2. Weber’s Model Industrial Location

3. Locational Model What is a model? –Simplified –representative / common key features

4. Weber’s Model Aim: find out the optimum location of a factory Optimum location = least cost location Assumptions –isotropic surface / uniform plain –different labour cost at different locations but labour is not mobile –single mode of transport and transport cost is direct proportion to distance and weight

5. –perfect competition(same product, same quality, same price) –entrepreneurs are economic rational (minimize cost) –resources (raw materials) ubiquitous (everywhere) localized (fixed) pure (no weight change) gross (weight loss) Material index = Weight of localized raw materials Weight of finished product

6. Procedures for finding optimum location Stage 1 - Least Transport Cost Stage 2 - add in Labour Saving Stage 3 - add in Agglomeration Economies

7. One market and Single raw material Situation 1 R.M.Market $$ distance Pure raw material Assembly cost Distribution cost Total transport cost

8. R.M.Market $$ distanceR.M.Market $$ distance Weight loss material Weight gain material

9. One market and Two raw materials Situation 2 Market RM2RM1 100 km Both RM1 and RM2 are localized and pure

10. The Varignon frame RM1 + RM2 + RM3 Product 2kg 3kg 0.5 kg 1 kg RM1 RM2 RM3 Market Optimum location

11. Stage 2 - add in Labour Saving 2 sets of isotim assembly cost + distribution cost  Total transport cost Isodapane $20 $25 $30

12. Stage 2 - add in Agglomeration Economies

13. Exercise Assembly cost A=land (114)x$1x4 +lake (160+120)x$0.5x4 = $1016 B=lake (120+120)x$0.5x2+land (176)x$1x4 = $944 C=lake (120+160)x$0.5x2 + land(114)x$1x2 = 508 M= lake (120+120)x$0.5x2+land (118)x$1x2 + land (176)x$1x4+ land(118)x$1x4 =$1652

14. Exercise Distribution cost A to M = lake (120+120)x$0.5x1+land (118)x$1x1=$238 B to M = land (118)x$1x1=$118 C to M = land (176)x$1x1+land(118)x$1x1=$294

15. Exercise Total Transport Cost A = $1016+$238=$1254 B = $944+$118=$1062 C = $508+$294=$802 M=$1652+$0=$1652

16. Optimal Location

17. Criticism Unrealistic assumptions Important factors neglected

18. Criticism Unrealistic assumptions uniform plain transport cost labour mobility economic man Single market competition Important factors neglected profit diseconomies technology institutional factors behavioural factors

19. Labour Spatial mobility of labour industrial mobility of labour structure of labour cost - wages, holiday, fringe benefit, training cost other than cost, quantity and quality

20. Labour Intensity Ratio Scatter diagram=Scattergram shows correlation of 2 variables

21. Independent variable dependent variable Scatter Diagram Best fit line Y=ax+b b a

22. positive correlation

23. Negative correlation

24. No correlation

25. Transport cost/freight rate Structure of transport cost Distance Freight rate Weber’s idea Real world Terminal cost Haulage cost

26. Real world Taper off rate Distance Freight rate Diminishing marginal transport cost

27. Effect of Taper off rate R.M.Market $$ distance Assembly cost Distribution cost

28. Different modes of transport Distance Freight rate Road/truck Rail Water

29. Comparison

30. Break of bulk/Transhipment point A point where there is a need to change mode of transport due to physical reason - port artificial - national boundaries

31. R.M.Market $$ distance Transhipment point Assembly cost Distribution cost

32. Impact of technology Production technology use less amount of raw materials and/or power use of substitutes (raw materials or power) e.g. use of scrap in iron and steel industry Transport technology lower freight rate refrigeration standardization(use of containers) Automation - less labour and skilled labour

33. Impact of Information technology What are the uses of computers and internet in manufacturing? Computer aided design CAD Computer controlled production Computer controlled logistics –getting raw materials, products to market e-business / e-commerce –buying raw materials, sale of products e-recruitment

34. Impact of Information technology Impact on getting raw materials? Impact on seeking labour? Impact on mobility of capital? Impact on transportation and logistics? Impact on market? Impact on industrial location?

35. Impact of information technology –Information about price and supply of raw materials is widely spread –More information for labour to seek employment –Recruitment and online interview over internet –Information on job vacancies is widely spread –Decrease the reluctance of labour to migrate to othre countries –Increases mobility of labour –Increase demand for skilled labour TNCs shift to countries with cheap labour

36. Impact of information technology Promotion of world trade Better monitoring of investment Mobility of capital is greater Lean production method and Just-in-time production is possible Industries may be shifting away from sites closed to raw materials and power resources or nodal points of transportation as the influence of transport cost is diminishing Better flow of market information

37. Impact of technology Information technology –With the ease of making foreign investment, it may become more and more popular to set up new factories in other countries, especially in the less developed countries, for the sake of lowering the production cost with cheaper land and labour –Decrease the need to move industries to other countries for labour with special skills –Development of Transnational corporations / cross-border production is more common –Clustering / agglomeration of industries

38. Locational change Declining importance of traditional factors relative importance of other factors rise more flexible / footloose importance of research and development market / large urban centres Cross-border production / international division of labour / TNCs

39. Behavioural Factors Not all decision-makers are economic rational perception, knowledge and information satisficers rather than optimizers psychic income advantages : –lower rent because of weaker competition –reduce over-concentration-pollution, etc. –provide employment to inferior areas

40. Institutional Factors Causes Strategic reasons Economic reasons Political reasons Social reasons Ways provision of infrastructure provision of land redistribution of population

41. Favourable terms of trade e.g. Shenzhen Special Economic Zone tax holiday / concession rate land use planning / zoning protection of local industries e.g. tariff, quota Anti-pollution laws and traffic control regulations

42. Lean production / Just in Time