Chapter 5: Theoretical Considerations Key factors underlying location decisions The Weberian model...
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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
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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
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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?
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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
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Unionization Rates in 2000
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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
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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)
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Major Corporate Headquarters 2004
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Change in Headquarters Concentration
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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
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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
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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.
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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”
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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
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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
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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
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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
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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”
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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
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Isotims and Isodapanes
Isotims:Contours ofTransport costsFrom a given point(Here point A)
Isodapanes:Contours of Total transportCosts:Here combinationFrom pointsA and B
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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
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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
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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
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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
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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
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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
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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
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Spacing of isoquants and scale economies and/or
diseconomies
Factor X
Out
put
Diseconomies
Linear
Scale Economies
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Isoquants displaying scale economies & diseconomies
Factor XFactor X
Fac
tor
Y
Fac
tor
Y
10 2030
1020 30 40
Diseconomies
Economies
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Isard’s Substitution Model: two point location model - pure materials
M C
Transformation Line
Distan
ce from M
Distance from C
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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