Feb 12: Economic Geography, Location Theory and Theories of Firm Location
Alonso, William. "Location Theory," in Regional Policy. Cambridge: MIT Press, 1975, pp.
35-63. [Library reserves
Nelson, Arthur C. et. al. “Exurban Industrialization: Implications for Economic
Development Policy” Economic Development Quarterly 9, 2 (May 1995) [Library
reserves]
Carlson, Virginia L. "Identifying Neighborhood Businesses: a Comparison of Business
Listings." Economic Development Quarterly, Vol. 9, No. 1, February 1995, pp. 50-59.
[Library reserves]
see also: Edgar M. Hoover and Frank Giarratani, An Introduction to Regional Economics
(on-line edition)
Carlson, Virginia L. "Identifying Neighborhood
Businesses: a Comparison of Business Listings."
Economic Development Quarterly, Vol. 9, No.
1, February 1995, pp. 50-59. [Library reserves]
• Basic issue: how do you find accurate
information on local businesses?
• Comparison of various sources:
– Dun’s Market indicators
– Harris directory
– Covered Employment and Wages file (ES202)
– Manufacturers Directory
– A local database
Nelson, Arthur C. et. al. “Exurban
Industrialization: Implications for
Economic Development Policy”
Economic Development Quarterly 9, 2
(May 1995)
• Where are industries locating? Neither urban
• nor rural hinterland,
• but somewhere in between: “middle area exurbia”
1.
Bike Messenger Land/Urban Hipster Zone (within city)
Lower East Side (NYC), Little Five Points (Atlanta),
Pioneer Square (Seattle), Wicker Park (Chicago)
2.
Crunchy/Progressive Suburbs (urban exiles who still
identify with city life) Takoma Park (MD).
3.
Professional Zone (affluent inner-ring suburbs, old-line
communities) Bethesda (MD), Greenwich (CT),
Tarrytown (NY), Winnekta (IL), Santa Monica (CA),
Shaker Heights ( OH)
4.
Immigrant Enclaves (semi-residential, semi-industrial,
often serving the professional zone) San Gabriel Valley
(east of LA); Middlesex County (NJ)
5.
Suburban Core (the heart of suburbia; mid-ring)
6.
The Exurbs (big box malls, exit-ramp office parks)
Location Quotients for Durable Goods
follow
Jobs
people
follow
Where are the jobs (firm location/relocation)?
industrial economics + geography = location theory
Where are the people (labor force concentrations and migration)?
labor economics + geography = economic demography
CONCEPTS
•Agglomeration economies
Central place theory
•Spatial division of labor [update graph about division and clustering – i.e., from
vertically-integrated to vertically disintegrated]
•Input-oriented and output-oriented activities (e.g., weight-gaining and weightlosing sectors)
•Hotelling Model
•Tendencies to spread (decentralize) and tendencies to cluster (centralize) [e.g.,
corner convenience stores vs. jewelry stores
Ideas in location theory,
•Product cycle/profit cycle theory
economic geography,
•Active vs. passive locational attributes
business siting
How to explain uneven development?
Gunnar Myrdal (1898 – 1987)
“Spread and backwash effects”
spread
back wash
Starting conditions
How to explain uneven development?
Gunnar Myrdal (1898 – 1987)
“Spread and backwash effects”
spread
back wash
after the effects take place
3 basic questions in location theory
1. Why does economic activity cluster? (e.g., why are
there cities, industrial districts, etc.?)
1. Why does it initially cluster in a specific location? (e.g.,
steel in Pittsburgh, computers in the SF Bay Area, autos
in Detroit, music in Nashville, etc.)
1. Why does the initial cluster remain or instead disperse
and/or relocate? (e.g., the aerospace industry moved
from the east coast and Midwest to Los Angeles, San
Diego, Seattle, etc.)
The connection between economic era and human settlement patterns
two opposing forces
centripetal
centrifugal
centripetal sentri.pital, a. [f. mod.L. centripet-us
(Newton) centre-seeking + -al1.]
Tending toward the centre;
centrifugal sentri.fiugal, , a. [f. mod.L. centrifugus (Newton, f. centrum centre + -fugus fleeing,
avoiding) + -al1.]
Flying or tending to fly off from the centre
Agglomeration Economies
“economies” = savings
two parts:
localization
economies
scale
economies
Savings due
to producing
on a large
scale (e.g.,
mass
production of
a Model T
Ford)
+
Spatial
dimension
Applying the
concept to
economic
geography
=
agglomeration
economies
Savings due
to clustering
of economic
activity in
one place
clustering
among the
same sectors
(e.g.,
apparel)
urbanization
economies
clustering
across
sectors (and
sharing
urban
infrastructur
Christaller, Walter. 1933. Die zentrale Orte in Süddeutschland. [Central
Places in southern Germany]
The larger the city,
• the larger the market
area
Type
M (Marktort)
A (Amtsort)
K (Kreisstadt)
B (Bezirkstadt)
G (Gaustadt)
P (Provinzstadt)
L (Landstadt)
Market area
Radius, km
4.0
6.9
12.0
20.7
36.0
62.1
108.0
Popul ation of
town
1,000
2,000
4,000
10,000
30,000
100,000
500,000
Popul ation of
market area
3,500
11,000
35,000
100,000
350,000
1,000,000
3,500,000
Sources: GaWC Research Bulletin 59 (A): 'Christaller for a Global Age: Redrawing the
Urban Hierarchy' (P. Hall) Christaller, W. (1966 (1933)) Central Places in Southern
Germ any. Translated by C.W. Baskin. Englewood Cliffs: P rentice-Hall. Dickinson, R.E.
