Industrial Location Theory PDF

The Location of Industry 02-Nov-24 Annual Review 1 Intra-regional Analysis Location of Industry: Theory and Practice The location of the unit of production, the firm will obviously be determined in relation to the source of inputs and the ma...

The Location of Industry 02-Nov-24 Annual Review 1 Intra-regional Analysis Location of Industry: Theory and Practice The location of the unit of production, the firm will obviously be determined in relation to the source of inputs and the market for the output. The various factors of production- land, labor, capital and enterprise plus the market factor constitute the primary determinants of location. These factors can be refined into more specific determinants like quality and quantity of labor, geographical location of a site & the availability of the necessary infrastructure. Other determinants like central and local government policy & behavioral factors can also be added. 02-Nov-24 Annual Review 2 Factors Affecting Industrial Location Decisions 02-Nov-24 Annual Review 3 Approaches of Industrial Location Study Two main approaches are used to study these factors of industrial location Theoretical Approach: an all-embracing system of ‘pure’ rules; a general theory of industrial location (Economists) Empirical Approach: involves the listing of factors which might be important with examples of situations (Geographers) The two approaches have developed independently with little attempt at reconciliation. 02-Nov-24 Annual Review 4 Industrial Location Theory Economists- attempting to integrate location into the main body of economic theory As location is concerned with spatial relationships also attracted the attention of numerous geographers later An all-embracing system of “pure rules” of location attempting to derive the “optimum location” for the individual firm It is very difficult in case of wide range of industry (primary, secondary, tertiary, quaternary) & wide variety of firms within each industry. 02-Nov-24 Annual Review “pure rules” > purity of material > Weber’s least cost theory 5 Industrial Location Theory Adam Smith, Ricardo, Von Thunen and Mill (post-1900), Alfred Weber (1909) The analysis is structured around three approaches to industrial location theory a. The least cost approach b. Market area analysis c. The profit maximization approach These three umbrella approach provide a useful framework for the analysis of the theoretical approach to industrial location 02-Nov-24 Annual Review 6 a. The Least Cost Approach Weber believed three factors influenced industrial location to ascertain minimum cost: Transport costs – general regional factors Labor costs – general regional factors Agglomerative or deagglomerate forces –local factors Locational objective for a businessman involves an optimum in substitution between these factors, selecting a site which minimizes total costs. 02-Nov-24 Annual Review 8 a. The Least Cost Approach Alfred Weber (1909)-a comprehensive theory of industrial location A businessman would choose a location where his costs were least General Assumptions 1. Isotropic surface (climate, soil fertility, physiography are homogenous with no variability. 2. Equal connectivity from everywhere. 3. Self sustainable economy. 4. Perfect market competition. 02-Nov-24 Annual Review 9 a. The Least Cost Approach Economic Assumptions 1. Demand is uniform 2. Single mode of transportation 3. Price of industrial products in the market is uniform 02-Nov-24 Annual Review 10 a. The Least Cost Approach Raw material classification (on the basis of location) Ubiquitous Sand, soil, air, water Uniquitous Coal, petroleum, gold 02-Nov-24 Annual Review 11 a. The Least Cost Approach Raw material classification (on the basis of purity) Beer Pure raw Does not loose weight during material production process Gross raw Looses considerable weight during material production process Sugar cane, iron ore 02-Nov-24 Annual Review 12  a. The Least Cost Approach Weber has given a material index to show the tendency of industries to get located either at a place where raw materials are easily available or where the markets are closer. Material Index (MI) = Weight of localized gross material/Weight of finished commodity Material index of beer Material index of sugar Material index of cloth manufacturing = 10 manufacturing = 7 manufacturing = 10 tonnes of wheat / 100 tonnes of sugar cane / 1 tonnes of yarn / 10 tonnes of beer = 0.1 tonne of raw sugar = 7 tonnes of cloth = 1 Weight Looses considerable gaining weight Weight loosing Neutral during production 02-Nov-24 process Annual Review 13  a. Least Cost Approach- Transport Cost If there is a single market and a single raw material, LINEAR LOCATION is expected. 1. If raw material is gross and ubiquitous, industry will be located near the market, since away from market increases transportation cost. 2. If raw material is pure and weight gaining, industry will be located near the market, because raw material is weight gaining and final product has greater volume and weight. 