GEOG 135 – Economic Geography
Professor: Dr. Jean-Paul Rodrigue
Topic 5 – Location Theory
A – Factors of Location
B – Scale and Organization
C – Business and Product Cycles
Hofstra
Department
of Global
Studies
& Geography
HofstraUniversity,
University,
Department
of Global
Studies
& Geography
A – FACTORS OF LOCATION
1.
2.
3.
4.
Labor
Land
Capital
The Weberian Representation
© Dr. Jean-Paul Rodrigue
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
© Dr. Jean-Paul Rodrigue
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.
© Dr. Jean-Paul Rodrigue
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.
© Dr. Jean-Paul Rodrigue
Hourly Compensation in Manufacturing, 1997-2010 ($US)
0
Germany
France
United States
Japan
UK
Singapore
South Korea
Brazil
Taiwan
Poland
Mexico
India
China
Philippines
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
2010
1997
$1.90
© Dr. Jean-Paul Rodrigue
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.
Land cost
Suburbanization / Offshoring
Transport cost
© Dr. Jean-Paul Rodrigue
Land Rent and Land Use
2 – Overlay
of bid rent
curves
1 – Bid rent curves
Rent
A- Retailing
B- Industry/
commercial
City limits
Distance
C - Apartments
D - Single houses
3- Land use
© Dr. Jean-Paul Rodrigue
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.
© Dr. Jean-Paul Rodrigue
3. Capital
■ Capital intensification
•
•
•
•
Substitute capital for labor (often involves job losses).
Linked with technological innovations.
Increase in productivity.
Cope with labor scarcity.
Labor per
unit of
output
Mechanization
Capital per unit of output
© Dr. Jean-Paul Rodrigue
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.
© Dr. Jean-Paul Rodrigue
Weber’s Location Triangle
w(M)
M
d(M)
P
d(S2)
w(S2)
S2
d(S1)
S1
w(S1)
© Dr. Jean-Paul Rodrigue
Transport Costs Surfaces and Location
M
2,000 $
1,000 $
P
S2
S1
© Dr. Jean-Paul Rodrigue
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.
© Dr. Jean-Paul Rodrigue
Share of Transport Costs in Product Prices and Average Haul
Length
0
5
10
15
20
25
30
Leather products
Electronics
Printing and publishing
Apparel
Instruments
Machinery
Tobacco
Rubber and plastics
Transport equipment
Fabricated metals
Textiles
Primary metals
Paper products
Furniture
Food
Lumber and wood
Petroleum
Stone, clay and glass
0
100
200
300
400
500
600
700
Haul length (miles)
© Dr. Jean-Paul Rodrigue
B – SCALE AND ORGANIZATION
1.
2.
3.
Scale Economies
Agglomeration Economies
Vertical and Horizontal Integration
© Dr. Jean-Paul Rodrigue
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.
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
© Dr. Jean-Paul Rodrigue
$1,000
2.25
$900
2.00
$800
1.75
$700
Millions
Cost and Production of Ford Vehicles, 1908-1924
1.50
$600
1.25
$500
1.00
$400
Cost
$300
Production
0.75
$200
0.50
$100
0.25
$0
0.00
© Dr. Jean-Paul Rodrigue
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.
© Dr. Jean-Paul Rodrigue
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.
© Dr. Jean-Paul Rodrigue
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).
© Dr. Jean-Paul Rodrigue
Transport and Co-Location
Co-Location Zone
Activity
Terminal
© Dr. Jean-Paul Rodrigue
3. Vertical and Horizontal Integration
Vertical Integration
Horizontal Integration
Outsourcing
Nature
Expand backward (suppliers) or
forward (customers) along the
supply chain.
Acquiring or merging with
competitors.
Some activities
performed by another
corporation.
Goal
Lower costs. Enhance and
protect product quality. Improve
supply chain efficiency.
Economies of scale.
Product differentiation.
Business model
replication. Oligopoly.
Reduce costs. Focus
on core
competencies.
Issues
Higher cost structure of
suppliers. More difficult to adapt
to changes.
Different business
cultures. Anti-monopolistic
responses.
Dependency. Loss of
competency.
Coal Extraction
Iron Ore
Steel Making
Corporation A
Corporation B
Corporation C
Metallic Products
Mechanical Products
© Dr. Jean-Paul Rodrigue
Main Types of Economies in Production, Distribution and
Consumption
Production
Distribution
Consumption
Economies of
transportation
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
scale
Lower 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
labor (skills) with higher
densities
Lower unit distribution
costs with higher
densities
Increased accessibility to
goods and services with
higher densities
© Dr. Jean-Paul Rodrigue
C – BUSINESS AND PRODUCT CYCLES
1.
2.
Geographic Organization of Corporations
The Product Cycle
© Dr. Jean-Paul Rodrigue
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).
© Dr. Jean-Paul Rodrigue
1. Geographic Organization of Corporations
■ Growth strategies
•
•
•
•
•
•
•
•
•
Very few firms grow beyond a certain size.
Access to capital a restraining factor.
Market potential.
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).
© Dr. Jean-Paul Rodrigue
• Less
innovative
sectors
• Mostly
financial
(holdings)
• Outsourcing
State support
• Resource,
technology,
product
• Technology
and
Innovation
Better management
New market opportunity
The Growth of Large Multinationals
• Large
government
contracts
(e.g. defense
corporations)
• Corporate
socialism
(private
profits /
socialized
losses)
© Dr. Jean-Paul Rodrigue
Locational Changes and Production Strategies
Employment
Production
X
3
1
Intensification
Concentration
Specialization
Rationalization and
relocation
2
4
X
X
X
X
Product A
Product B
Product C
Product D
X
Closing
© Dr. Jean-Paul Rodrigue
Product Life Cycle
Sales
Monopoly
Idea
Competition
Promotion
First competitors
Mass production
Obsolescence
Research and
development
Growth
Maturity
Decline
Stage 1
Stage 2
Stage 3
Stage 4
© Dr. Jean-Paul Rodrigue
Pace of innovation
Long Wave Cycles of Innovation
Water power
Textiles
Iron
1785
Steam
Rail
Steel
1st Wave
60 years
Electricity
Chemicals
Internal-combustion
engine
2nd Wave
1845
55 years
Petrochemicals
Electronics
Aviation
3rd Wave
1900
50 years
Digital networks
Software
New Media
4th Wave
1950
40 years
5th Wave
1990
30 years (?)
© Dr. Jean-Paul Rodrigue
Main Stages in a Bubble
“New Paradigm”!!!
Valuation
Delusion
Denial
Return to “normal”
Greed
Institutional
investors
Smart Money
Public
Enthusiasm
Bull trap
Fear
Capitulation
Media attention
Return to the
mean
First Sell off
Take off
Stealth Phase
Bear trap
Awareness Phase
Despair
Mania Phase
Blow off Phase
Time
© Dr. Jean-Paul Rodrigue