1. Chapter 5: Theoretical Considerations Key factors underlying location decisions The Weberian model Relationship between scale, location and technology Basis for firm growth and development The geographic organization of corporations The product cycle and changing location requirements of firms Business cycles and long-waves Role of the state in shaping economic landscapes

2. Basic Considerations “Theory is what separates description from explanation. A theory allows us to establish causality, to test hypotheses, to justify arguments and make claims to truth. Theories are simplifications about the world that allow us to gain understanding.” p. 131 Alternative theoretical approaches: neoclassical, behavioral, political economy or structural Apply to all categories of industry, not just manufacturing

3. Factors of Location Labor (L) Land (A) Capital (C) Managerial and Technical Skills (T) Brought together in a production function: O = f(L,A,C,T) Basic problem: How to combine factors, at what scale of output, at what location, and serving what geographic markets?

4. Labor Labor as an important determinant of location – Why? Required in all types of economic activity, but significant variation in labor cost and use Long-run substitution of capital for labor Regional variation in labor costs → migration Importance of labor productivity “…the labor process is saturated with politics.” Unionization rates (Figure 5.2); “right-to-work” legislation Capital-labor conflict & level of development

5. Unionization Rates 2007

6. Land and Capital Local land cost related to accessibility (Figure 5.3) Intrametropolitan location & transportation system development Fixed capital vs. liquid or variable capital Spatial supply/demand conditions for capital Capital-labor substitution – Figure 5.4

7. Managerial & Technical Skills All businesses require these skills Their deployment and formality varies significantly by firm size Concentrations of the largest corporate headquarters in largest metro areas (Figure 5.5), but deconcentration and decentralization has occurred Clusters of industry-specific headquarters (Figure 5.6)

8. Major Corporate Headquarters 2004

9. Corporate Headquarters 2008

10. Silicon Valley Headquarters Concentration

11. Change in Headquarters Concentration

12. Weber’s Model of Manufacturing Industry Production Developed in the early 20th Century in southern Germany Input factors are not ubiquitous This means that: – physical resources are not found everywhere – human labor is differentiated by skill & ability – capital availability varies – other inputs are also differentiated

13. Weber hypothesized that: Given market prices, producers would seek to minimize production costs to maximize profits. This leads to a taxonomy of production cost situations, considering – factor costs – transport costs on factors – transport costs on finished goods

14. In the Weber Model, If producers Minimize Costs, then: Min:  i p i q i +  i r i q i d i +r q qd jj e.g. Minimize sum of factor costs + transport costs on factor inputs + transport cost on shipment of product to the market If factor costs are “given,” then the problem becomes how to minimize transport costs.

15. The Material Index Principle as a guide to manufacturing location Material index = weight of localized material weight of product (unit) If M.I. < or = 1.0, locate at market Material types: “Pure” materials: no weight loss in production “Weight-losing materials” “ubiquities”

16. Weber’s Cost Minimizing Model & the Principle of Material Orientation Example: 2T local materials 3T ubiquities MI = 2/5 =.4, locate at market Alternative Situations (1) Ubiquities only, MI = 0, locate at market (2) Pure Materials only (a) 1 pure material, MI = 1 M C

17. Material Index Cases, Cont. (b) 1 pure material + ubiquities MI < 1, locate at market (c) several pure materials only MI = 1, locate at market (d) several pure materials + ubiquities MI < 1, locate at market (3) Weight Losing Materials (a) 1 weight losing material MI > 1, locate at material location MC

18. Material Index Cases, Cont. (b) 1 weight losing material + ubiquities If MI > 1, locate at material site If MI <1, locate at market If MI = 1 ?, probably at market ( c) Several weight losing materials M 1 M2M2 C Locate away from C

19. An Example of (c) P 1 = 10, q 1 = 2, r 1 =.1 r q =.1, q = 5 p 2 = 5, q 2 = 4, r 2 =.1 MI = 6/5 = 1.2 M1M1 C M2M2 7 7 5 At M1: 40 + 0 +2.0 + 3.5 = 45.5 At M2: 40 + 1 + 0 + 3.5 = 44.5 At C: 40 + 1.4 +2.8 + 0 = 44.2 At L: 40 + 1.225 + 2.45 +.5 = 44.175 L 6.125 1

20. Material Index Situations, Cont. (d) Several weight-losing materials + pure materials: MI decreases, outcomes as in (b) above (e) Several weight-losing materials + pure materials + ubiquities: outcomes as in (d) Upshot: Most situations are like c, d, and e. 3 classic locational outcomes: 1. Market, 2. Resource, and 3. Intermediate, sometimes “footloose”

21. Labor Cost Deviation M1 M1 M2 M2 C P L1 L1 L2 L2 P - Transport Cost Minimum Location L 1, L 2 - Low Labor Cost Locations C - Market M 1, M 2 - Raw Material Sites Critical Isodapane

22. Isotims and Isodapanes Isotims: Contours of Transport costs From a given point (Here point A) Isodapanes: Contours of Total transport Costs: Here combination From points A and B

23. Weber’s Approach to Agglomeration Economies Scale of Output $ Q1Q1 Q2Q2 a1a1 a2a2 For some index of agglomeration (e.g. a 1 or a 2 ): A C B Separate Market Regions e.g. A,B,C, or agglomeration A B C Critical Isodapanes

24. Competition for Location in Agglomerations S T U T T S SU U S1S1 T1T1 U1U1 S, T, and U can get agglomeration savings at T1, S1, and U1, but need to bargain to move to a location realizing them in S, T, and U are separate Markets, whose critical isodapanes are SS, TT, and UU

25. Critique of Weber Conception of market demand limited Transport costs not defined realistically Labor is typically mobile, not fixed in space Many manufacturing plants produce complex sets of products with complex sets of inputs Treatment of agglomeration is rigid Lösch: Location based on maximum profit, not minimum cost

26. Isard’s Substitution Framework Input-factors can often be used substitutability although the degree of substitution can vary by scale and by technology A B Q1Q1 Q2Q2 “Perfect” substitutability A B No substitution Q1Q1 Q2Q2 Q3Q3

27. Substitution possibilities (Suggested by Figure 5.4) Isoquants - Equal levels of output Substitution is possible over a range Factor A Factor B Q1Q1 Q2Q2 but factor proportions change Output Levels

28. Substitution possibilities Isocosts - Equal levels of cost, C 1 <C 2 <C 3 A B Q1Q1 Q2Q2 Q1Q1 Q2Q2 C1C1 C1C1 C2C2 C3C3 C2C2 C3C3 Y X X is the ideal amount of A, Y is the ideal amount of B for production at level Q 1

29. Expansion Curve - joins optimal factor combinations across scale of output Factor X Factor Y Q1Q1 Q2Q2 Q3Q3 Q1Q1 Q2Q2 Q3Q3 C1C1 C1C1 C2C2 C2C2 C3C3 C3C3 Expansion Path

30. Spacing of isoquants and scale economies and/or diseconomies Factor X Output Diseconomies Linear Scale Economies

31. Isoquants displaying scale economies & diseconomies Factor X Factor Y 10 20 30 10 20 30 40 Diseconomies Economies

32. Isard’s Substitution Model: two point location model - pure materials M C Transformation Line Distance from M Distance from C

33. Isard’s Substitution Model, 3 point location problem Market Material A Material B S O   R P Distance from B Distance from A       O P R S T U W Y V X Distance from B Distance from A X Y V W T U     O P R S