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GEOG 135 – Economic GeographyProfessor: Dr. Jean-Paul Rodrigue
Hofstra University, Department of Global Studies & GeographyHofstra University, Department of Global Studies & GeographyHofstra University, Department of Global Studies & GeographyHofstra University, Department of Global Studies & Geography
Topic 5 – Location Theory
A – Factors of LocationB – Scale and OrganizationC – Business and Product Cycles
© Dr. Jean-Paul Rodrigue
Location Theory
■ The rationale (where and why) in the location of economic activities• Usually divided by sector of economic activity.
■ Businesses• Maximize their profitability.• Minimize their costs.
■ Individuals• Maximize their utility (can be objective or subjective).• Objective: Proximity to work or to services (e.g. education).• Subjective: Community.
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A – FACTORS OF LOCATION
1. Labor2. Land3. Capital4. The Weberian Representation
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The Location Spectrum
Outputs Material Inputs
Non-material inputs
(Markets, Customers) (Resources, Parts, Energy, Land)
(Labor, Capital, Technology, Policies, Regulations)
Location factors
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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
Explain the differences between country, regional and local location factors.
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Commonly Cited Location Factors for Foreign Direct Investments
Access to customers
Stable social and political environment
Ease of doing business
Reliability and quality of infrastructure and utilities
Ability to hire technical professionals
Ability to hire management staff
Level of corruption
Cost of labor
Crime and safety
Ability to hire skileld workers
National taxes
Cost of utilities
Roads
Access to raw materials
Available land
Availability of technical training
Local taxes
Access to suppliers
Labor relations and unionization
Air service
0 10 20 30 40 50 60 70 80 90
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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.
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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.
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Hourly Compensation in Manufacturing, 1997-2010 ($US)
Germany
France
United States
Japan
UK
Singapore
South Korea
Brazil
Taiwan
Poland
Mexico
India
China
Philippines
0 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
$1.901997 2010
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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:
• High land costs / low transport costs (or time).• Low land costs / high transport costs (or time).
Land cost
Transport cost
Suburbanization / Offshoring
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Land Rent and Land Use
Rent
Distance
A- RetailingB- Industry/commercial
C - ApartmentsD - Single houses
1 – Bid rent curves 2 – Overlayof bid rent
curvesCity lim
its
3- Land use
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Explain the relationships between the rent paying capacity of economic activities and land use.
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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.
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3. Capital
■ Capital intensification• Substitute capital for labor (often involves job losses).• Linked with technological innovations (mechanization and
automation).• Increase in productivity.• Cope with labor scarcity.
Labor perunit of output
Capital per unit of output
Mechanization
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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.
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Weber’s Location Triangle
M
S1
S2
d(M)
d(S2)
d(S1)
P
w(S1)
w(S2)
w(M)
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Transport Costs Surfaces and Location
1,000 $
1,000 $
1,000 $
2,000 $
2,000
$
3,000 $
3,000
$4,000 $
P
2,000 $
M
S2
S1
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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.
Explain the Weberian location theory and to what type of activities it is the most suitable.
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Share of Transport Costs in Product Prices and Average Haul Length
Stone, clay and glassPetroleum
Lumber and woodFood
FurniturePaper productsPrimary metals
TextilesFabricated metals
Transport equipmentRubber and plastics
TobaccoMachinery
InstrumentsApparel
Printing and publishingElectronics
Leather products
0 100 200 300 400 500 600 700
0 5 10 15 20 25 30
Haul length (miles)
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B – SCALE AND ORGANIZATION
1. Scale Economies2. Agglomeration Economies3. Vertical and Horizontal Integration
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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.
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Cost and Production of Ford Vehicles, 1908-1924
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
0.00
250,000.00
500,000.00
750,000.00
1,000,000.00
1,250,000.00
1,500,000.00
1,750,000.00
2,000,000.00
2,250,000.00
Cost ProductionRead this content
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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.
Plant size
Cost per unit
A
B
C
A- Small industry (restaurants, personal services)B- Large industry (banks, manufacturing)C- Very large industry (aircraft manufacturer, refinery)
Economies and diseconomies of scale are two sides of the same coin; explain.
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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.
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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).
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Transport and Co-Location
Activity
Terminal
Co-Location Zone
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3. Vertical Integration
Nature• Backward expansion (suppliers).• Forward expansion (customers).
Goal
• Lower costs.• Enhance and protect product quality.• Improve supply chain efficiency and coordination.
