Location theory Attempts to predict where business will or should be located. Based on 3 assumptions: That business owners want to maximize their advantages over competitors; That they also want to maximize their profits; and That they will take into account variable costs such as energy supply, transport costs, labor costs, etc.

Fixed or variable costs Spatially fixed costs—do not change wherever a company is. They are NOT important in determining its location. which means that the costs of the products do not change despite where the product is assembled Spatially varied costs differ from place to place. A company's goal is to minimize these costs.

Weber’s Least Cost Theory of Industrial Location Developed by German economist Alfred Weber in the early 20th

Weber’s Least Cost Theory Weber assumed a uniform landscape with equal transportation paths and routes throughout the space (no mountains, lakes, etc. to get in the way). The location of industry is driven by four factors: Transportation Labor Agglomeration Deglomeration

Weber’s Least Cost Theory Location of Industry Manufacturing plants will locate where costs of transportation, labor, and agglomeration are the least Weight or Bulk Gaining = market oriented Weight or Bulk Reducing = materials/resource oriented

Transportation The site should include the lowest possible cost of Moving raw materials to the factory; Getting finished products to consumers.

Bulk-reducing industries Weight or bulk-reducing industries: Copper and iron Paper, pulp, sawmills are near forests Canning of fruits and veggies Meatpacking This leads to a material orientation: when material costs are high, the factory locates near the inputs.

Transportation Cost Minimization DISCUSSION: * What raw materials need to be processed close to where they are extracted due to high transportation costs? Raw Material Oriented Figure 6.2 (p. 145)

Bulk-gaining industries These are ones in which weight is gained during processing. Soft drinks: supplies are easy to ship, only water needs to be added. They cause a market orientation: when costs of getting products to market are high, businesses locate near the market.

Transportation Cost Minimization DISCUSSION: * What raw materials need to be processed close to markets due to high transportation costs? Market Oriented Figure 6.2 (p. 145)

Transportation Cost Minimization DISCUSSION: * What raw materials would be processed at a break-of-bulk point? Break-of-Bulk Oriented Figure 6.2 (p. 145)

Labor It might be better to move the factory away from resources if cheap labor can make up for transportation costs. “substitution principle”

Labor Cost Minimization DISCUSSION: * Today maquiladoras are on the decline. Why? [cheaper labor in Asian countries] Maquiladora workers in Matamoros, Tamaulipas, Mexico Figure 6.1 (p. 143)

Export Processing Zones Definition: region of a less-developed country that offers tax breaks and loosened labor restrictions to attract export-driven production processes, such as factories, producing goods for foreign markets; sometimes called free trade zone Example: Mexico’s system of maquiladoras

Agglomeration The clustering of a large number of similar enterprises in the same area. They can assist each other in share talents, services, facilities, communication, equipment, etc. infrastructure. This makes big cities somewhat more attractive. Example: Silicon Valley (computers, software), Hollywood (film, tv), Nashville (music), Houston (energy), NYC (finance)

Agglomeration Economies DISCUSSION: * How did the largest agglomeration of semiconductor design houses come to exist in San Jose, California? Location of semiconductor design houses, 1991 Figure 6.4 (p. 148)

Agglomeration Economies DISCUSSION: * Why would it be more difficult for one fabrication facility in a city to be economically successful than it would be for a fabrication facility that exists in a city where there are several others located in close proximity? Location of semiconductor fabrication facilities, 1991 Figure 6.6 (p. 150)

Theory of locational interdependence (Hotelling’s model) Related to agglomeration (Industry and Services) Industries choose locations based on where their competitors are located Maximize their dominance of the market (influenced by competition) Ex. Gas stations near a highway exit

However… Too much agglomeration can cause problems, such as high rents and wages, lack of resources and labor or too much traffic. This can lead to deglomeration: plants or businesses leave the crowded megalopolis and move to less crowded areas.

Criticisms of Weber’s Least Cost Theory Does not identify the fact that markets and labor are often mobile Labor force varies in age, skill sets, gender, language, and other traits. Some transportation costs are not directly proportional to distance as his model assumes.