Chapter4

Location Conditions and Location Factors: 

Location Conditions and Location Factors Presentation by Jelena Jeknić and Florian Winkler

Why study industry locations…: 

Why study industry locations… Very important role in economic growth Important for understanding local, regional and national economic development policies Highly uneven geographical distribution of manufacturing activity Reasons for industrial locations are complex… Therefore we need different approaches to collectively try to interpret industry locations

3 main theoretical approaches in studying industrial locations: 

3 main theoretical approaches in studying industrial locations As location is a part of an investment decision made by individual firms, any theoretical explanation of location must invoke a theory of the firm… Neoclassical Behavioral Institutional / Managerial FIRM>Assembles materials and services in factories in order to add value by the application of factors of production (labor, land, capital and entrepreneurship)

Location conditions - location factors: 

Location conditions - location factors Synonyms Distinction (Nishioka & Krumme, 1973) Location conditions are the differences among locations that exist for all industries, while location factors refer to the specific importance that is attached to such differences by individual firms when choosing locations for specific factories.

Typology of location conditions : 

Typology of location conditions Transportation facilities Materials Markets Labor External economies of scale Energy Community infrastructure Capital Land / Buildings Environment Government policy There are 11 broad categories of location conditions that are recognized:

Complexity of location conditions : 

Complexity of location conditions Each location condition has its tangible and intangible (non-tangible) features This distinction between tangible and non-tangible is based on ease of quantification in terms of costs E.g. in case of labor, locations vary in terms of different characteristics – tangible: wages, hiring costs, etc. and non-tangible: attitudes, unionization, skills… So… location conditions are hard to measure Tangible cost-based factors – interval scales Intangible factors – ordinal or nominal scale Ceteris paribus Various categories of location are not mutually exclusive Tangible – that can be clearly seen to exist, that you can touch and feel

Transportation, materials & markets: 

Transportation, materials & markets Freight/cargo rates, transportation costs, transfer costs, which all have tangible (measurable) nature are connecting these 3 conditions They are determined by distance, the physical characteristics of the goods (weight, size, quantity, perish ability), the value of goods, the mode of transportation (e.g. road, rail, air, pipeline, water), the existence of competition, back-haul possibilities. Transfer costs include both direct (above mentioned) and indirect cost (insurance, interest charges on capital costs of materials and goods, losses resulting from damage in transit). Production costs Servicing costs, market potential Intangible: Frequency, speed and reliability of the distribution system (suppliers, distributors), the need to provide fast and reliable servicing requirements Security, quality Personal contacts, tastes, rivals All manufacturing activities use transport services to access inputs and distribute outputs which are highly unevenly distributed; locations vary in terms of accessibility to materials and markets

Labor: 

Labor Tangible: Labor costs wages, non-wage benefits (medical plans, unemployment insurance, vacation time and pay, pension schemas), hiring and training costs Vary by industry, union and non-union sector, gender and location Intangible: Attitude, willingness to work Gender, ethnicity, The degree/level of unionization, Skills and productivity (influence of technological development) Type, turnover, availability All manufacturing activities include labor

External economies of scale : 

External economies of scale Urbanization – advantages/disadvantages of locating in larger rather than smaller city Intangible: - & + externalities – unintended consequences of decisions by firms on other firms (positive: access to larger labor polls and access to wider range of business services, etc. negative: crime, pollution…) Localization – advantages/disadvantages of locating among the concentration of firms in the same and related industries – industrial districts Intangible: labor skills (low recruitment, turnover and training costs), information sharing (compete and co-operate in sharing info on markets and technology), common services (marketing, research and development…), established reputation for goods (lower costs)

Energy: 

Energy Tangible COSTS Water power Steam power Coal Electrical power Oil Nuclear power Hydropower sites Intangible RELIABILITY DIVERSITY Before Industrial Revolution an important locative condition The general tendency for energy to decline as a location condition

Community infrastructure and amenity: 

