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SSR3033:Theories & Techniques of Regional

Planning

Industrial Location Theory10th and 11th October 2016

Objectives• To explain the factors of production, industrial

location and how they relate to regional growth and regional development;

• To describe the following theories/ models: Weber’s Model, Losch’s Model and Bid Rent Theory, and explain how the theories/models are being applied (theory & application)

Industrial Location: Theory & Practice

Production Factors: Input

OutputMarketTransportation

PRODUCTION

Input:LandLabour forceCapital

Output: Goods Services

Other production factors

• Location – determined by availability of materials for production, input and output

• Other determinants – land, capital, labour/ workforce, and market

• Also – quality and quantity of work force, geographical location, available infrastructure, government policies

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Class activity (8 per group) – 10 minutes

Your agricultural-based company is thinking of setting up a factory in a new location. You have asked your board members to a meeting in order to finalise the following details:

• What is your new product?• Where are you going to locate your factory?• What are the factors that influence your

decision on the above two questions? Why?

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Industrial Location Theory

Often associated

with economists

Also involves geographers – spatial context

Aim: to find the

OPTIMUM location

Von Thunen (18th Century);

Richardson (19th Century);

Others:Alfred Weber,

Losch,Alonso

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Industrial Location Theory

Weber’s Model of Least Cost Location

Bid Rent Theory

Losch’s Market Area Analysis

Weber’s Model of Least Cost Location

• Main principle: entrepreneur will choose a location which has the minimum cost for the development of a new industry.

• Where should it be sited?• What are the determinants?

Weber’s Model : Assumptions

1. Uneven distribution of natural resources. 2. Size and location of markets are given at fixed points3. Wage rates are fixed; labor is immobile and unlimited4. A uniform culture, climate and political system5. Entrepreneurs minimize costs of production6. Perfect competition exists7. Cost of land, structures, equipment and capital do not

vary regionally8. A uniform system of transport over a flat surface

Based on the assumption, Weber identified 3 factors which determine location:

1. Cost of transportation

2. Cost of labour

3. Agglomeration

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Basic assumption:

Direct relationship between cost of transportation and the distance

x3x 2x

RAW MATERIAL OR MARKET SITE?

• There are two potential locations to locate an industry – near the raw material or market site.

• Using the Material Index after manufacturing process – to determine the location of the factory.

Material Index = Total weight of materials used to manufacture the product

Total weight of the finished product

RAW MATERIAL OR MARKET SITE?

Material Index = Total weight of materials used to manufacture the product

Total weight of the finished product

Index Value = 1, product is natural material

Index Value = <1, the final product increased in weight, the best location to determine the factory is close to the market site. [e.g. market oriented products]

Index Value = >1, the final product experience weight loss, the best location is close to the raw material site. [Material oriented products]

RAW MATERIAL OR MARKET SITE? : Weight Losing Case

Source MarketProcessingLocation

Unit Cost(Transport) Figure 1

Source MarketProcessingLocation

Unit Cost(Transport) Figure 2

What happen when the industry is moved nearer to the source?

MarketProcessingLocation

Source

Unit Cost(Transport)

Figure 3

the best site to locate this industry is to place it right at the source of raw material = allows optimization of transportation cost to the market.

RAW MATERIAL OR MARKET SITE? – Weight Gaining CaseQ: Why such curve? What happen when the industry

moves nearer to the market site?

Source MarketProcessingLocation

Unit Cost(Transport) Figure 1

Figure 2

Source MarketProcessingLocation

Unit Cost(Transport)

Figure 3

Market

ProcessingLocation

Unit Cost(Transport)

The best location to optimize transportation cost is the market itself.

What if labour cost is included?

T =Area with lowest transportation cost

L = Location with cheap labour cost (-$2 compared to T)

+$1

+$2

+$3

• Isodapane shows the increase of transportation cost as the distance increases • L = labor market where the cost is lower by $2 as compared to T • A location will be able to attract firms if the saving from the labor cost is greater that the increase of transportation cost for each unit output produced

INDUSTRIAL LOCATION THEORY: Weber’s Model

Bid-Rent Theory

Bid-Rent Theory• Developed by Alonso

(1964) – based on the concept of micro economy.

• Land use pattern is determined by its value –related to transportation cost.

• Each activity will have its own bid-rent function and combination of a few bid-rents will explain the bid-rent gradient

Bid Rent Func.Housing

CBD Distance

Bid Rent FunctionRetailer

Rent Per Acre

Bid Rent FunctionManufacturing

d1 d2

Bid-Rent Theory: Assumptions

• The city is comprised of many identical producers that operate in a perfectly competitive environment.• All land is privately owned• All firms are identical and sell in competitive

markets, therefore, each firm generates a normal rate profit, can sell as much as it produces, and faces the same set of production costs as all other firms

Bid-Rent Theory: Assumptions (contd)

• The market place for goods and services is located in the center of city • For a firm to sell its product it must be

transported to the market located at CBD • Transportation costs are a linear function of

distance.• The city’s population is evenly distributed and

households have uniform tastes for housing.

