Transcript Chapter 5: Theoretical Considerations • Key factors underlying location decisions • The Weberian model • Relationship between scale, location and technology • Basis for firm growth.

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
• The product cycle and changing location
requirements of firms
• Business cycles and long-waves
• Role of the state in shaping economic
landscapes
Basic Considerations
• “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. 131
• 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 2007
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
Corporate Headquarters 2008
Silicon Valley Headquarters Concentration
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 location
Material 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 location
M
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
C
Locate away from C
M2
An Example of (c)
P1 = 10, q1 = 2, r1 = .1
p2 = 5, q2 = 4, r2 = .1
M1
5
M2
rq = .1, q = 5
MI = 6/5 = 1.2
7
6.125
6.125
C
L
1
7
At M1: 40 + 0 +2.0 + 3.5 = 45.5
At M2: 40 + 1 + 0 + 3.5 = 44.5
At C: 40 + 1.4 +2.8 + 0 = 44.2
At L: 40 + 1.225 + 2.45 + .5 = 44.175
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
•C
•P
Critical
Isodapane
• L1
• M2
• L2
P - Transport Cost Minimum Location
L1, L2 - Low Labor Cost Locations
C - Market
M1, M2 - Raw Material Sites
Isotims and Isodapanes
Isodapanes:
Contours of
Total transport
Costs:
Here combination
From points
A and B
Isotims:
Contours of
Transport costs
From a given point
(Here point A)
Weber’s Approach to
Agglomeration Economies
$
a1
a2
Q1
Q2
Scale of Output
For some index of agglomeration (e.g. a1 or a2):
B
A
Critical
Isodapanes
C
Separate
Market
Regions
e.g. A,B,C,
or agglomeration
A
B
C
Competition for Location in
Agglomerations
S, T, and U are separate Markets, whose critical isodapanes are
SS, TT, and UU
U
S
S
S1
U
U1
T
T
T1
S
T
U
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
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
A
Q2
Q1
B
“Perfect” substitutability
• Q3
• Q2
• Q1
B
No substitution
Substitution possibilities
(Suggested by Figure 5.4)
Isoquants - Equal levels of output
Substitution is possible over a range
but factor proportions change
Factor
A
Q2
Q1
Factor B
Output
Levels
Substitution possibilities
Isocosts - Equal levels of cost,
C1<C2<C3
Q1 Q2
X is the ideal amount of A,
Y is the ideal amount of B
for production at level Q1
C3
A
C2
C1
X
Q2
C1
Y
C2
B
Q1
C3
Expansion Curve - joins
optimal factor combinations
across scale of output
Factor Y
Q1 C2
Q2 C3 Q3
C1
Expansion Path
Q2
C1 Q1 C2
Factor X
Q3
C3
Spacing of isoquants and
scale economies and/or
diseconomies
Scale Economies
Output
Linear
Diseconomies
Factor X
Isoquants displaying scale
economies & diseconomies
Factor Y
Factor Y
Diseconomies
Economies
30
20
10
Factor X
10
Factor X
20
30 40
Isard’s Substitution Model:
two point location model - pure materials
C
M
Distance from M
Transformation Line
Distance from C
Market
O
R P
Material A
Distance from A
S
Material B
V O X

T
P
Distance from A
Isard’s Substitution Model,
3 point location problem
R
X
O
P
R
S
Y
U
W
Distance from B
V
T
S
W
U
Distance from B
Y