4.2: factors determining industrial location

introduction

• North America and Europe have become less dominant in the world of industry as Asia and other regions have seen growth
• China’s manufacturing has moved inland, Europe’s has moved East, and the United States' has moved between states

industrial location

• usually correlated with market forces and factors of production
  • factors of production: land, labor, and capital
• physical space, natural resources, capital machinery and facilities, the number of workers available, and the skill level of those workers are all major deciding components in the production and transportation of goods
  • this relates to site and situation
  • site: local characteristics of a place
  • situation: relative location and characteristics of a place
  • eg. a factory would likely need access to a large workforce with a high school education (site) and proximity to raw materials like iron and coal (situation) to be profitable
  • the importance of these characteristics varies based on what is being produced
  • eg. low-cost energy for petrochemical manufacturing, lots of low-skill workers for textile production
  • essentially, look for places that will hold a manufacturing advantage over other places

early industrial location theory

• main theorist Alfred Weber suggested that transportation is the most important factor in production based on location of consumers and raw materials
  • he studied transportation, labor, and agglomeration in relation to manufacturing
  • eg. US industrial heartland originated near Appalachia, where coal was readily available as an energy source
• labor is also important
  • the cost of labor is dependent on:
  • the strength of the local economy
  • the supply of available workers
  • the skill and efficiency of available workers
  • local labor laws
  • unionization legality and norms
  • and other factors
• 1800s-1900s: manufacturing in the US and Europe was largely fueled by lots of cheap labor with low regulation and unionization
• agglomeration is important as well
  • agglomeration: a localized economy in which a large number of companies and industries cluster together and benefit from the cost reductions and gains in efficiency that result from this proximity
  • “industrial manufacturers benefit by clustering in the same location”
  • small factories can merge into bigger entities and efficiencies via economy of scale
  • specialty suppliers can help manufacturers more easily/efficiently
  • experienced workforce in clusters (decreases cost of training new workers)
  • shared infrastructure of industrial agglomeration (developing roads, water, electricity, etc.)
    • this benefits all firms in the area
• agglomeration has a size limit
  • levels of concentration can become too high to a point where deglomerative forces become present
  • deglomerative forces eg. high rent, congestion (disadvantageous for transportation), wage increases
• contemporary industrial location
  • Weber aimed to explain how site impacts the location of manufacturers; since his time, however, some of these factors have changed in importance
  • eg. considering shifts in economic and political environments
  • mainly, relative distance has decreased, changing transportation’s effect and influence
  • this means many manufacturers just go wherever has the greatest return on investment
  • government policy has also played an increasingly important role (eg. trade agreements)
  • cost of labor is also decided by individual governments, as well as the formation of industrial agglomeration, in some cases
  • policies such as environmental regulations and taxes must also be considered
• outsourcing: when a corporate entity does not own its production facilities, but contracts with other companies to produce components or assemble products
  • referred to as offshoring if done in countries other than the home country of the corporate entity
• the role of transportation
  • less important than it has been historically
  • road and air transportation costs have significantly decreased in recent years (namely the latter part of the 20th century)
  • ocean transportation prices haven’t decreased much, but since technology has improved, trips can be done in shorter periods of time, and cost declines as a result of that
  • invention of the shipping container also helps this effect
  • since transportation is easier, faster, and cheaper, corporations can simply build production facilities wherever is most profitable for them
• the role of government policy
  • growing awareness surrounding worker and environmental exploitation led to greater governmental regulation (wages, safety, benefit for workers)
  • tax rates, trade investments, etc. also weigh in
  • trade
  • inputs (raw materials) + manufactured components → industrial production → outputs (goods for sale to consumers)
  • inputs and consumers are often found globally, so trade affects distribution when locating facilities
  • many European countries encourage free trade (quick and cheap transportation of goods, no tariffs, import quotas, other restrictions)
    • easy to import and export goods
  • relatively open trade policies in countries such as South Korea, Singapore, and Japan (East Asia)
  • highly restrictive trade policies in countries such as the Democratic Republic of the Congo, Iraq (Sub-Saharan Africa, the Middle East)
  • worse for industrial production due to slow and expensive customs and procedures
  • labor
  • government regulations on labor must be taken into consideration as well
  • labor flexibility — flexible labor markets = limited regulation on minimum wages, mandated taxes, worker benefits, and job security
    • eg. US has a low federal minimum wage, no government-mandated health or vacation requirements, “at will” employment policies (easy to hire/fire)
    • other labor flexible places include Singapore, Denmark, Uganda, and Somalia (dispersed geographically and developmentally)
    • American labor laws can vary by place, minimum wage is very different in different parts of the country
  • taxes
  • tax burden must also be considered
  • lowest tax burdens are mainly in Middle Eastern oil states, “tax havens” eg. Liechtenstein (Europe) and the Bahamas (Caribbean)
• overall business environment
  • subjective and highly dependent on which factors are valued; the World Bank ranks business friendliness based on the following factors:
  • costs and time associated with obtaining permits to start a business
  • obtaining construction permits
  • getting electrical rigs
  • obtaining financing
  • paying taxes
  • importing/exporting goods
  • legal protections for investors and contract enforcement
  • the Heritage Foundation takes different factors into consideration when determining business friendliness:
  • size of government (tax burden)
  • rule of law
  • overall regulatory environment (labor laws)
  • openness of markets to investment and trade
  • different criteria used by the two sources, but heavy overlap between rankings
  • thirteen of the top twenty are the same in each list (eg. Hong Kong, the US, UK, many Eastern European Countries, Denmark, Sweden)
  • worst overlap too (difficult to invest privately, start industry)
  • most highly-ranking countries have high standards of living while those who do not are often less-developed countries
  • economic growth leads to higher tax revenue which increases the average standard of living within a country
  • best regulatory environments

• worst regulatory environments (alphabetically)
  • Afghanistan
  • Angola
  • Chad
  • Democratic Republic of the Congo
  • Djibouti
  • Equatorial Guinea
  • Liberia
  • Timor-Leste
  • Venezuela
  • government incentives
• generalized regulations
• business incentives
  • eg. tax breaks, subsidized land, liberalized labor/import laws, modern and reliable infrastructure
• strategy and end goal: subsidize industrial development until special incentives are no longer needed
  • the role of labor
• dependent on the type of manufacturing being performed
• skilled labor usually entails technical certification, and higher educational degrees
• automation decreases the need for less-skilled workers