Industrial Geography 3
Chapter Two Part Two
Models of industrial location
Models of industrial location are analytical frameworks that help understand the factors and considerations involved in determining the optimal location for industrial activities. These models provide insights into the economic, geographical, and social factors that influence industrial location decisions. There are several models of industrial location, including:
Weber's Least Cost Theory: Proposed by German economist Alfred Weber in 1909, Weber's Least Cost Theory focuses on minimising production costs as the primary determinant of industrial location. According to this theory, industries tend to locate where the total cost of production is the lowest, considering factors such as transportation costs, labour costs, and raw material availability. Weber identified three main determinants of industrial location: transportation costs, labour costs, and agglomeration economies. This model emphasizes the importance of achieving economies of scale and minimising transportation costs in determining industrial locations.
Hotelling's Model of Spatial Competition: Developed by American economist Harold Hotelling in 1929, Hotelling's Model of Spatial Competition explores the location decisions of firms in a competitive market. The model assumes that firms seek to maximise their market share and profits by strategically choosing their location along a linear market space. Hotelling's model highlights the concept of spatial differentiation and suggests that firms will tend to cluster together to capture a larger share of the market. The model also demonstrates that competition and the desire to differentiate products can lead to a balanced distribution of firms across the market space.
Losch's Model of Profit Maximization: Proposed by German economist August Lösch in 1954, Losch's Model of Profit Maximization focuses on the optimization of profits in industrial location decisions. This model introduces the concept of "locational rent," which represents the extra revenue a firm can earn by locating in a particular area due to market access, labour availability, or resource availability. The model suggests that firms will choose locations where they can maximize their profits by considering factors such as market demand, production costs, and access to resources. Losch's model emphasizes the role of market size and potential profit in determining industrial location.
Central Place Theory: Developed by German geographer Walter Christaller in the 1930s, Central Place Theory explores the spatial distribution of cities and the provision of goods and services in an economic system. The theory suggests that cities and towns serve as central places that provide goods and services to surrounding areas. According to the theory, the location and size of these central places are influenced by factors such as transportation networks, market demand, and competition. Central Place Theory helps understand the hierarchical relationships among cities and the functional specialisation based on the range and threshold of goods and services offered.
These models of industrial location provide theoretical frameworks to analyse and understand the factors that shape the spatial distribution of industries. While each model emphasizes different aspects and factors, they collectively contribute to our understanding of the economic, geographic, and social considerations involved in industrial location decisions. These models continue to be used as valuable tools for analysing industrial location patterns and making informed decisions in the field of economic geography.
Some industrial location models examined in more detail
Weber's Least Cost Theory, proposed by German economist Alfred Weber in 1909, is an economic model that focuses on minimizing production costs as the primary determinant of industrial location. The theory suggests that industries tend to locate in places where the total cost of production is the lowest, taking into account factors such as transportation costs, labour costs, and raw material availability. Weber identified three main determinants of industrial location: transportation costs, labour costs, and agglomeration economies.
Transportation Costs: Weber emphasized the significance of transportation costs in determining industrial location. According to his theory, firms aim to minimise transportation expenses by locating their facilities near the sources of raw materials or the markets for their finished products. The cost of transporting raw materials to the production site and the cost of distributing the final goods to consumers play a crucial role in this decision.
Weight-Gaining Industries: Industries that produce goods that increase in weight during the manufacturing process, such as beverage bottling or automobile assembly, tend to locate near their markets. This is because the cost of transporting heavier finished products is higher compared to the transportation of lighter raw materials.
Weight-Losing Industries: Industries that produce goods that decrease in weight during the manufacturing process, such as paper mills or steel production, locate near the sources of raw materials. This minimises the transportation costs associated with moving heavy raw materials.
Labour Costs: Weber also considered labour costs as a significant factor in industrial location decisions. Labour costs include wages, productivity levels, and the availability of skilled or unskilled workers. The theory suggests that firms seek to minimize labor costs by locating in regions where wages are lower or where labour productivity is higher.
Labour-Intensive Industries: Industries that require a large labour force, such as textile manufacturing or garment production, tend to locate in regions with lower wage levels. This enables firms to take advantage of lower labour costs and maintain their competitiveness.
Capital-Intensive Industries: Industries that rely more on capital and technology than on labour, such as semiconductor manufacturing or pharmaceutical production, place less emphasis on labour costs. Instead, they focus on factors such as technological expertise, infrastructure, and access to research institutions.
Agglomeration Economies: Weber recognized the importance of agglomeration economies, which refer to the cost advantages gained by firms through clustering in a specific location. These economies arise due to factors such as a specialised labour force, knowledge spill-overs, shared infrastructure, and the availability of supporting industries. Agglomeration economies can lead to cost savings and increased productivity for firms located in industrial clusters.
