Topic 5 – Location Theory

GEOG 135 – Economic GeographyProfessor: Dr. Jean-Paul Rodrigue

Hofstra University, Department of Global Studies & GeographyHofstra University, Department of Global Studies & GeographyHofstra University, Department of Global Studies & GeographyHofstra University, Department of Global Studies & Geography

Topic 5 – Location Theory

A – Factors of LocationB – Scale and OrganizationC – Business and Product Cycles

© Dr. Jean-Paul Rodrigue

Location Theory

■ The rationale (where and why) in the location of economic activities• Usually divided by sector of economic activity.

■ Businesses• Maximize their profitability.• Minimize their costs.

■ Individuals• Maximize their utility (can be objective or subjective).• Objective: Proximity to work or to services (e.g. education).• Subjective: Community.


A – FACTORS OF LOCATION

1. Labor2. Land3. Capital4. The Weberian Representation


The Location Spectrum

Outputs Material Inputs

Non-material inputs

(Markets, Customers) (Resources, Parts, Energy, Land)

(Labor, Capital, Technology, Policies, Regulations)

Location factors

Read this content

https://transportgeography.org/?page_id=9383


Factors Affecting Location Decisions

Country Factors Region Factors Local Factors•Government rules, attitudes, political risk, incentives•Culture & economy•Market location•Labor availability, attitudes, productivity, and cost•Availability of supplies, communications, energy•Exchange rates and currency risks

•Attractiveness of region (culture, taxes, climate, etc.)•Labor, availability & costs•Costs and availability of utilities•Environmental regulations of state and town•Government incentives•Proximity to raw materials & customers•Land/construction costs

•Site size and cost•Air, rail, highway, and waterway systems•Zoning restrictions•Nearness of services / supplies needed•Environmental impact issues

Explain the differences between country, regional and local location factors.


Commonly Cited Location Factors for Foreign Direct Investments

Access to customers

Stable social and political environment

Ease of doing business

Reliability and quality of infrastructure and utilities

Ability to hire technical professionals

Ability to hire management staff

Level of corruption

Cost of labor

Crime and safety

Ability to hire skileld workers

National taxes

Cost of utilities

Roads

Access to raw materials

Available land

Availability of technical training

Local taxes

Access to suppliers

Labor relations and unionization

Air service

0 10 20 30 40 50 60 70 80 90


1. Labor

■ Factor• One of the most important cost factors.• Geography of labor:

• Availability.• Productivity.• Skills.• Militancy.

■ Labor demand:• Large variations by type of activity.• Labor intensive versus capital intensive.• A shift towards capital intensiveness in most industries.


1. Labor

■ Labor supply:• High birth rates involve high supply and low wages.• Low birth rates involve low supply and higher wage.• Inciting to shift towards capital intensiveness.

■ Labor mobility:• Attractiveness of high wage areas.• Immigration control on labor mobility.• Cost of living impacts (e.g. housing and food).• A shift towards an equilibrium.• Relative inertia.

■ Labor productivity:• Human capital.• Skill level.


Hourly Compensation in Manufacturing, 1997-2010 ($US)

Germany

France

United States

Japan

UK

Singapore

South Korea

Brazil

Taiwan

Poland

Mexico

India

China

Philippines

0 5 10 15 20 25 30 35 40 45$43.76

$40.55

$34.74

$31.99

$29.40

$19.10

$16.62

$10.08

$8.36

$8.01

$6.23

$2.68

$2.51

$1.901997 2010


2. Land

■ Most important local location factor• Activity and size specific:

• Some activities seeking low land costs (e.g. manufacturing).• Some activities seeking high land costs (e.g. retailing).

• Accessibility (transport) most determining element in land cost.• Trade-off between land and transport costs:

• High land costs / low transport costs (or time).• Low land costs / high transport costs (or time).

Land cost

Transport cost

Suburbanization / Offshoring


Land Rent and Land Use

Rent

Distance

A- RetailingB- Industry/commercial

C - ApartmentsD - Single houses

1 – Bid rent curves 2 – Overlayof bid rent

curvesCity lim

its

3- Land use

Read this content

Explain the relationships between the rent paying capacity of economic activities and land use.



3. Capital

■ Capital• Fixed capital (infrastructure and equipment).• Financial capital (savings and other mobile forms of capital).• Many activities require large amounts of fixed capital to operate,

maintain and be expanded.• Requires investment capital (banks, funds, stocks, bonds).• The challenge of securing capital:

• Available surplus.• Interest rates.• Confidence.


3. Capital

■ Capital intensification• Substitute capital for labor (often involves job losses).• Linked with technological innovations (mechanization and

automation).• Increase in productivity.• Cope with labor scarcity.