CBD Distance

Bid Rent Function

Rent Per Acre

• Transportation cost in CBD is lower – firms locating at CBD are willing to pay more for centrally located area in order to minimize their transportation cost. • Added transportation cost will reduce profit, firms will not be willing to pay as much for land at more distant locations.• More distance firms will only be willing to bid up to the amount at which lower land cost are exactly off-set by their higher transportation cost.• Land value decline with distance from the city centre$5 + $2 = $3 + $4

Near CBD Far from CBD

Land Transportation Cost

Bid-Rent Theory: Explanation

• The amount of money being paid for a certain land use is known as “rent”.

• The changing value of land according to the distant from CBD is known as “location rent”.

• Imagine: Potential land users are conceptualized as participating in an open bidding process such that the highest bidder for a parcel of land will occupy that parcel.

Bid-Rent Theory: Explanation (contd)

• It is assumed that all persons involved in the bidding process have complete information about the land value – they will not offer price higher than its worth – eventually the bid rent will equals location rent.

• The graph that describes how rent declines with distance from the CBD is called the bid-rent function and illustrates how the value of land reflects its accessibility to the CBD.

• What if there is more than one activity that need space to operate?

• For instance: Retail and Manufacturing.

CBD Distance

Bid Rent FunctionRetail

Rent Per Acre

Bid Rent FunctionManufacturing

d1

At point d1, the land use pattern changes from retail to manufacturing. Why is the curve of the bid-rent function for retail is much steeper?

If this process goes on and doesn’t change, spatial equilibrium will be achieved – where land will be utilized for activities that offer the highest bid-rent.

INDUSTRIAL LOCATION THEORY: Bid-Rent Theory

Bid Rent Func.Housing

CBD Distance

Bid Rent FunctionRetailer

Rent Per Acre

Bid Rent FunctionManufacturing

d1 d2

Forget the assumption that users are distributed evenly. Let’s allow the household too, to bid for the land usage.

There are household that desire for locations nearer to CBD to allow easy access to urban facilities, and there are also households desire for low density housing areas with generous greenery – parks.

Should this happen, the household will have a less steep curve compared to retailing & manufacturing.

INDUSTRIAL LOCATION THEORY: Bid-Rent Theory

I

II

III

d1 d2

Retail

Rent Per Acre

Manufacturing

Housing

d3Distance from CBD

I – RetailII – ManufacturingIII - Housing

Beyond d3, urban users do not value land and its value falls to the value of agricultural land.

If the city is symmetrical, the pattern of land use will form a set a concentric rings as shown in this slide.

INDUSTRIAL LOCATION THEORY: Bid-Rent Theory

Market Area Analysis(Losch’s Model)

Market Area Analysis• Losch criticised Weber’s least cost

approach (on labour and transportation) to locate an industry as too much input oriented.

• Losch: the optimum location will enjoy the most profit i.e. highest sale volume

Losch’s Assumptions

• There is no differences in term of production factor – even distribution of raw materials, labor and capital on a homogenous plain

• Equal density of population anywhere and homogenous in taste

• There is no interdependence between firms.

•This is a simple curve of root beer demand, assuming farmers are the customers• At the retail center adjacent to farm P, the price per unit of root beer is OP with PQ of demand • As you go further to R, transportation cost increases the price to OR – with demand reduces to RS • For locations too far from the market area, transportation cost escalates to OF and demand is zeroO

P Q

R S

F

Quantity

INDUSTRIAL LOCATION THEORY: Market Area Analysis (Losch’s Model)

•Now imagine PFQ is rotated along the PQ axis. • You will get a demand cone• The base of the cone = range of market• Height = the amount of sale at any point • Volume = the total amount of market demand

**************Similar to Weber’s Model, this model ignore the “supply” aspect; and focus solely on “demand” to determine optimum location.

F

RP

Q

S

Base of the cone

INDUSTRIAL LOCATION THEORY: Market Area Analysis (Losch Model)

Other considerations in determining location?

Personal Factor• Also play a role in determining the location of an

industry• E.g. Automobile industry in Detroit and Morris Plant in

Crawley (England), Boots pharmaceutical plant in Nottingham

• Due to its proximity to their hometown, families and friends

• Also depending on supplier, climate and other services• Tiebout (1957): personal factors are more prevalent in

terms of siting a small industry compared to a large industry.

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Summary• Weber’s Least Cost Theory: the location of

manufacturing establishments is determined by the minimization of three critical expenses: labor, transportation, and agglomeration.

• Bid-rent theory: how the price and demand for real estate change as the distance from the central business district (CBD) increases. It states that different land users will compete with one another for land close to the city center.

• Losch’s market area analysis: based on demand and volume of sales

References• Glasson (1978) Introduction to Regional

Planning, UCL Press: London• Richardson, H (1993) –Regional & Urban

Economics• http://www.yourarticlelibrary.com/industries/

factors-controlling-and-influencing-the-location-of-industries-with-illustrations/25351/

• http://escholarship.org/uc/item/1k3927t6• http://

economics.uoregon.edu/wp-content/uploads/sites/4/2014/07/BenjaminTrussell.pdf