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Understanding how industries/Firms locate in diff places and why -lec 3 jan 20th.docx

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Political Science
Harald Bathelt

Jan 27th 2014 Table of contents 1. Traditional cost minimisation 2. Agglomeration economies 3. Competitive location decisions 4. Spatial cost curves 5. Behavioural location analysis 6. Location decision as a search process 7. Critique of traditional location theory 8. Complex location factors and national competitive advantage Understanding how industries/Firms locate in diff places and why  Countries develop according to the cities 1. Traditional cost minimisation  Alfred Weber (1909) views industrial location decisions as optimisation processes  Nominated to become the first president of Germany  Dominate industries were all heavy industries- steel was a very dominate material  Wanted to find the optimal places for such industries  Came up with a really good model with good variables  Assumes a completely homogenous space except raw materials  Assumptions of Weber’s analysis: o 1 single-plant firm looks for an optimal location o 2 raw materials are used to produce one product- once the products r finished they will be shipped to one consumption place  Distinguished b/w 2 types of materials- Weber’s, location triangle- gross localized materials r easy to access – material u have to mine  The other he calls pure localized materials  If u have 3 types of martials u can chose where they go o Technological/spatial conditions do not differ between places (a) Step 1: only transportation costs are variable  Search for a location that minimises transportation costs  It is to be found within the so-called location triangle  Location decision depends on the characteristics of raw materials o Ubiquities (everywhere available at the same cost) - the optimal location will be on the spot on the site where the transportation costs r minimal. U an always locate the materials in eth market o Localised materials (pure vs. gross localised materials)- the optimal place will also be in eth market cause the transportation costs will also be less cause its eth shortest transport distance 1. Traditional cost minimisation (b) Step 2: introducing spatially variable labour costs  Labor costs is a variable- a substantial amount of cost can be saved if u produce it where labor cost is less  Weber constructs lines of equal transportation costs around each raw material location (isotimes)- lines of equal transportation costs. Then add up all 3 systems and u and up with a mountain of transportation cost. The cheapest poit of eth valley is where P is.  Additional transportation costs that u would have to pay when going away from P,  Spatial aggregation leads to “transportation cost mountains”  Aso-called critical isodapane is identified to make decisions: (a) Staying at the location of minimal transportation costs, or (b) Relocating to another location with lower labour costs (b) Step 3: introducing agglomeration costs  4 diff firms- if firms cluster in eth same place, they can save money on transportation if they locate together  Only transportation and labor cost for locating close to the firms  Cost advantages are assumed to result from the agglomeration of firms of an industry (e.g. joint input sourcing)  This leads to a reinvestigation of the location decision 2. Agglomeration economies  Study of Hoover (1937) of the U.S. shoe/leather industry  Identification of different types of “economies of concentration” (a) Economies of scale (internal economies)  Average production cost decrease the more u produce  Very powerful mechanisms in eth economy b/c of eth cost saving advantages  Drives economy to a great deal  Consequence- there r relatively few large producers  Large imbalance b/c of this effect (b) Agglomeration economies (external economies) o Localisation economies –when firms in eth same industries locate together. Huge labor market developing naturally o Urbanisation economies- derive from diversity  Economic benefit of diversity –economies of big cities. Diff skills and diff companies  Lots of manufacturing industries- it can benefit if you have diversity in labor markets  Good to have combinations of selling a variety of goods. Selling shoes and selling groceries. EX- Walmart (b) New economies of scope (Scott 1988)  Markets change drastically  Refers to eth situation of how production is organized  Produce large production of producrs but at small cost  Lots of buyers in diff locations   Segmentation of markets requires large product varieties  In part, economies of scale become less important  New economies of scope result from multi-purpose machinery which can be flexibly configured o Production of larger variety at a single location, instead of specialisation between firms/locations 3. Competitive location decisions  Imagine u have a liner market- ice cream sellers  Minimize effort for the consumer  Overall, most ppl will have to travel more than before if they park by each other in the centre. So if they r both in the centre they lose  Hotelling (1929) investigated the relation of competition and strategic decision making  Example: two ice-cream sellers (A/B) make business at a beach  Question: where should they have their locations?  Ideally,Awould locate close to the one end, B close to the other  Visitors of the beach buy ice-cream at the closest seller  BUT: seller Amight move a bit closer toward the centre of the beach to intrude into the market area of B  Seller B might react by also moving closer to the centre  At the end, both would locate in the centre: here, none could expand their market at the expense of the other  BUT: this is not optimal in terms of overall costs 4. Spatial cost curves  Revenue higher than eth cost margins of location for profitable production  What happens when the cost remain 4eth same – the revenue shift upwards  What if eth state wants to play a part to increase jobs- the effect of such subsidies r bound  Smith (1971) conceptualised space cost curves in order to analyse different influences on location decisions  Focus of his analysis is the identification of spatial margins of profitable production, instead of just one optimal location  This neoclassical approach investigates the effects of different variables on location decisions: o Increase of product price o Increase of transportation costs o Improvement of management capabilities o State subsidies 5. Behavioural location analysis  Some places provide deficits  2 impacts on industrial locations besides cost  Looks at role of knowledge- how knowledge can be used and the availability of knowledge  When firms r located in eth best place they have the best knowledge to expand in optimal location  Many firms don’t have enough information and cannot draw the right conclusion  Might end up in locations outside the profit zones  What eth model wanted to show is that I fthey want to maximize income, they might not real optimal location cause they don’t have enough information  Pred (1967) applies a behav
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