3. If raw material is gross and weight loosing, industry will be located near the raw material source as the final product has lesser weight than raw material. Looses considerable weight during production 02-Nov-24 process Annual Review 15  a. Least Cost Approach- Transport Cost If there is a single market and 2 raw materials: 1. Case 1: (both raw materials are ubiquitous) or (one raw material is ubiquitous and second raw material is pure) or (both the raw materials are pure) then the industry location would be near market to save transportation cost. 2. Case 2: there difficulties to find out the location of the industry if both the raw materials are localized. The preferred location would be near to those raw materials which are more impure. Looses considerable weight during production 02-Nov-24 process Annual Review 16 Locational Triangle M M P P R1 R2 R1 R2 Looses considerableWeightweight gaining Weight loosing during production 02-Nov-24 process Annual Review 17  a. Least Cost Approach- Labor Cost Labor costs can attract a firm to a location other than the least transport cost if the savings in the labor costs per unit of output are greater than the extra transport costs per unit involved. Labor cost index = Labor cost / Weight of product If labor coefficient is higher, the industry will get located at the place where costs are low and If labor coefficient is lower, transportation costs may influence the decision. Looses considerable weight during production 02-Nov-24 process Annual Review 19  a. Least Cost Approach- Labor Cost In figure no. 2, P represents the least transportation cost and the circles at the periphery of P represents the Isodopanes (the lines of equal transportation cost per unit of production). According to the figure no. 2, the L1 and L2 are two locations where the transportation costs are 15 unit and 20 unit. C represents the consumption point for manufacturing goods. Any location within the L1 Isodopane would save more on labour cost than transportation cost as it is near the consumption point. Looses considerable weight during production 02-Nov-24 process Annual Review 20 Least Cost Approach- Labor Cost 02-Nov-24 Annual Review 21 a. Least Cost Approach- Agglomeration A firm may be diverted away from both the least transport cost and labor cost locations if cost economies can be achieved through the third location factor. The advantages of agglomeration might include the development of a pool of skilled labor & the establishment of specialist services. There may also be diseconomies such as rising land prices and congestion which may eventually encourage deglomeration. Agglomeration helps in mutual sharing of services and specialization among the industries. For instance, the development of software industries, electronic industries and readymade industries in the metropolitan regions Looses considerable weight during production 02-Nov-24 process Annual Review 22 02-Nov-24 Annual Review 23  Q UESTION : WHERE TO SETTLE INDUSTRY? S CENARIO I : LOCATING NEAR THE MARKET  An industry will settle near the consumer market, if ✓ The final product is heavier than the aggregate weight of the raw materials, energy sources and intermediary products, or otherwise, if ✓ The final product is not heavier than the aggregate weight, but transportation costs of the final product are so high that they would over-compensate the difference in weight.  Typical examples: ✓ Beverages (high water demand) ✓ Paints, thinners, etc. (again, high water demand) ✓ Perishable goods (foods, etc.) Looses considerable weight during production 02-Nov-24 process Annual Review 24  QUESTION : WHERE TO SETTLE INDUSTRY? S CENARIO 2: LOCATING NEAR RAW MATERIALS  An industry will settle near the raw materials or sources of energy, if the industry is heavily dependent on these.  Examples: ✓ Construction materials ✓ Oil refining ✓ Smelting (blast furnaces) ✓ Alimentation (flour milling, sugar and canning industry) Looses considerable weight during production 02-Nov-24 process Annual Review 25  Q UESTION : WHERE TO SETTLE INDUSTRY? S CENARIO 3: OTHER LOCATIONS ?  What if the industry does not produce for a single market only, and/or requires more than just a few raw materials and energy sources?  If there is no single item (either on the input or output side) that would dominate the production, where should we locate the industry?  The solution: finding a compromise location!  