Weber's Least Cost Theory assumes perfect competition, homogeneous products, and a static economic environment. While it simplifies the complex dynamics of industrial location decisions, the theory provides a valuable framework for understanding the trade-offs and considerations involved. However, it is important to note that in reality, industrial location decisions are influenced by a broader range of factors, including market demand, government policies, infrastructure, and access to markets. Despite its limitations, Weber's Least Cost Theory continues to be influential in the field of economic geography and provides insights into the fundamental factors that shape the spatial distribution of industries.
Hotelling's Model of Spatial Competition, developed by American economist Harold Hotelling in 1929, is a theoretical framework that explores the location decisions of competing firms in a market. The model assumes that firms aim to maximize their market share and profits by strategically choosing their location along a linear market space. It highlights the concept of spatial differentiation and its impact on competition and market outcomes.
Key Assumptions:
Linear Market: The model assumes a linear market space represented by a line segment, with consumers uniformly distributed along it.
Homogeneous Products: Firms offer identical or perfect substitutes for their products. There is no product differentiation based on quality, features, or branding.
Consumers' Preferences: Consumers make purchase decisions based on their proximity to the location of firms. They choose the nearest firm to minimize transportation costs.
Fixed Costs: The model assumes that firms face fixed costs, which are incurred regardless of the location chosen.
Key Concepts:
Spatial Differentiation: Hotelling's model emphasises the strategic choices firms make regarding their location along the linear market space. Firms aim to differentiate themselves by selecting a position that is different from their competitors. However, since products are homogeneous, the only differentiating factor is the location itself. The model assumes that firms will locate equidistantly along the market space to maximize their market share.
Competition and Market Outcomes: The model demonstrates that competition between firms leads to a "prisoner's dilemma" scenario. If one firm chooses to move its location to capture a larger market share, the other firm is compelled to do the same to prevent losing customers. This creates a competitive cycle where both firms gradually move towards the centre of the market space. As a result, firms end up clustering together, and the market becomes more homogeneous in terms of the locations of competing firms.
Consequences of Spatial Differentiation: Hotelling's model highlights the consequences of spatial differentiation and its impact on consumer welfare and profits. As firms move closer together, they capture smaller market shares since they are equidistant from each other. Consumers also face reduced product variety since all firms offer the same product. This results in lower consumer welfare and reduced profits for firms.
Extensions and Applications: Hotelling's model has been extended and applied in various contexts to explore additional factors and dynamics of spatial competition. Some extensions include:
Multiple Dimensions: The model has been extended to account for multiple dimensions, where firms can differentiate their products based on multiple attributes.
Endogenous Transport Costs: Extensions consider variable transport costs based on the location chosen by firms, rather than assuming uniform transportation costs.
Oligopolistic Competition: The model has been adapted to analyse the behaviour of a few dominant firms in an oligopolistic market structure.
The model has found applications in various fields, including economics, marketing, political science, and urban planning. It provides insights into the strategic behaviour of firms and the implications of spatial differentiation in competitive markets. While the assumptions of Hotelling's Model may not fully capture the complexity of real-world market dynamics, it serves as a foundational framework for understanding the relationship between competition, product differentiation, and location choices in spatially distributed markets.
Losch's Model of Profit Maximisation, proposed by German economist August Lösch in 1954, is an economic model that focuses on understanding the location decisions of firms based on the goal of maximising profits. The model considers factors such as market demand, production costs, and access to resources in determining the optimal location for a firm's operations.
Key Assumptions:
Perfect Competition: The model assumes a perfectly competitive market where firms are price-takers and cannot influence market prices.
Homogeneous Products: Firms produce identical or perfect substitutes for their products. There is no differentiation based on quality, features, or branding.
Fixed Production Costs: The model assumes that firms face fixed production costs, which are incurred regardless of the location chosen.
Spatial Differentiation: The model recognizes that consumers have preferences for goods produced in different locations. These preferences are based on factors such as proximity, transportation costs, and regional brand image.
Key Concepts:
Locational Rent: Lösch introduced the concept of "locational rent" to analyse the profitability of different locations. Locational rent refers to the additional revenue a firm can earn by locating in a particular area due to market access, labour availability, resource availability, or other locational advantages. The model suggests that firms will choose locations where they can maximise their profits by considering the potential locational rent.
Market Size and Profit: The model emphasizes the importance of market size in profit maximisation. Firms aim to locate in areas with a larger consumer base to capture a greater market share. Larger markets offer more revenue opportunities, enabling firms to maximize their profits. Market size is influenced by factors such as population density, income levels, and consumer preferences.
Production Costs: Lösch's model recognizes the significance of production costs in location decisions. Firms aim to minimise production costs by choosing locations that offer access to low-cost inputs such as labour, raw materials, energy, and transportation infrastructure. By minimising production costs, firms can enhance their competitive advantage and profitability.
