Chapter 5: Theoretical Considerations

• Key factors underlying location decisions• The Weberian model• Relationship between scale, location and

technology• Basis for firm growth and development• The geographic organization of corporations• Social contexts and relations in the behavior of

firms• Business cycles and long-waves• Role of the state in shaping economic

landscapes

Basic Considerations• Theory: “A theory is what separates

description from explanation. A theory allows us to establish causality, to test hypotheses, to justify arguments and make claims to truth. Theories are simplifications about the world that allow us to gain understanding.” p. 150

• Alternative theoretical approaches: neoclassical, behavioral, political economy or structural

• Apply to all categories of industry, not just manufacturing

Factors of Location

• Labor (L)• Land (A)• Capital (C)• Managerial and Technical Skills (T)• Brought together in a production function: O = f(L,A,C,T)• Basic problem: How to combine factors, at

what scale of output, at what location, and serving what geographic markets?

Labor• Labor as an important determinant of location –

Why?• Required in all types of economic activity, but

significant variation in labor cost and use• Long-run substitution of capital for labor• Regional variation in labor costs → migration• Importance of labor productivity• “…the labor process is saturated with politics.”

Unionization rates (Figure 5.2); “right-to-work” legislation

• Capital-labor conflict & level of development

Unionization Rates in 2000

Land and Capital

• Local land cost related to accessibility (Figure 5.3)

• Intrametropolitan location & transportation system development

• Fixed capital vs. liquid or variable capital

• Spatial supply/demand conditions for capital

• Capital-labor substitution – Figure 5.4

Managerial & Technical Skills

• All businesses require these skills• Their deployment and formality varies

significantly by firm size• Concentrations of the largest corporate

headquarters in largest metro areas (Figure 5.5), but deconcentration and decentralization has occurred

• Clusters of industry-specific headquarters (Figure 5.6)

Major Corporate Headquarters 2004

Change in Headquarters Concentration

Weber’s Model of Manufacturing Industry

Production• Developed in the early 20th Century in

southern Germany

• Input factors are not ubiquitous

• This means that:– physical resources are not found everywhere– human labor is differentiated by skill & ability – capital availability varies– other inputs are also differentiated

Weber hypothesized that:

• Given market prices, producers would seek to minimize production costs to maximize profits.

• This leads to a taxonomy of production cost situations, considering

– factor costs– transport costs on factors– transport costs on finished goods

In the Weber Model, If producers Minimize Costs, then:

Min: ipiqi+ iriqidi +rqqdjj

e.g.

Minimize sum of factor costs + transport costs

on factor inputs + transport cost on shipment of product to the market

If factor costs are “given,” then the problem becomes how to minimize transport costs.

The Material Index Principle as a guide to manufacturing locationMaterial index = weight of localized material

weight of product (unit)

If M.I. < or = 1.0, locate at market

Material types:

“Pure” materials: no weight loss in production

“Weight-losing materials”

“ubiquities”

Weber’s Cost Minimizing Model & the Principle of Material Orientation

Example: 2T local materials

3T ubiquities

MI = 2/5 = .4, locate at market

Alternative Situations

(1) Ubiquities only, MI = 0, locate at market

(2) Pure Materials only

(a) 1 pure material, MI = 1

M C

Material Index Cases, Cont.(b) 1 pure material + ubiquities

MI < 1, locate at market

(c) several pure materials only

MI = 1, locate at market

(d) several pure materials + ubiquities

MI < 1, locate at market

(3) Weight Losing Materials

(a) 1 weight losing material

MI > 1, locate at material locationM C

Material Index Cases, Cont. (b) 1 weight losing material + ubiquities

If MI > 1, locate at material site

If MI <1, locate at market

If MI = 1 ?, probably at market

( c) Several weight losing materials

M1

M2

CLocate away from C

An Example of (c)

P1 = 10, q1 = 2, r1 = .1 rq = .1, q = 5

p2 = 5, q2 = 4, r2 = .1 MI = 6/5 = 1.2

M1 C

M2

7

7

5

At M1: 40 + 0 +2.0 + 3.5 = 45.5At M2: 40 + 1 + 0 + 3.5 = 44.5At C: 40 + 1.4 +2.8 + 0 = 44.2At L: 40 + 1.225 + 2.45 + .5 = 44.175

L

6.125

6.125

1

Material Index Situations, Cont.

(d) Several weight-losing materials + pure materials: MI decreases, outcomes as in (b) above

(e) Several weight-losing materials + pure

materials + ubiquities: outcomes as in (d)

Upshot: Most situations are like c, d, and e.

3 classic locational outcomes: 1. Market,

2. Resource, and 3. Intermediate, sometimes “footloose”

Labor Cost Deviation

• M1

• M2

• C

• P

• L1 • L2

P - Transport Cost Minimum LocationL1, L2 - Low Labor Cost LocationsC - MarketM1, M2 - Raw Material Sites

CriticalIsodapane

Isotims and Isodapanes

Isotims:Contours ofTransport costsFrom a given point(Here point A)

Isodapanes:Contours of Total transportCosts:Here combinationFrom pointsA and B

Weber’s Approach to Agglomeration Economies

Scale of Output

$

Q1 Q2

a1 a2

For some index of agglomeration (e.g. a1 or a2):

A

C

BSeparateMarket Regionse.g. A,B,C,or agglomeration

A B

CCriticalIsodapanes

Competition for Location in Agglomerations

S

T

U

T T

S

SU

U

S1

T1

U1

S, T, and U can get agglomeration savings at T1, S1, and U1,but need to bargain to move to a location realizing them in

S, T, and U are separate Markets, whose critical isodapanes areSS, TT, and UU

Critique of Weber

• Conception of market demand limited• Transport costs not defined realistically• Labor is typically mobile, not fixed in

space• Many manufacturing plants produce

complex sets of products with complex sets of inputs

• Treatment of agglomeration is rigid• Lösch: Location based on maximum

profit, not minimum cost

Isard’s Substitution Framework

Input-factors can often be used substitutability

although the degree of substitution can vary by scale and by technology

A

B

Q1

Q2

“Perfect” substitutability

A

B

••

•

No substitution

Q1

Q2

Q3

Substitution possibilities(Suggested by Figure 5.3)

Isoquants - Equal levels of output

Substitution is possible over a range

FactorA

Factor B

Q1

Q2

but factor proportions change

OutputLevels

Substitution possibilities

Isocosts - Equal levels of cost, C1<C2<C3

A

B

Q1

Q2

Q1Q2

C1

C1 C2C3

C2

C3

Y

X

X is the ideal amount of A,Y is the ideal amount of Bfor production at level Q1

Expansion Curve - joins optimal factor combinations

across scale of output

Factor X

Factor Y

Q1

Q2

Q3

Q1

Q2Q3

C1

C1

C2

C2

C3

C3

Expansion Path

Spacing of isoquants and scale economies and/or

diseconomies

Factor X

Out

put

Diseconomies

Linear

Scale Economies

Isoquants displaying scale economies & diseconomies

Factor XFactor X

Fac

tor

Y

Fac

tor

Y

10 2030

1020 30 40

Diseconomies

Economies

Isard’s Substitution Model: two point location model - pure materials

M C

Transformation Line

Distan

ce from M

Distance from C

Isard’s Substitution Model, 3 point location problem

Market

Material A

Material BS

O

R P

Distance from B

Dis

tan

ce f

rom

A

O

P

R

S

T

UW

Y

V X Distance from B

Dis

tan

ce f

rom

A X

Y

V

W

T

U

OP

RS