Location of Production

6 Key excerpts on "Location of Production"

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  eBook - ePub

  Regional Economics

  • Roberta Capello(Author)
  • 2015(Publication Date)
  • Taylor & Francis

    (Publisher)

  Location theory Physical-metric space Passage contains an image

  1Agglomeration and location

  1.1 Agglomeration economies and transportation costs

  Space is inextricably bound up with economic activity. This statement is prompted by the rather banal observation that all forms of production require space. But it also derives from the fact that not all geographical areas afford the same opportunities for production and development. The uneven distribution of raw materials, production factors (capital and labour) and demand (final goods markets) requires firms, and productive activities in general, to select their locations just as they select their production factors and technology. And just as the choice of the factors and technology decisively influences the productive capacity of firms and their position on the market, so location crucially determines the productive capacities of firms and, in aggregate terms, of the geographical areas in which they are located. To ignore this dimension – as traditional economic theory does – is to disregard a factor that sheds significant light on the mechanisms underlying firms’ behaviour and economic activities in general, which drive economic development.1

  The notion of space was first introduced into economic analysis by theories on industrial location. The aim of these theories was to explain location choices by considering the two great economic forces that organize activities in space: transportation costs and agglomeration economies. These forces push the location process in opposite directions since they simultaneously induce both the dispersion and the spatial concentration of production.2

  It is because of agglomeration economies that spatial concentration comes about. Widely used in regional economics, the term ‘agglomeration economies’ denotes all economic advantages accruing to firms from concentrated location close to other firms: reduced production costs due to large plant size; the presence of advanced and specialized services; the availability of fixed social capital (e.g. infrastructures); the presence of skilled labour and of managerial expertise, and of a broad and specialized intermediate goods market. All of these are resources whose availability, or production, require a high level of demand.

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  Industrial Location and Community Development

  • Barry M. Moriarty(Author)
  • 2018(Publication Date)
  • The University of North Carolina Press

    (Publisher)

  Gross localized raw materials (those found at specific locations but that contain large amounts of impurities that must be disposed of) require that plants be located close to the material site in order to avoid transporting waste material. For example, the copper refiner who processes a highly localized ore that is less than 5 percent pure is strongly attracted to a location near the copper deposit. With the passage of time more and more industries have shifted from using basic raw materials as major inputs to using finished component parts. Such components are actually localized pure raw materials, which are more easily transported than the fully assembled final product. Firms manufacturing such products have a great deal of flexibility in the locational decision.

  Table 5.1. Total Payroll as a Percentage of Value of Shipments, 1972

  A major factor in the cost structure and profit margin of a manufacturing firm is the geographic location of its markets. Firms in many industries, such as the automobile industry, have close linkages to related industries, which constitute the sole market for their product. The market may actually consist of a single location, making geographic proximity vital. Often extensive interindustry linkages have evolved that are closely related to a complex system of firms that serve as markets for one another’s production. Cities such as Detroit have emerged as centers of specialized production because of the need for geographic proximity among suppliers.

  If the manufacturer may be supplying consumer products for a set of warehouses, retail outlets, or households, the market is better viewed as an area. At the regional search level, consideration of the geographic extent of this area can be a crucial location factor, a factor that has too often been neglected; consequently, the costs of distributing products have been underestimated. Such miscalculations can result in overlooking some customers who may be within the economical market range of the industrial plant.

  Historically, manufacturing has been greatly affected by transportation linkages and access. Since the beginning of the Industrial Revolution man’s ability to overcome the friction of distance has continually improved. Initially, bulky products could be moved only by water and so, ports necessarily developed as important break-in-bulk industrial locations. The advent of the railroad greatly influenced the number of potential sites for manufacturing. The combination of rail and water spurred the development of extensive manufacturing complexes along the East Coast and the Great Lakes. However, as the country switched from railroad to interstate highway freight, new manufacturing cities emerged (table 5.2

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  Regional Policy

  A European Approach

  • Norbert Vanhove(Author)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  4 Micro and Macro-Aspects of the Location of Firms Introduction Theories about the location of firms and theories about the regional distribution of industries are in fact closely related to one another. Although the location of a firm is of course, a precisely defined concept, an exact point in space, for many reasons the region within which a location takes place is a much more convenient geographical concept to handle, particularly since from many a point of view knowledge of the exact location is irrelevant for a proper regional analysis. An important restriction should, of course, be made here. Regional analysis may serve different purposes. An analysis of the location of shops requires much smaller regions than one of the location of international airports. The relevant size of a region depends on the activity that is being considered. This should always be kept in mind whenever a study of a particular activity is undertaken. In the next chapter we shall have the opportunity to explain the consequences in some more detail. Weber, the father of location theory 1 2 A location factor is, according to Weber, ’ein seiner Art nach scharf begrenzter Kostenvorteil, der einen bestimmten Industrieprozess hierhin oder dorthin zieht’. In his analysis he makes a distinction between factors that determine the distribution of industries among regions (general location factors) and those which determine location within a region (specific factors). He considers the costs of the inputs (raw materials), labour, and transport. As price differences of raw materials can be reduced to differences in the costs of transporting these raw materials, only two differences in costs are actually relevant: those of labour and transport. When there are no differences in labour costs, the location chosen will coincide with the point of minimum transportation costs (determined by weight and distance). The point of optimum location is in general determined by three factors : 148

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  Chinese Foreign Direct Investment

  A Subnational Perspective on Location

  • Tao Qu, Milford B. Green(Authors)
  • 2018(Publication Date)
  • Taylor & Francis

    (Publisher)

  As the tactical locational decision of MNEs is the major concern of this book, the LSVs will, from now on, exclusively refer to variables that are of spatial variation and exert some impact on the MNEs’ locational choices within a host country. Following is an elaboration of some of the most important LSVs.

