Topic 5 – Location Theory

1. Topic 5 – Location Theory A – Factors of Location B – Scale and Organization C – Business and Product Cycles

2. 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.

3. A – Factors of Location Labor Land Capital The Weberian Representation

4. The Location Spectrum Read this content Non-material inputs (Labor, Capital, Technology, Policies, Regulations) Location factors Material Inputs Outputs (Markets, Customers) (Resources, Parts, Energy, Land)

5. Factors Affecting Location Decisions Explain the differences between country, regional and local location factors.

6. Commonly Cited Location Factors for Foreign Direct Investments

7. 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.

8. 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.

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

10. 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 Suburbanization / Offshoring Transport cost

11. Land Rent and Land Use Read this content 2 – Overlay of bid rent curves 1 – Bid rent curves Rent B- Industry/ commercial A- Retailing Distance City limits C - Apartments D - Single houses 3- Land use Explain the relationships between the rent paying capacity of economic activities and land use.

12. 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.

13. 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 per unit of output Mechanization Capital per unit of output

14. 3. Capital • Labor versus capital intensive • Labor: Management and employees. • Capital: Equipment, IT systems, buildings, vehicles. • Labor intensive • Food processing. • Hotels & restaurants. • Produce farming. • Personal services. • Capital intensive • Oil extraction & refining. • Car manufacturing. • Intensive farming (wheat, corn). • Transport (air, rail, maritime).

15. 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.

16. Weber’s Location Triangle w(M) M d(M) P d(S2) w(S2) S2 d(S1) S1 w(S1) Read this content

17. Transport Costs Surfaces and Location Read this content 3,000 $ M 4,000 $ 2,000 $ 3,000 $ 1,000 $ 1,000 $ P S2 2,000 $ S1 2,000 $ 1,000 $

18. 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.

19. Share of Transport Costs in Product Prices and Average Haul Length

20. B – Scale and Organization Scale Economies Agglomeration Economies Vertical and Horizontal Integration

21. 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.

22. Cost and Production of Ford Vehicles, 1908-1924 Read this content

23. 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. A- Small industry (restaurants, personal services) B- Large industry (banks, manufacturing) C- Very large industry (aircraft manufacturer, refinery) Cost per unit B A C Plant size Economies and diseconomies of scale are two sides of the same coin; explain.

24. 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.

25. 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).

26. Transport and Co-Location Co-Location Zone Activity Office Park Logistics zone Terminal Read this content

27. 3. Vertical Integration

28. 3. Vertical Integration

29. 3. Horizontal Integration

30. 3. Horizontal Integration

31. 3. Outsourcing

32. 3. Outsourcing

33. Main Types of Economies in Production, Distribution and Consumption Production Distribution Consumption Lower unit costs through accessibility to suppliers and customers Lower unit distribution costs through transport chains management Lower unit output costs through accessibility to suppliers and customers Economies of transportation Economies of scale Lower unit costs with larger plants Lower unit transport costs through larger modes and terminals Lower unit costs with larger retail outlets Read this content 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 Lower unit distribution costs with higher densities Increased accessibility to goods and services with higher densities Increased accessibility to labor (skills) with higher densities

34. Economies of Transportation Lowering transportation costs by being close to ponderous inputs Lowering transportation costs by being close to markets

35. Economies of Scale Lowering production costs with larger output Lowering transportation costs with larger conveyances (ships)

36. Economies of Scope Lowering unit output costs with more product types Attract more customers with product variety Lowering transportation costs by combining loads

37. Economies of Agglomeration Lowering production costs with related firms in proximity (clusters) Lowering the costs of providing services by clustering

38. 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

39. Essay: Economies For each type of economies, provide an example.

40. C – Business and Product Cycles Geographic Organization of Corporations The Product Cycle

41. 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, abatements).

42. 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.

43. The Growth of Large Multinationals

44. Locational Changes and Production Strategies Production Employment X 3 1 Concentration Intensification Rationalization andrelocation Specialization 2 4 X X Product A Product B Product C Product D X X X Closing

45. Product Life Cycle Read this content Monopoly Competition Sales Competitors Innovating firm Idea Promotion First competitors Mass production Obsolescence Research and development Growth Decline Maturity Stage 1 Stage 2 Stage 3 Stage 4

46. Typical Business Cycle 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 CONTRACTION RECOVERY EXPANSION + Economic Growth - Explain the relationships between product life cycles and business cycles.