So Where Should We So Where Should We Put Our Factory?Put Our Factory?

• Fixed Costs: Costs that do not change with the level of production. For example, the cost of owning a hog building is incurred regardless of whether the building is empty, half full of hogs, or overflowing with hogs. A firm that manufactures aluminum pipes has to pay for the cost of its factory and machines whether it makes one pipe or 1,000

• Variable costs: Those costs that vary directly with changes in the number of units produced or sold (labor, transportation, materials…)

• Ubiquitous: available everywhere. For example, some raw materials are available everywhere, like water. If one had to add water to a product, like lemonade, one wouldn’t need to worry about finding water.

• Least Cost Theory (Weber): least cost location theory accounted for the location of a manufacturing plant in terms of the owner’s desire to minimize costs: the three areas to consider as far as costs are transportation (the biggie), labor, and agglomeration. Agglomeration means a good number of enterprises cluster together in the same area (like in a large industrial city), and they can provide assistance to each other by shared talents, services and facilities. Agglomeration makes big city locations more attractive.

Substitution principle: This principle was used to argue against Weber’s Least Cost Location Theory. Weber’s model might indicate a location had become unprofitable, BUT perhaps there were variations in costs over time that still allowed it to be profitable. For example, labor costs may have decreased, or maybe rent went down. The substitution principle is focused on the substitution of a product, service or process to another that is more efficient or beneficial in some way while retaining the same functionality.

Used to have to use U.S. laborers, but huge influx of migrant labor and it’s now it’s equally as cheap ) -- substituted migrant labor for US labor

Entrepot: A term used for international trade where goods are shipped to a center for re-export; a port where merchandise can be imported and then exported without paying import duties. Hong Kong engages in significant amounts of this form of trade as does Bahrain

Special Economic Zones

•Export processing zone: Specially created legal spaces within a country with the purpose of attracting foreign-owned factories with economic incentives (also “foreign trade zone”). Maquiladoras.

•Free trade zone: An area in which goods are not subject to custom’s jurisdiction, and therefore paperwork and other cost-causing barriers are also avoided (also called free port, duty free zones, free cities). Maquiladoras

•China has free trade zones – tax concessions, permission to recruit foreign investors, capitalist management strategies. Korea has followed Japan’s model.

Mexico

China

Bid-rent theory: A graph of the variations in land rents payable by different users with distance from some point in the market, usually the CBD . Since transport costs rise with distance from the market, rents generally tend to fall correspondingly, but different forms of land use (retail, service, industrial, housing, or agricultural) generate different bid-rent curves.