Agglomeration Economies: The model acknowledges the role of agglomeration economies in shaping location decisions. Agglomeration economies refer to the cost advantages gained by firms through clustering in a specific location. These economies arise due to factors such as a specialised labour force, knowledge spill-overs, shared infrastructure, and the availability of supporting industries. Firms may choose to locate in areas with existing industrial clusters to benefit from these agglomeration economies and maximise their profitability.
Extensions and Applications: Lösch's Model of Profit Maximisation has been extended and applied in various contexts to explore additional factors and dynamics of location decisions. Some extensions include:
Imperfect Competition: The model has been adapted to analyse the behaviour of firms in imperfectly competitive markets, where firms have some market power and can influence prices.
Firm Heterogeneity: Extensions consider the heterogeneity of firms in terms of size, technology, and production capabilities, which can influence location decisions.
Regional Development: The model has been applied to analyse regional development policies and the impact of location decisions on regional economic growth.
Lösch's Model provides a theoretical framework for understanding the considerations and trade-offs involved in location decisions from a profit-maximization perspective. While the model simplifies the complexity of real-world location dynamics, it serves as a valuable tool for analysing the relationship between market size, production costs, locational advantages, and profit maximization.
Central Place Theory, developed by German geographer Walter Christaller in the 1930s, is a theoretical framework that explains the spatial distribution of cities and the provision of goods and services in an economic system. While the original theory primarily focused on retail and service establishments, it can also be applied to understand industrial location patterns. Central Place Theory helps identify the hierarchical relationships among cities, the functional specialization based on the range and threshold of goods and services offered, and the factors influencing the location of industrial activities.
Key Concepts of Central Place Theory:
Central Places: Central places are settlements that provide goods and services to the surrounding population. These places can range from small towns to large cities, and their size and function are determined by the population they serve and the range of goods and services they offer.
Hierarchy of Central Places: Central Place Theory suggests that central places are organised in a hierarchical structure based on their size and the range of goods and services they provide. Larger central places at higher levels of the hierarchy serve larger populations and offer a broader range of goods and services. Smaller central places at lower levels of the hierarchy serve smaller populations and provide more specialised goods and services.
Range and Threshold: Range refers to the maximum distance consumers are willing to travel to obtain a particular good or service. Threshold represents the minimum number of consumers required to support the provision of a particular good or service. Central places at higher levels of the hierarchy have larger ranges and higher thresholds, while those at lower levels have smaller ranges and lower thresholds.
Market Area: The market area of a central place refers to the geographical area that depends on that central place for goods and services. The size of the market area depends on factors such as the range of goods and services offered, transportation infrastructure, and consumer preferences.
Application to Industrial Location:
Industrial Service Centres: Central Place Theory can be applied to understand the location of industrial service centres that provide specialised services to industries. These centres may include research and development facilities, technical support services, testing laboratories, or specialized manufacturing clusters. Larger industrial service centres are likely to be located in higher-level central places to cater to a larger market area and benefit from economies of scale.
Regional Specialization: Central Place Theory helps explain the regional specialisation of industries based on the range and threshold of goods and services required by the local population. Higher-level central places tend to have a more diverse industrial base, offering a wider range of goods and services. Lower-level central places may have more specialised industries that cater to specific local needs or have lower thresholds for certain products. This specialisation can result in complementary relationships among industries and facilitate the efficient allocation of resources.
Transportation Infrastructure: Central Place Theory considers the importance of transportation infrastructure in facilitating the exchange of goods and services between central places and their market areas. Industrial activities are likely to locate in central places with good transportation connectivity, such as proximity to highways, railroads, or ports. Access to efficient transportation networks reduces transportation costs and enhances the competitiveness of industries.
Market Size and Industrial Location: The size and purchasing power of the market area influence the location decisions of industries. Larger central places with larger market areas provide access to a larger consumer base, allowing industries to capture a larger market share. Industries requiring a large consumer market, such as automotive manufacturing or consumer electronics, are more likely to locate in higher-level central places.
Central Place Theory provides valuable insights into the spatial distribution of industrial activities and the factors influencing their location decisions. While it originated from the study of retail and service establishments, its concepts can be applied to understand industrial location patterns, regional specialization, and the interactions between central places and their market areas.
The Space-Cost Curve Model, also known as the space-cost trade-off model, is a theoretical framework used to analyse the relationship between the spatial allocation of land and the costs associated with that allocation. The model examines the trade-off between the cost of land and the distance from a specific location, taking into account factors such as accessibility, transportation costs, and land prices. It helps in understanding how firms or individuals make decisions regarding the optimal use and allocation of land resources.
Key Concepts:
Cost of Land: The model considers the cost of land as a significant factor in decision-making. Land prices vary depending on the location, proximity to markets, infrastructure, and other amenities. Higher-demand areas or locations with better accessibility tend to have higher land prices.