(1967) The City Region in Western Europe. London: Routledge & Kegan Paul.
• the greater the offering of
goods and services
• the greater the number of
specialized economic
activities
How big is your market area? (a function of production costs and transportation costs)
How big is your market area? (a function of production costs and transportation costs)
tc - starting condition
How big is your market area? (a function of production costs and transportation costs)
tc’ - firms A and C lower production costs
How big is your market area? (a function of production costs and transportation costs)
tc’’ - all three firms lower per mile transportation costs
Global cities have the prerequisite of the spatial division of labor, with the concentration of
specialized, advanced service sectors (that pay high wages and control global capital flows).
And the spatial division of labor goes hand in hand with trade. so the new international
division of labor (NIDL) goes hand in hand with international trade.
Once all located under one roof
Single location: Boston,
Mass.
R&D
production
Corporate
headquarters
distribution
Global cities have the prerequisite of the spatial division of labor, with the concentration of
specialized, advanced service sectors (that pay high wages and control global capital flows).
And the spatial division of labor goes hand in hand with trade. so the new international
division of labor (NIDL) goes hand in hand with international trade.
Cambridge, Mass.
R&D
production
Guangdong, China
Midtown Manhattan
Corporate
headquarters
distribution
Phoenix, Hong
Kong, Frankfurt
Spatial
dispersion by
function
Spatial
dispersion by
function
production
R&D
Midtown Manhattan
production
R&D
Cambridge, Mass.
Corporate HQ
Corporate HQ
distribution
production
R&D
distribution
Corporate HQ
production
R&D
distribution
Guangdong, China
Corporate HQ
distribution
production
R&D
distribution
Corporate HQ
Phoenix, Hong
Kong, Frankfurt
Spatial
dispersion by
function
production
R&D
Midtown Manhattan
Corporate HQ
production
R&D
production
Corporate HQ
R&D
Corporate HQ
distribution
R&D
production
distribution
distribution
distribution
Guangdong, China
Corporate HQ
Corporate HQ
distribution
production
R&D
Cambridge, Mass.
Phoenix, Hong
Kong, Frankfurt
Spatial
dispersion by
function
R&D
production
production
Corporate HQ
production
R&D
Corporate HQ
distribution
production
Corporate Corporate
HQ
HQ
distribution
distribution
Guangdong, China
R&D
Corporate HQ
distribution
production
R&D
Midtown Manhattan
distribution
R&D
Cambridge, Mass.
Phoenix, Hong
Kong, Frankfurt
Spatial
dispersion by
function
Guangdong, China
R&D
production
production
production
Corporate HQ
distribution
distribution
distribution
distribution
production
production
R&D
R&D
Corporate HQ
Corporate Corporate
HQ
HQ
Corporate HQ
distribution
R&D
Midtown Manhattan
R&D
Cambridge, Mass.
Phoenix, Hong
Kong, Frankfurt
Spatial
dispersion by
function
R&D
R&D
Corporate HQ
Corporate Corporate
HQ
HQ
Corporate HQ
Corporate HQ
Guangdong, China
production
production
R&D
production
production
production
R&D
Midtown Manhattan
distribution
distribution
distribution
distribution
distribution
R&D
Cambridge, Mass.
Phoenix, Hong
Kong, Frankfurt
•WHERE DO YOU LOCATE PROCESSING? CLOSE TO THE RAW MATERIALS
OR THE MARKET – OR A MID-POINT COMPROMISE?
Raw Materials
Market
?
?
pro
cess
?
•Input-oriented and output-oriented activities
(e.g., weight-gaining and weight-losing
sectors)
Raw Materials
Market
pro
cess
Weight losing: Iron ore processing,
lumber milling, meat packing, raisin
production, wine making, fruit
canning,
pro
cess
Weight gaining: Beer,
bread,
Soft drinks, cement,
newspaper printing
•The mid-point rarely makes sense…
Raw Materials
Market
pro
cess
•Except…
boat
Raw Materials
road
Market
The declining significance of transportation (time
and money costs as a percent of total costs) – and
therefore as a factor in industrial location
•Hotelling Model
•2 ice cream sellers at the beach
•Customers evenly distributed on beach
•Customers have one criterion of where to
buy ice cream: which stand is closer?
