1. Industrial Location Theories

2. 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

3. 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

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

5. 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

6. 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?

7. 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.

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

9. 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?

10. 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?

11. 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 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.

12. 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.

13. 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?

14. 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?

15. 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

16. 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

17. Weber’s Locational TriangleM $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

18. 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

19. 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)

20. 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).

21. 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)

22. 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)

23. 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.

24. 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:

25. 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

26. 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.

27. 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

28. 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

29. 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

30. 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

31. 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.

32. 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