Distance from the Reference Point: The space-cost curve model focuses on the relationship between the cost of land and the distance from a reference point or a central location. The reference point can be a city centre, a transportation hub, or any other relevant location. The distance from the reference point affects transportation costs, travel time, and accessibility, which in turn impact the cost of land.
Accessibility and Transportation Costs: The model recognises that accessibility and transportation costs are crucial factors in land allocation decisions. Locations that are closer to markets, suppliers, or transportation networks tend to have lower transportation costs and better accessibility, making them more desirable and potentially more expensive.
Space-Cost Curve: The space-cost curve represents the relationship between the cost of land and the distance from the reference point. It illustrates how land prices vary as one moves away from the reference point. The curve typically exhibits an inverse relationship, reflecting the trade-off between cost and distance. As distance increases, land prices tend to decrease due to lower accessibility and higher transportation costs.
Implications and Applications:
Land Use Planning: The space-cost curve model is valuable in land use planning. It helps identify areas with high land costs and low accessibility, indicating potential constraints for development. Planners can use this information to guide decisions regarding zoning, infrastructure investments, and the allocation of resources to maximise land use efficiency and economic development.
Industrial Location Decisions: The model is applicable to industrial location decisions, as firms consider the trade-off between land costs and accessibility. Industries with high transportation costs or that rely on proximity to suppliers or markets may strategically locate closer to the reference point to minimise transportation expenses. On the other hand, industries with lower transportation costs or specialized land requirements may be more flexible in their location choices.
Housing and Real Estate: The space-cost curve model has implications for housing and real estate markets. It helps explain the variation in housing prices based on distance from amenities, transportation options, and urban centres. Homebuyers and real estate developers consider the trade-off between housing costs and proximity to desired locations when making decisions about purchasing or developing properties.
Infrastructure Planning: Infrastructure planning, such as transportation networks or utility systems, can be influenced by the space-cost curve model. Understanding the relationship between land costs and distance from the reference point can inform decisions regarding the optimal placement of infrastructure to minimize costs and enhance accessibility.
The space-cost curve model provides a valuable framework for analysing the spatial allocation of land and the associated costs. By considering the trade-off between cost and distance, the model helps stakeholders make informed decisions regarding land use, industrial location, housing, and infrastructure planning.
Most models of industrial location tend to assume single-product companies. Many modern large companies have a market orientation and are multi-product businesses receiving raw materials or components from a wide variety of sources as well as marketing their products in many areas. Many companies are multi-plant businesses, with major factories and many satellite or branch plants. Therefore it is not only the market access of a single plant that has to be considered but the costs, revenues and distances for the overall company or group. This is why study and interpretation of market access in relation to industrial plant location has become an international and very complex issue. Multinational companies such as Unilever and ICI manufacture goods in several countries whilst being administered from one country. Their decisions on industrial location must take account not only of market access within individual countries but also group profitability across many countries.
Multiple Choice Questions (MCQs)
(1 mark each)
Which of the following is NOT a factor in Weber’s Least Cost Theory?
A. Transportation Costs
B. Market Demand
C. Labour Costs
D. Agglomeration Economies
In Hotelling's Model, firms tend to:
A. Maximise locational rent
B. Avoid clustering together
C. Offer differentiated products
D. Cluster near the centre of the market
In Losch’s Model, "locational rent" refers to:
A. The fixed cost of land
B. The total cost of labour
C. Extra revenue due to locational advantages
D. Government subsidies for relocating
According to Central Place Theory, the "range" refers to:
A. The minimum population needed to support a service
B. The number of goods sold in a central place
C. The maximum distance consumers will travel for a service
D. The number of central places in a region
Short Answer Questions
(3–5 marks each)
Briefly explain the difference between a weight-gaining and a weight-losing industry. Give one example of each.
What are agglomeration economies and how do they influence industrial location?
Describe two key assumptions of Hotelling's Model of Spatial Competition.
In Losch’s Model, how does market size influence the location of industries?
Explain the concept of the space-cost curve and its implication for industrial land use planning.
Structured/Essay Questions
(10–20 marks)
Compare and contrast Weber’s Least Cost Theory and Losch’s Model of Profit Maximisation. In your answer, discuss at least three similarities and three differences between the two models.
Discuss the relevance of Central Place Theory in understanding the modern industrial location patterns in a country of your choice.
Evaluate the usefulness and limitations of Hotelling’s Model of Spatial Competition in analysing industrial location decisions in urban settings.
Using examples, explain how the Space-Cost Curve Model can influence decisions on the location of industries and infrastructure in urban planning.
"No single model fully explains the complexities of industrial location decisions." To what extent do you agree with this statement? Support your argument with reference to at least three models discussed in the extract.
One of my favorite parts of this was learning about the concepts of "weight-gaining" and "weight-losing" industries.