Labor perunit of output

Capital per unit of output

Mechanization


4. The Weberian Representation

■ Classic location theory• Firms will chose a location to minimize their costs.• Transportation costs the most significant factor:

• Linear function of distance.• Material and market oriented industries:

• Heavy industries oriented towards raw material sources.• Market industries (e.g. soft drinks) oriented towards main consumption

markets.


Weber’s Location Triangle

M

S1

S2

d(M)

d(S2)

d(S1)

P

w(S1)

w(S2)

w(M)

Read this content



Transport Costs Surfaces and Location

1,000 $

1,000 $

1,000 $

2,000 $

2,000

$

3,000 $

3,000

$4,000 $

P

2,000 $

M

S2

S1

Read this content



4. The Weberian Representation

■ Contemporary relevance• Decline in transport costs:

• More locational flexibility.• Terminal costs and non-linear transport costs function.• Importance of intermediary (load break) locations.

• Level of dematerialization of the economy:• Smaller and lighter products.• More added value.

• Inertia and cluster formation:• Real world decisions are not the outcome of optimization.• Accumulation of related firms.

Explain the Weberian location theory and to what type of activities it is the most suitable.


Share of Transport Costs in Product Prices and Average Haul Length

Stone, clay and glassPetroleum

Lumber and woodFood

FurniturePaper productsPrimary metals

TextilesFabricated metals

Transport equipmentRubber and plastics

TobaccoMachinery

InstrumentsApparel

Printing and publishingElectronics

Leather products

0 100 200 300 400 500 600 700

0 5 10 15 20 25 30

Haul length (miles)


B – SCALE AND ORGANIZATION

1. Scale Economies2. Agglomeration Economies3. Vertical and Horizontal Integration


1. Scale Economies

■ A Fundamental Principle• The division of labor favors productivity (easier to train workers to

perform a single task).• The division of labor incites a higher scale of operation.• Reduction in production costs in relation to the increase of

outputs.


Cost and Production of Ford Vehicles, 1908-1924

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

0.00

250,000.00

500,000.00

750,000.00

1,000,000.00

1,250,000.00

1,500,000.00

1,750,000.00

2,000,000.00

2,250,000.00

Cost ProductionRead this content

https://people.hofstra.edu/geotrans/eng/ch2en/conc2en/fordcostproduction19081924.html


1. Scale Economies

■ Diseconomies of scale• Size level after which the cost per unit increases.• Often linked with growing complexity and difficulties to manage.• The ideal firm size is when diseconomies of scale start to emerge.

Plant size

Cost per unit

A

B

C

A- Small industry (restaurants, personal services)B- Large industry (banks, manufacturing)C- Very large industry (aircraft manufacturer, refinery)

Economies and diseconomies of scale are two sides of the same coin; explain.


2. Agglomeration Economies

■ Agglomeration of firms• Clustering of firms creates advantages:

• Positive external economies of scale.• Production linkages:

• Reduction of input costs through proximity and common purchase of input.• Share similar materials and parts.

• Service linkages:• Specialized services.

• Creates an environment prone to innovation.


2. Agglomeration Economies

■ Types of agglomeration economies• Urbanization economies:

• Agglomeration of population, namely common infrastructures (e.g. utilities or public transit), the availability and diversity of labor and market size.

• Industrialization economies:• Agglomeration of industrial activities, such as being their respective

suppliers or customers.• This favors the emergence of industrial clusters.

• Localization economies:• Agglomeration of a set of activities near a specific facility.• A transport terminal (logistics parks), a seat of government (lobbying,

consulting, law) or a large university (technology parks).


Transport and Co-Location

Activity

Terminal

Co-Location Zone


3. Vertical Integration

Nature• Backward expansion (suppliers).• Forward expansion (customers).

Goal

• Lower costs.• Enhance and protect product quality.• Improve supply chain efficiency and coordination.

Issues• Higher cost structure and lower quality.• More difficult to adapt to changes.


3. Vertical Integration


3. Horizontal Integration

Nature• Acquiring or merging with competitors.• Business model replication.

Goal

• Economies of scale (greater market share).• Product differentiation (offer more products).• Oligopoly (less competition).

Issues• Less flexibility and less innovation. • Anti-monopolistic responses.


