations • Growth strategies • Very few firms grow beyond a certain size. • Access to capital a restraining factor. • Market potential. • Ability to be productive and competitive in a wider market. • Continue to maintain innovation. • Ability to expand geographically (e.g. franchising). • Internal growth; investing in new capacities. • External growth; acquiring other firms: • Means: • Horizontal integration. • Vertical integration (forward and backward).

  28. The Growth of Large Multinationals

  29. Locational Changes and Production Strategies Production Employment X 3 1 Concentration Intensification Rationalization andrelocation Specialization 2 4 X X Product A Product B Product C Product D X X X Closing

  30. Product Life Cycle Monopoly Competition Sales Competitors Innovating firm Idea Promotion First competitors Mass production Obsolescence Research and development Growth Decline Maturity Stage 1 Stage 2 Stage 3 Stage 4

  31. Long Wave Cycles of Innovation Water power Textiles Iron Steam Rail Steel Electricity Chemicals Internal-combustion engine Petrochemicals Electronics Aviation Digital networks Software New Media Pace of innovation 1st Wave 2nd Wave 3rd Wave 4th Wave 5th Wave 1785 1845 1900 1950 1990 60 years 55 years 50 years 40 years 30 years (?)

  32. Main Stages in a Bubble “New Paradigm”!!! Valuation Denial Delusion Return to “normal” Greed Bull trap Institutionalinvestors Fear Public Smart Money Enthusiasm Capitulation Media attention Return to the mean First Sell off Bear trap Take off Despair Mean Stealth Phase Awareness Phase Mania Phase Blow off Phase Time

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