  Factors of production

  Economic factors such as land (including natural resources), labor, capital, and raw materials constitute a region’s aggregate production function. They combine to determine the maximum production potential of a region given certain technologies. Since MNEs are conduits of capital and technology, the cost of labor, land, and availability of raw materials and resources may be relevant.

  The importance of labor as a locational factor can be shown with two simple statistics: wages and salaries of workers as a proportion of production cost and the wage difference between countries and spatial variation of labor cost within one country (Dicken and Lloyd, 1990, pp. 156 –161 ). In the US, the proportion of wages and salaries of production workers accounted for one-fourth of the value added for all manufacturing industries in 1982. This percentage increases to 46 per cent if all the wages and salaries of non-production workers are also included. Despite mechanization and automation of production processes, labor cost will probably maintain the overall cost significance as a production factor. This is because mechanization and automation cause the gradual shift of labor force from blue-collar to white collar rather than eliminate labor as a fundamental production element.

  The cost of labor as a locational factor is well founded in locational theory (Smith, 1981) and macroeconomic theory of foreign direct investment (Kojima, 1982). In classical location theory, labor is treated as a general factor that would divert the least transportation cost location if the saving in labor is enough to offset the additional transportation cost incurred by the change of location. Obviously, the immobility of labor is assumed. Within the macroeconomic analysis of foreign direct investment, the comparative disadvantages of some industries in developed countries due to high labor cost and resource deficiency are considered the main reasons for these industries to shift production abroad. Consequently, labor cost should be one of the most important factors affecting the location of foreign direct investment, especially for labor intensive and export-oriented foreign direct investment. These industries are also industries of standardized technology and production processes.

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  Internationalisation Theory and Technological Accumulation

  An Investigation of Multinational Affiliates in East Germany

  • B. Jindra(Author)
  • 2011(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  5.2 Theory and international empirical evidence In principle, region-specific locational determinants of firms can be grouped into market, agglomeration, production and public-policy related factors. Market size and income of the region itself, as well as neighbour- ing regions, signal potential demand for the investor. Production fac- tors affect the cost side and are related to the supply, price and quality of regional input markets such as labour, transport, land, capital and technology. The existence of agglomeration economies in turn affects production factors through technological and pecuniary externalities, such as access to a more stable labour market, availability of intermediate goods, production services, skilled manpower and knowledge spillover between adjacent firms. Thus one can discern the effects related to the regional agglomeration of domestic and foreign firms. Finally, location choice might also be affected by public policy in the form of investment incentives and taxation. Market and demand related factors The size of the regional market should make the location of multinational firms relatively more profitable, as larger sales would allow investors to Location Choice of Multinationals 55 recover the fixed set-up cost of foreign production (Devereux et al. 2007; Basile et al. 2008). Head et al. (1999) argue that market size matters for foreign manufacturers even more if the transport cost of the good produced is high. However, regional units can be of a relatively small size and multinational investors might target consumers far beyond the frontier of the region. Following Harris (1954) or the theory of export- platform FDI (Neary 2002), a number of authors consider, in addition to the regional market size, the market potential measured by a distance- weighted matrix of the market size of all other regions (Head et al. 1999; Head and Meyer 2004; Crozet et al. 2004; Basile et al. 2008).

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  The Anatomy of Job Loss (Routledge Revivals)

  The How, Why and Where of Employment Decline

  • Doreen Massey, Richard Meegan(Authors)
  • 2014(Publication Date)
  • Taylor & Francis

    (Publisher)

  When it is rationalization through which job loss takes place, the geographical pattern of employment decline is determined by the kind of criteria used to decide where capacity is to be cut. Instead of the usual ‘location decision’, where to put a new plant, the question here is which factories, or parts of factories, to close. At its simplest, rationalization follows a straightforward scrapping model. That is, in some notional pure form, the abandonment of capacity will take place according to a profitability criterion, with the least profitable capacity being scrapped first. In order to get any further with understanding the geography of decline under rationalization, then, it is necessary to identify the main determinants of the level of profitability. These can be grouped into two types. First, there are those that are ‘internal’ to the production process: characteristics of the factory itself. Second, there are those that are ‘external’: characteristics of the factory’s location. Among the former – characteristics of production – all kinds of things may be important. In their investigations of shifting patterns of employment amongst US cities, Varaiya and Wiseman (1978) found clear indications of a pattern of scrapping based on age and labour productivity, with serious implications for employment prospects in the older cities of the North-East states. Size of plant may also be important; in a previous study (Massey and Meegan 1979a) we found that, because of economies of scale in both production and management, small outlying factories were often most vulnerable to closure, as companies concentrated their remaining production in their main factories. Clearly, in that precise form, this is an option only open to multi-plant firms. A similar result may well be arrived at, however, in a sector entirely composed of single-plant firms if they are of different sizes, and there exist economies of scale. The second group of influences on profitability consists of those that relate to location. These may include such things as geographical variations in labour type, militancy and cost; they may include rent levels, and the various sorts of accessibility, for instance to market.

  In any real case, both these groups of influences (production and geography) are likely to be involved in explaining variations in profitability. The outcome – which capacity is least profitable and which therefore is closed – will depend on the overall effect of the two together. Moreover, the two factors may well interact, different techniques, for instance, being used in different locations. It is nonetheless possible, analytically, to separate the two sets of influences and, roughly, to establish their relative significance in order to clarify the actual role of location factors in employment decline. The implications of the two sets of factors are clearly different. If levels of profitability are heavily dependent on locational characteristics, this may have more general implications for profitable production in the area in question. But a predominance of production characteristics does not necessarily have such implications. This is important because production characteristics, such as age or size of plant, may well exhibit geographical regularity. Geographical regularity does not

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