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Location theory

Location theory. Attempts to predict where business will or should be located. Based on 3 assumptions: That business owners want to maximize their advantages over competitors; That they also want to maximize their profits; and

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Location theory

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  1. Location theory • Attempts to predict where business will or should be located. • Based on 3 assumptions: • That business owners want to maximize their advantages over competitors; • That they also want to maximize their profits; and • That they will take into account variable costs such as energy supply, transport costs, labor costs, etc.

  2. Fixed or variable costs • Spatially fixed costs—do not change wherever a company is. They are NOT important in determining its location. • which means that the costs of the products do not change despite where the product is assembled • Spatially varied costs differ from place to place. A company's goal is to minimize these costs.

  3. Fixed and Variable Costs Influence the Optimum Location for Economic Activity Classical economic geography models focus mainly on the variable cost of transportation

  4. Weber’s Least Cost Theory of Industrial Location Developed by German economist Alfred Weber in the early 20th

  5. Weber’s Least Cost Theory • Weber assumed a uniform landscape with equal transportation paths and routes throughout the space (no mountains, lakes, etc. to get in the way). • The location of industry is driven by three factors: • Transportation • Labor • Agglomeration

  6. Weber’s Least Cost Theory • Location of Industry • Manufacturing plants will locate where costs of transportation, labor, and agglomeration are the least • Weight or Bulk Gaining = market oriented • Weight or Bulk Reducing = materials/resource oriented

  7. Transportation • The site should include the lowest possible cost of • Moving raw materials to the factory; • Getting finished products to consumers.

  8. Transportation Cost Minimization Raw Material Oriented Tendency for industry to locate near its source of raw materials in order to save on transport costs Usually occurs when raw materials lose weight in the production process (e.g., paper, steel)

  9. Determining the best location for a mfg. plant with raw materials in Minnesota, Florida, and Texas & the market in New York (but with differing amounts of raw mat’s needed)

  10. Transportation Cost Minimization Market Oriented Tendency for industry to locate near population centers in order to save on transport costs Occurs when product is more costly to transport than raw materials (e.g., beverages, glass)

  11. Transportation Cost Minimization Break-of-Bulk Oriented Location between sources of raw materials and markets – for products that must be divided and shipped from a central point of entry Intermodal transportation – e.g., moving from rails to trucks or ships to trucks, or ports to pipelines

  12. Labor • It might be better to move the factory away from resources if cheap labor can make up for transportation costs. • “substitution principle”

  13. Labor Cost Minimization Maquiladora workers in Matamoros, Tamaulipas, Mexico Figure 6.1 (p. 143)

  14. Export Processing Zones Definition: region of a less-developed country that offers tax breaks and loosened labor restrictions to attract export-driven production processes, such as factories, producing goods for foreign markets; sometimes called free trade zone Example: Mexico’s system of maquiladoras

  15. Agglomeration • The clustering of a large number of similar enterprises in the same area. • They can assist each other in share talents, services, facilities, communication, equipment, etc. infrastructure. • This makes big cities somewhat more attractive. • Example: Silicon Valley (computers, software), Hollywood (film, tv), Nashville (music), Houston (energy), NYC (finance)

  16. Agglomeration Economies Location of semiconductor design houses, 1991 Figure 6.4 (p. 148)

  17. Agglomeration Economies Location of semiconductor fabrication facilities, 1991 Figure 6.6 (p. 150)

  18. Growth Poles- Silicon Valley CA- Research Triangle NC

  19. Research Triangle, NCThis thriving hub of innovation is home to more than a dozen pioneering industries including biotechnology, pharmaceuticals, clean technology, and information technology.

  20. Theory of locational interdependence (Hotelling’s model) • Related to agglomeration (Industry and Services) • Industries choose locations based on where their competitors are located • Maximize their dominance of the market (influenced by competition) • Ex. Gas stations near a highway exit

  21. However… • Too much agglomeration can cause problems, such as high rents and wages, lack of resources and labor or too much traffic. • This can lead to deglomeration: plants or businesses leave the crowded megalopolis and move to less crowded areas.

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