Industrial Location Theories

Supply & Demand, Market Mechanism Price is determined by the market as a function of supply and demand. Elastic goods = price affects demand Cars, iPods, coffee, restaurant meals Inelastic goods = demand unaffected by price Milk, medicine, salt For goods whose prices are elastic Supply reduces prices Demand increases prices Market equilibrium = price at which supply equals demand and satisfies consumers and producers

Principles of Location Some costs are spatially fixed Unaffected by changes in location. Ex: national min. wage. Some are spatially variable Location changes the costs. Ex: land rent Goal is to maximize profits by finding the least total cost location In some situations, sales/market play a role Location decisions are based on spatially variable costs Transportation costs are highly variable and therefore determine orientation Characteristics of raw material are important Interdependence between factories increases with the complexity of industrial processes Agglomeration reduces costs

Fixed and Variable Costs Influence the Optimum Location for Economic Activity Classical economic geography models focus mainly on the variable cost of transportation

Factors Influencing Location Raw materials Weight-loss industries = reduce waste/impure material; final product transportation cost is lower Weight-gain industries = final stage of production nearest to the market; transportation cost is higher Labor (price, skill, amount) Some jobs need cheap, abundant labor Others need highly skilled labor Market Size, nature and distribution of markets play key role in location decisions

Transportation Cost Minimization Raw Material Oriented Tendency for industry to locate near its source of raw materials in order to save on transport costs Usually occurs when raw materials lose “weight” in the production process (e.g., paper, steel) DISCUSSION: * What raw materials need to be processed close to where they are extracted due to high transportation costs?

Where is the best location for a steel manufacturing plant? Recipe for steel (traditional) Coal = 2 to 3 tons (+ energy*) Iron ore = 1½ to 2 tons Limestone = ¼ to ½ ton Mix all solid ingredients. Heat at about 600º F until thoroughly melted.* Pour molten blend into molds. Cool and serve. Makes one ton of finished steel.

The recipe for making steel has changed (new technology) How has this affected the location of modern steel-producing areas?

Transportation Cost Minimization Market Oriented Tendency for industry to locate near population centers in order to save on transport costs Occurs when final product is more costly to transport than raw materials (e.g., soda, glass) DISCUSSION: * What raw materials need to be processed close to markets due to high transportation costs?

Consider transport costs of a car’s components Consider transport costs of a car’s components. Where’s a good place to locate your assembly plant?

Sources: PBS & Ingolf Vogeler Minimizing Labor Cost Maquiladoras – foreign-owned assembly plants in Mexico (mostly textiles and consumer electronics) Over 11,500 maquiladoras along border with U.S.; employ 2 million+ Mexicans Revenues from maquiladoras, exceed make up 85% of trade between Mexico and U.S. Sources: PBS & Ingolf Vogeler Average work week is 60-70 hours; wages about $5.75 per day. Women are 70% of maquiladora workforce. Since 2000, some maquiladoras have closed as corporations move assembly-line jobs to even lower-wage countries, mainly China.

Factors Influencing Location Transportation Costs reflect freight rates Terminal costs = associated with loading, packing and unloading Line-haul costs = vary with individual shipments, distance and equipment used Break-of-bulk points Sites where goods must be transferred or transshipped; change in mode of transportation Result in additional terminal costs Creates orientation near the BoB point.

Break-of-Bulk Oriented Transportation Cost Minimization Break-of-Bulk Oriented Location between sources of raw materials and markets – for products that must be divided and shipped from a central point of entry Intermodal transportation – e.g., moving from rails to trucks or ships to trucks, or ports to pipelines DISCUSSION: * What raw materials would be processed at a break-of-bulk point?

Least-Cost Location Theory Developed by Alfred Weber Optimum location Depends on the minimization of three expenses: Relative transportation costs * major consideration! Labor costs Agglomeration costs Can be found where the costs of transporting raw materials to the factory and finished goods to the market are lowest. DISCUSSION: * Why is cost minimization so important to a business?

Agglomeration Clustering of productive activities and people for mutual advantage Infrastructure (transportation, water) Set of activities (schools, government) People (urban centers, labor market) Can create “diseconomies” due to competition Higher rents and/or wages (ex: Silicon Valley) Examples: Shopping centers (auto squares, malls) Silicon Valley Financial Districts

Weber Assumptions Uniform area “Isotropic” assumption Single product shipped to single market Inputs require raw materials from multiple source locations Labor is infinitely available Transportation routes connect by shortest path Transportation costs reflect the weight of the items and the distance

Weber’s Locational Triangle M $1 Diagram of the cost consequences of fixed locations of materials and market and movement in any direction of a given weight of commodity at a uniform cost per unit of distance. Used to locate the optimum point of production where the distance involved in production & distribution is minimal

Weber Triangle Three factors: Transport costs Labor costs Agglomeration 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 S1 $2 S2 P $2 $2 M

Determining the best location for a mfg Determining the best location for a mfg. plant with raw materials in Minnesota, Florida, and Texas & the market in New York (but with differing amounts of raw mat’s needed)

Locational Interdependence Theory Developed by Harold Hotelling Optimum location Locational decision influenced by locations chosen by competitors Competing firms (similar product and cost structures) will try to establish a “spatial monopoly” and avoid yielding locational advantage to their competitor This solution maximizes profits but does not minimize costs. It applies primarily to inelastic goods (ex: ice cream).