How do we define such a location? Looses considerable weight during production 02-Nov-24 process Annual Review 26  F INDING A COMPROMISE LOCATION  We’re after a point where the product of the transport tariffs and the import and export costs w1t1s1 + w2t2s2 + w3t3s3 → min Wi = point - specific import & export weights (material & product index) t i = transport costs of materials and products si = distances from the end points, defining the distance from P  If the new location would be at a distance of S kilometres from the optimal location, and the cost of transportation would be t per tonne, a switch of location would only be worthwhile, if T∙S∙t < A 1 -A 2  If A 1 is the labour coefficient at the "optimal” (with the supposedly higher labour costs), and  A 2 is the labour coefficient at the city with the supposedly lower labour costs, then  The difference A - A 2 will indicate the savings in labour expenditure. Looses considerable weight 1 during production 02-Nov-24 process Annual Review 29  Lets, think about a hypothetical situation… Suppose, to produce 1000 tonnes finished product, the required raw materials from each source is 2000 tonnes, the rate of transportation cost is $1 per tonne per km M 86.6 km R1 R2 Looses considerable weight 50 km P 50 km during production 02-Nov-24 process Annual Review 30  Another example… Suppose, you are the owner of an industry, which is located at an optimum location P and there is another compromise location A. If the labor cost of location A is 50,000 $ and the labor cost of location P is 70,000 $, are you willing to shift the industry from P to A? You have to keep in mind that the cost of transportation is 20$ per unit of material and the locational weight is 30 unit. Looses considerable weight during production 02-Nov-24 process Annual Review 31  Criticism of Least Cost Approach Regarded as very “noisy” in terms of its abstraction from reality Transport cost doesn’t rise proportionally due to distance and weight Disregard of institutional factors such as government policy Perfect competition of market rarely exists. Market demand also varies with firms locating so as to gain some control over the demand Weber ignored the spaced problem, high cost of land and high rent in the industrial area. Impact of price fluctuation does not consider. Homogeneous areas have been questioned. Looses considerable weight during production 02-Nov-24 process Annual Review 32  b. Profit maximizing approach August Losch realized that the optimum location is the place of maximum profits where revenue exceeds costs by the largest amount Losch in “The Economics of Location” attempts establish a modified Christaller’s model, to incorporate demand in the theory by considering the optimum size of the market. His model has an empirical inductive approach and provide a moderate critic as he accepted many parts of the Christaller’s model.. It was also the first attempt to develop a general theory of location with major emphasis on demand. Losch claimed that it’s not a single economic pull that influences most settlements rather a complex combination of market, communication or administration. Assumptions: a. An isotropic surface (No spatial variations in the distribution of factor inputs- raw materials, labor and capital- over a homogeneous plain), and Losch eliminates spatial cost variations. b. Uniform population densities & constant tastes c. No locational interdependence between firms d. Demand decreases with an increase in price Looses considerable weight during production 02-Nov-24 process Annual Review 34  b. Profit maximizing approach For the analysis Losch uses and adapts a simple demand curve. He oversimplified the world to a flat uniform plain, held supply constant and assumed that: ✓With increase in price, the demand for a product decreased and ✓If this price increase was a result of an increase in transportation costs, the demand would decrease with distance from the production center. Looses considerable weight during production 02-Nov-24 process Annual Review 35 Loschian Demand Curve & Cone 02-Nov-24 Annual Review 36  Every good sold and every service offered will have a different range and threshold and could be offered at variety of points, resulting in a chaos of different meshes designed over the supposed uniform plain. to create some order in this disorder system of market, an arbitrary center need to be picked, which will represent the metropolis. 02-Nov-24 Annual Review 37  So…What is the difference between Christaller theory and Loschian theory? 02-Nov-24 Annual Review 38 Relocating Industry Relocation of an established firm can result from pressures both internal and external to the firm. Internal pressure - growth in output imposes pressure on the limited floor space - a decline in output with a subsequent rise in unit fixed costs encourage a reduction in floor space External pressure - from other firms bidding up the price of labor From the government with its local planning controls & national taxation policies 02-Nov-24 Annual Review 41 The Choice of a New Location Labor-Quality & Quantity Transport & Communications Site & Premises Government Aid Environmental Factors 02-Nov-24 Annual Review 42  Reference Book An Introduction to Regional Planning - John Glasson (Chapter – 6) 02-Nov-24 Annual Review 43  Thank you 02-Nov-24 Annual Review 44