•QUESTION: where do the two stands locate?
•Hotelling Model
•2 ice cream sellers at the beach
•Customers evenly distributed on beach
•Customers have one criterion of where to
buy ice cream: which stand is closer?
•QUESTION: where do the two stands locate?
•Hotelling Model
•2 ice cream sellers at the beach
•Customers evenly distributed on beach
•Customers have one criterion of where to
buy ice cream: which stand is closer?
•QUESTION: where do the two stands locate?
•Hotelling Model
•2 ice cream sellers at the beach
•Customers evenly distributed on beach
•Customers have one criterion of where to
buy ice cream: which stand is closer?
•QUESTION: where do the two stands locate?
•Hotelling Model
•2 ice cream sellers at the beach
•Customers evenly distributed on beach
•Customers have one criterion of where to
buy ice cream: which stand is closer?
•QUESTION: where do the two stands locate?
equilibrium
•Hotelling Model
•2 ice cream sellers at the beach
•Customers evenly distributed on beach
•Customers have one criterion of where to
buy ice cream: which stand is closer?
•QUESTION: where do the two stands locate?
NO equilibrium with three…
•Hotelling Model
•BUT WHAT IS THE SOCIALLY OPTIMAL?
•(e.g., minimize the average distance walked (over
hot sand)
•or minimize the deviation of distance walked?
•Tendencies to spread (decentralize) [e.g.,
corner convenience stores]
•Tendencies to cluster (centralize) [e.g.,
jewelry stores]
Profit and product cycles
http://www.fairchildsemi.com/graphics/productLifeCycle.gif
http://people.hofstra.edu/geotrans/eng/ch5en/conc5en/img/productlifecycle.gif
Add geography…
Geographically
concentrated
Geographic
dispersion
Either further
dispersion and/or
reconcentration
(but also
restructured)
http://people.hofstra.edu/geotrans/eng/ch5en/conc5en/img/productlifecycle.gif
Do you export production ….
Or import labor?
Passive or mechanistic or
quantitative locational
attributes:
•Taxes
•Transportation costs
•Labor costs
•Material costs
•Land costs
•Etc.
Active or dynamic or qualitative
locational attributes:
•Business culture,
entrepreneurial culture
•Strength of growth machine
•Residential amenities and
culture
•Governance regarding permits,
codes, etc.
Three Waves of Economic Development
Source: Blakely, Edward J and Ted K Bradshaw. 2002. Planning Local Economic Development Theory
and Practice: Third Edition. Sage. Page 45: Table 2.3
Component
First Wave
Second Wave
Third Wave
Location assets
Discount them to
attract outside
business
Reduce taxes
and provide
incentives to all
businesses
Build regional
collaboration
Business focus
Outside firms
Assist all local
firms
Create context
for better
relations among
firms
Human
resources
Create jobs for
local
unemployed
people
Develop training
programs
Utilize workforce
training to build
businesses
Community
Base
Physical
resources
Social and
physical
resources
Leadership and
development of
quality
environment
Another historical view….
Fitzgerald, Joan and Nancey Green Leigh. 2002. Economic Revitalization: Cases
and Strategies for City and Suburb. Sage. pp. 10-26
PHASE
Selective characteristics
1. State Industrial Recruitment (starting in the
1930s)
Create good business climate (taxes, loans,
infrastructure, etc.) • “greasing the skids” for
business • corporatist paradigm
2. Political Critiques of Local Economic
Development Activity (starting in the late 1960s)
Focus on who is paying and who benefits. ED
actors as political agents • political economic
analysis • critique of “smokestack chasing” •
recognition of tension between footloose capital
and communities •
3. Entrepreneurialism and Equity Strategies
Two separate movements: Promoting high tech
(mimic Silicon Valley) and pushing
equity/redistribution (e.g., Mayor Harold
Washington’s initiatives in Chicago, 1980s).
4. Sustainability with Justice
Balancing economic development, social justice
and environmentalism. Brownfield development.
5. Privatization and Interdependence
Market solutions (e.g., Michael Porter’s
competitive inner cities) and regional/metropolitan
strategies.
If time, also cover these concepts
(von Thünen, etc.)
Source: James
Heilbrun, Urban
economics and
public policy, St.
Martin’s Press.
Von Thünen
Twenty Really Useful Concepts in Understanding Local Economic
Development
•agglomeration economy
•cumulative causation vs.
equilibrium models
•cyclical versus structural change
•deindustrialization
•equity vs. efficiency
•linkages (forward and backward)
•location theory
•market failure
•multiplier (and basic vs. non-basic
employment)
•opportunity costs
•Externalities (both positive and
negative)
•“leaky bucket” theory of money
flows in local economies
•globalization
•growth vs. development
•innovation (process versus
product)
•public-private partnerships
•spatial division of labor
•supply-side vs. demand-side
approaches
•value added
•zero-sum game