3. Horizontal Integration

Acquiring company Acquired company Outcome

Porsche Volkswagen Owned a 35% in 2008

Daimler Benz Chrysler Merged in 1998

Kraft Foods Cadbury 2010

Quaker Oats Snapple 1997

PepsiCo Quaker Oats 2000 ($13B)

Pfizer Wyeth 2009 ($68B)

Pfizer Pharmacia Corporation 2002 ($60B)

Glaxo Wellcome SmithKline Beecham Merger (GlaxoSmithKline)

AT&T T-Mobile Blocked in 2011

AT&T Bell South Completed in 2006

Mittal Steel Arcelor 2006 ($20B)

HP Compaq 2002 ($24B)

Oracle PeopleSoft 2004 ($10B)

Delta Northwest Airlines 2008

United Airlines Continental 2010

JPMorgan Chase Bank One 2011 ($50B)

BP Amoco 1998 ($48B)


3. Outsourcing

Nature• Some activities performed by another corporation.

Goal

• Reduce costs.• Focus on core competencies.

Issues• Dependency. • Loss of competency.


3. Outsourcing


Main Types of Economies in Production, Distribution and Consumption

Production Distribution

Consumption

Economies of transportation

Lower unit costs through accessibility to suppliers and customersEconomies of

scale

Lower unit distribution costs through transport chains management

Lower unit output costs through accessibility to suppliers and customersLower unit costs

with larger plants

Lower unit transport costs through larger modes and terminals

Lower unit costs with larger retail outlets

Economies of scope

Lower unit output costs with more product types

Lower transport costs with bundling of different loads

Product diversification attracts more customers

Economies of agglomeration

Industrial and service linkages with manufacturing clusters

Lower input costs with clustering of distribution activities

Lower input costs with clustering of retail activities

Economies of density

Increased accessibility to goods and services with higher densities

Lower unit distribution costs with higher densities

Increased accessibility to labor (skills) with higher densities

Read this content



Economies of Transportation

Lowering transportation costs by being close to ponderous inputs

Lowering transportation costs by being close to markets


Economies of Scale

Lowering production costs with larger output

Lowering transportation costs with larger conveyances (ships)


Economies of Scope

Lowering unit output costs with more product types

Attract more customers with product variety

Lowering transportation costs buy combining loads


Economies of Agglomeration

Lowering production costs with related firms in proximity (clusters)

Lowering the costs of providing services by clustering


Economies of Density

Increased access to labor and customers with higher densities

Lower service costs (e.g. utilities, public transit)

Lower distribution costs with higher densities


Essay: Economies

For each type of economies, provide an example.


C – BUSINESS AND PRODUCT CYCLES1. Geographic Organization of Corporations2. The Product Cycle


1. Geographic Organization of Corporations

■ Location in a real world context• Firms have several location factors.• Several locations are suitable.• Costs and advantages cannot be readily calculated / evaluated.• The importance of inertia (unwilling to change existing behavior).• Impact of public policy / incentives (taxes, loans, subsidies).


1. Geographic Organization of Corporations

■ Growth strategies• Very few firms grow beyond a certain size.• Access to capital a restraining factor.• Market potential (see Walmart).• Ability to be productive and competitive in a wider market.• Continue to maintain innovation.• Ability to expand geographically (e.g. franchising).• Internal growth; investing in new capacities.• External growth; acquiring other firms.• Means:

• Horizontal integration.• Vertical integration (forward and backward).• Outsourcing and offshoring.

http://projects.flowingdata.com/walmart/


The Growth of Large MultinationalsNe

w m

arke

t opp

ortu

nity • Resource,

technology, product

• Technology and InnovationBe

tter m

anag

emen

t • Less innovative sectors

• Mostly financial (holdings)

• Outsourcing

Stat

e su

ppor

t • Large government contracts (e.g. defense corporations)

• Corporate socialism (private profits / socialized losses)


Locational Changes and Production Strategies

Intensification

Specialization

1Concentration

Rationalization andrelocation

X

XX

X

Production

Empl

oym

ent

Product AProduct BProduct CProduct D

X Closing

2

3

4 X


Product Life CycleSa

les

Stage 1 Stage 2 Stage 3

Monopoly Competition

Research anddevelopment Maturity Decline

First competitors Mass production

Innovating firm

Compe

titor

s

Growth

Stage 4

PromotionIdea

Obsolescence

Read this content



Typical Business Cycle

Economic Growth+

-

EARLY MID LATE RECESSION• Activity rebounds• Credit growth• Profits growth• Low inventories• Rising sales

• Growth peaking• Fast credit growth• Profits peak• Inventory growth• Sales peak

• Growth slowing• Tightening credit• Declining profits• Inventory growth• Sales decline

• Falling activity• Limited credit• Low/negative profits• Inventory decline• Sales decline

RECOVERY EXPANSION CONTRACTION

Explain the relationships between product life cycles and business cycles.

Documents

Topic 5 – Location Theory