Community infrastructure and amenity EOC – economic overhead capital: roads, railways, port facilities, power lines, service facilities… SOC – social overhead capital: schools, universities, hospitals, libraries… More sophisticated community amenities regarding health, recreation, aesthetics – in advanced countries these amenities are to become significant location condition in relation to abilities to hire skilled professionals and workers. Tangible: Capital costs Taxes Intangible: Quality Diversity Amenity is a feature that makes a place pleasant, comfortable or easy to live in. Infrastructure is enormously expensive to build. All manufacturing activities require access to community infrastructure, both EOC and SOC

Capital: 

Capital Physical (fixed) capital Buildings and equipment Tangible: These costs are measured in construction costs and design costs (strongly affected by site characteristics), rents Intangible: Availability, lay-out age Financial capital Highly mobile Interest rates vary by location Tangible: Borrowing costs Intangible: Availability

Land: 

Land Tangible: costs (varies considerably within as well among countries, highest cost are recorded in larger metropolitan areas) Intangible: size, shape, design, access, services (whether or not they are serviced), lay-out, availability.

Environment: 

Environment Spatial variations in environmental amenities Emerging role of environmental amenities as accessibility to various outdoor recreational pursuits (hunting, fishing, hiking, golfing, sailing, diving, mountaineering…) and the reliability of nice, warm, sunny weather Intangible – working preferences Spatial variations in environmental policies and regulations In recent years there has been growing interest in the role of environment regulations especially with the respect to air and water pollution Tangible – locationally variable costs varying among industries, taxes Intangible – local attitudes (concerns, laws - maintaining aesthetics, quality of life, spiritual values)

Government policy: 

Government policy Wide variety of ways how government influences the nature of local conditions; 3 types of policies by Watts (1987): Explicit – by national and supranational governments which seek to stimulate industrialization in specific regions (incentives: grants, income tax breaks, low-interest loans, subsidies) Implicit – primarily national terms (trade and tariffs policies, defense policies) Derived spatial policies – whenever regional and local governments pursue different industrial policies – local business climate Tangible: incentives, penalties, taxes Intangible: attitude, stability, business climate

What industry seeks in places: 

What industry seeks in places Important factors vary by: produced product personal values organization-specific constraints Many different surveys, varying geographical (scale/national context) number of firms interviewed “particular” and “general” surveys different factors

The product cycle model I: 

The product cycle model I

The product cycle model II: 

The product cycle model II Over the product cycle the best location shifts from high- to low-wage countries. Critics: in reality product cycles take on many different forms increasingly rapid product cycles and increasing automation of late-stage processes are reducing the attractiveness of dispersal to poor countries oversimplifies the range of location factors affecting branch plants

Location: 

Location Single-plant firms: normally all units at one location Often the city where the owner grew up (center of life) Multi-plant firms: normally separation of the different units

Head-office location factors: 

Head-office location factors Major metropolitan centers: downtown cores or central business districts Important factors: 1. business contacts (e.g. suppliers) 2. availability and quality of office space […] 3. prestige 4. available amenities 5. rental costs 6. availability of labor

R&D location factors: 

R&D location factors Important factors for management: 1. environmental quality / quality of public education 3. community business attitudes / availability of professionals 5. major airport 6. university / cost of housing Important factors for employees: 1. cost of housing 2. environmental quality 3. recreational opportunities

High-Tech location factors: 

High-Tech location factors Different surveys with different results, most important: labor skills + availability home of founder academic institutions (more important in surveys if university is near!) access to markets and suppliers

Branch plants location factors: 

Branch plants location factors Essential or important for 70% + > Labor climate Availability of semi and unskilled labor Extent of labor unionisation Labor costs Labor productivity Community attitude towards industry Suitability of motor freight service Suitability of access roads and highways Suitability of electrical service Room for expansion

Factory closure factors: 

Factory closure factors Cessation closure: quit the production of one product Selective closure: close one or more factories which produce this product, but also keep one or more open Important factors for selective closures: site features number of activities on site age of the building labor relations size of the site low labor productivity

Conclusion: 

Conclusion Many factors which influence factory locations Many of these factors are of a subjective nature The product cycle model does over-simplify Labor costs are important, but aren’t nearly the only factor 2 firms located in the same area, can be there because of different motivations