The Hotelling Beach Market split evenly; vendor at center of each market A moves into B to increase market share; both move closer to center Equilibrium; both locate at the edge of their markets (agglomeration)

Profit-Maximization Satisfying location = where net profit is greatest Substitution principle: Replace a declining amount of one input with an increase of another (ex: new steel recipe) Increase transportation costs while reducing land rent (ex: maquiladoras)

Ubiquitous and Footloose Industries Ubiquitous Industry Examples: Newspapers, bakeries, dairies In large cities, one cannot separate city dwellers as labor or market Widely available industries producing highly perishable items for immediate consumption Footloose Industry Examples: Diamonds, computer chips No market OR resource orientation Transport costs are negligible Raw material and finished product are equally valuable and lightweight.

Shipbreaking industry, Bangladesh Shipbreaking yards in Bangladesh alone dismantle about 90 giant ships a year, mostly oil tankers, generating millions in revenue, employing tens of thousands, and providing a significant proportion of the iron and steel used by local industry. However, there is a dark side to the industry in which the workers must toil in extremely hazardous conditions that frequently lead to death or serious injury and which is tremendously harmful to the environment. ... A majority of ships are built in South Korea and China, filling orders placed by Japan, the UK, the US, Norway, Singapore and Denmark. Until the 1970s, shipbreaking was done in the countries of origin, using heavy machinery on salvage decks. But increasing environmental regulations and labour costs resulted in the transfer of this work -- first to Korea and Taiwan, and then to South Asia after the Asian Tigers upgraded away from this work. Source: www.sos-arsenic.net

Fordism Traditional assembly line production; specialized labor Traditional manufacturing Traditional assembly line production; specialized labor Identical commodities produced in batches, delivered before need Lots of materials and supplies stored in advantage Savings in transportation costs & ordering charges Higher storage and inventory costs

Agglomeration Economies Spatial Concentration of people and activities for mutual benefit Savings from shared INFRASTRUCTURE Pools of labor and capital Market created by industries and population Links as customers and suppliers Multiplier Effect Each new firm leads to further development Expansion of labor pool through urban growth Deglomeration Relocation of firms to non-metro locations Caused by diseconomies: High land value, pollution, etc. Diseconomy: Forces that cause governments and firms to produce at a higher per-unit cost.

Post-Fordism Post-Fordism (Flexible manufacturing) Smaller production runs for niche (specialized) markets More flexible labor (ex: telecommuting) Reponsive to market fluctuations Lower transportation costs (cost-time versus cost-distance) Just-in-Time (JIT) manufacturing Frequent ordering of small lots of goods Requires rapid, precise timing for delivery Reinforces agglomeration Flexibility made possible by technology

Comparative Advantage Areas & countries can best improve their economies though specialization and trade Each place produces that in which it has the greatest relative advantage over other areas, and imports the rest Outsourcing Manufacturing relocated from higher-cost market locations to lower-cost production sites Subcontracting production and service sector work to outside domestic companies Key component of JIT Logistics companies handle packaging and movement

Outsourcing Examples Car manufacturing Traditionally Since 1990’s Located near raw materials (Rust Belt) Self-contained (everything made in factory) Since 1990’s Components made by different suppliers in different parts of the country Final assembly done in house Assembly may also be handled by outside companies Maquiladoras Tax-free assembly plants Made possible by NAFTA

Comparative Advantage (Cont’d) Offshoring Hiring foreign workers, or contracting foreign third-party service providers to run business services Call centers Accounting/billing Made possible by ease of Internet use, as well as increase of skilled, educated population in developing countries New International Division of Labor (NIDL) MDCs no longer base economies on manufacturing; focus on quaternary and quinary sectors Some LDCs still produce raw materials, others handle manufacturing and services System benefits TRANSNATIONAL CORPORATIONS

The cost of transporting data has declined to near zero Low transmission costs, plus ability to digitize data, revolutionized the location choices for high-tech industry Source: Probe Research, Inc., Telcordia (Bellcore); Progressive Policy Institute.

Transnational Corporations (TNCs) AKA Multinational: Private firms with branch operations in multiple countries Almost all engaged in secondary activities Division of labor (exploit competitive advantage) Tertiary-Quinary processes: core countries Secondary, some tertiary: semi-periphery Primary: primarily periphery Foreign Direct Investment: Purchase of infrastructure by TNCs Focused primarily in South/East Asia, and Latin America. Most of the money goes toward the rich in those countries, and to their governments