Location theory

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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.

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Fixed or variable costs

• Spatially fixed costsdo 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.

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Webers Least Cost Theory of Industrial Location
Developed by German economist Alfred Weber in the
early 20th
4
Webers 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 four
  factors
• Transportation
• Labor
• Agglomeration
• Deglomeration

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Webers 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

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Transportation

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

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Bulk-reducing industries

• Weight or bulk-reducing industries
• Copper and iron
• Paper, pulp, sawmills are near forests
• Canning of fruits and veggies
• Meatpacking
• This leads to a material orientation when
  material costs are high, the factory locates near
  the inputs.

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Transportation Cost Minimization
Raw Material Oriented
Figure 6.2 (p. 145)
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Bulk-gaining industries

• These are ones in which weight is gained during
  processing.
• Soft drinks supplies are easy to ship, only
  water needs to be added.
• They cause a market orientation when costs of
  getting products to market are high, businesses
  locate near the market.

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Transportation Cost Minimization
Market Oriented
Figure 6.2 (p. 145)
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Transportation Cost Minimization
Break-of-Bulk Oriented
Figure 6.2 (p. 145)
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Labor

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

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

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Agglomeration Economies
Location of semiconductor design houses, 1991
Figure 6.4 (p. 148)
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Agglomeration Economies
Location of semiconductor fabrication facilities,
1991
Figure 6.6 (p. 150)
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Theory of locational interdependence (Hotellings
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

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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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Criticisms of Webers Least Cost Theory

• Does not identify the fact that markets and labor
  are often mobile
• Labor force varies in age, skill sets, gender,
  language, and other traits.
• Some transportation costs are not directly
  proportional to distance as his model assumes.