Issues• Higher cost structure and lower quality.• More difficult to adapt to changes.
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3. Vertical Integration
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3. Horizontal Integration
Nature• Acquiring or merging with competitors.• Business model replication.
Goal
• Economies of scale (greater market share).• Product differentiation (offer more products).• Oligopoly (less competition).
Issues• Less flexibility and less innovation. • Anti-monopolistic responses.
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3. Horizontal Integration
Acquiring company Acquired company Outcome
Porsche Volkswagen Owned a 35% in 2008
Daimler Benz Chrysler Merged in 1998
Kraft Foods Cadbury 2010
Quaker Oats Snapple 1997
PepsiCo Quaker Oats 2000 ($13B)
Pfizer Wyeth 2009 ($68B)
Pfizer Pharmacia Corporation 2002 ($60B)
Glaxo Wellcome SmithKline Beecham Merger (GlaxoSmithKline)
AT&T T-Mobile Blocked in 2011
AT&T Bell South Completed in 2006
Mittal Steel Arcelor 2006 ($20B)
HP Compaq 2002 ($24B)
Oracle PeopleSoft 2004 ($10B)
Delta Northwest Airlines 2008
United Airlines Continental 2010
JPMorgan Chase Bank One 2011 ($50B)
BP Amoco 1998 ($48B)
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3. Outsourcing
Nature• Some activities performed by another corporation.
Goal
• Reduce costs.• Focus on core competencies.
Issues• Dependency. • Loss of competency.
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3. Outsourcing
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Main Types of Economies in Production, Distribution and Consumption
Production Distribution
Consumption
Economies of transportation
Lower unit costs through accessibility to suppliers and customersEconomies of
scale
Lower unit distribution costs through transport chains management
Lower unit output costs through accessibility to suppliers and customersLower 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 goods and services with higher densities
Lower unit distribution costs with higher densities
Increased accessibility to labor (skills) with higher densities
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Economies of Transportation
Lowering transportation costs by being close to ponderous inputs
Lowering transportation costs by being close to markets
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Economies of Scale
Lowering production costs with larger output
Lowering transportation costs with larger conveyances (ships)
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Economies of Scope
Lowering unit output costs with more product types
Attract more customers with product variety
Lowering transportation costs buy combining loads
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Economies of Agglomeration
Lowering production costs with related firms in proximity (clusters)
Lowering the costs of providing services by clustering
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Economies of Density
Increased access to labor and customers with higher densities
Lower service costs (e.g. utilities, public transit)
Lower distribution costs with higher densities
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Essay: Economies
For each type of economies, provide an example.
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C – BUSINESS AND PRODUCT CYCLES1. Geographic Organization of Corporations2. The Product Cycle
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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).
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1. Geographic Organization of Corporations
■ Growth strategies• Very few firms grow beyond a certain size.• Access to capital a restraining factor.• Market potential (see Walmart).• 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).• Outsourcing and offshoring.
© Dr. Jean-Paul Rodrigue
The Growth of Large MultinationalsNe
w m
arke
t opp
ortu
nity • Resource,
technology, product
• Technology and InnovationBe
tter m
anag
emen
t • Less innovative sectors
• Mostly financial (holdings)
• Outsourcing
Stat
e su
ppor
t • Large government contracts (e.g. defense corporations)
• Corporate socialism (private profits / socialized losses)
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Locational Changes and Production Strategies
Intensification
Specialization
1Concentration
Rationalization andrelocation
X
XX
X
Production
Empl
oym
ent
Product AProduct BProduct CProduct D
X Closing
2
3
4 X
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Product Life CycleSa
les
Stage 1 Stage 2 Stage 3
Monopoly Competition
Research anddevelopment Maturity Decline
First competitors Mass production
Innovating firm
Compe
titor
s
Growth
Stage 4
PromotionIdea
Obsolescence
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Typical Business Cycle
Economic Growth+
-
EARLY MID LATE RECESSION• Activity rebounds• Credit growth• Profits growth• Low inventories• Rising sales
• Growth peaking• Fast credit growth• Profits peak• Inventory growth• Sales peak
• Growth slowing• Tightening credit• Declining profits• Inventory growth• Sales decline
• Falling activity• Limited credit• Low/negative profits• Inventory decline• Sales decline
RECOVERY EXPANSION CONTRACTION
Explain the relationships between product life cycles and business cycles.