In several earlier lectures, we developed principles for the allocation of land-using activities across the landscape:  allocating an area into subareas.  The principles involved the relative intensity (profit per acre, if you will) of different land uses, and the relative transport costs generated by a unit of land under a particular use.

In this lecture, we’re going to consider the location of activities that, collectively, do not cover use a given landscape:  locating points in space.
 

MAXIMIZING  REVENUE
When we studied retail location, we were concerned with locating an individual outlet to maximize its potential market.  From a geographic point of view, we want to know which location has the most potential customers in the closest proximity.  We assume that the costs of operating the facility are the same, regardless of location.  This is the approach behind the market potential and the aggregate travel models covered in class, in the lecture notes, and in the Hanink text on pages 245-247.

If revenue varies by location but costs do not, the revenue-maximizing location is the profit-maximizing location.
 

MINIMIZING  COSTS
Most geographic models of manufacturing location emphasize the differences in cost among different, potential locations.  Today, we’ll develop a simple framework for systematically identifying the least-cost location for a production facility.
 

Factors of manufacturing production
We’ll assume that manufacturing production requires the manipulation of physical inputs to yield a physical product.

Therefore, the direct inputs to manufacturing production are:

• materials that are transformed in the production process;
• plant and machinery that are used (but not transformed) in the production process;  and
• labor that executes the production process.

To develop a solution to the least-cost location problem, we are concerned about all these costs.  However, we generally focus on:

• the costs of transporting tangible, mobile factors of production (materials and machinery) to the production location;
• the costs of transporting the manufactured product to its market(s);  and
• the local availability and cost of immobile factors of production (direct labor).

First step:  minimize transportation costs
To minimize the transportation costs entailed in a production/distribution chain, we consider the material inputs and the material product:  we want to minimize the weight carried each unit of distance.
 

In the second case, the production process uses two ubiquitous inputs (available at similar cost nearly anywhere) and two “pure” inputs (the total weight of which is present in the finished product):  the transport-cost-minimizing production location is at the market for which the production is taking place.

· In fact, the locations of basic steel mills are generally on major transport routes for bulk shipments of coal and iron ore.
· Steel “mini-mills,” that use scrap steel and electricity to make steel, tend to locate near the market — major steel markets are also sources of scrap steel, and electricity is almost ubiquitous.
· In fact, the locations of soft-drink bottling plants generally reflect the locations of major markets:  a map of U.S. bottling plants would look like a map of U.S. population.
 
 

We can generalize this in the form of the material index of a production process, which is simply the total weight of localized (non-ubiquitous) material inputs per weight unit of finished product.  If the material index is less than one, it’s cheapest to locate production at the market.  If the material index is greater than one, it’s cheapest to locate production at or between the gross inputs.

Table 8.1 in the Stutz and deSouza text categorizes the transport-cost-minimizing plant location as a function of the kinds of material inputs to production:
 

Step Two:  consider localized cost variations in immobile inputs
Some important considerations in the cost of production vary across potential locations, but can’t be transported to the production facility.  Labor wages and local-government taxes are two good examples.

• What if the lowest wages for relevant workers are not at the production point where total transport costs are minimized?
• What if a state or county government, far from the major market or material inputs for a product, offers the producer no tax bill for 10 years if it will locate in the state or county?  (See Seattle Times article debating government subsidies for industrial location;  see update article)

1) calculate how much the production facility will save by being in the low-wage or low-tax location (relative to the transport-cost-minimizing location);
2) calculate how much the low-wage or low-tax location will cost in terms of higher transport costs (relative to the transport-cost-minimizing location);  and
3) compare (1) and (2).

Overall, production processes that are very labor-intensive will more often be deflected from transport-minimizing points to low-wage-labor points:  we sometimes call these labor-oriented processes.  Processes that use very gross (weight-losing) raw materials will more often remain transport oriented:  we call these materials-oriented processes.  Production of especially perishable goods will still be pulled toward the market:  we call these market-oriented processes.
 

Step Three:  consider the benefits of industrial agglomeration
Some production processes benefit from specialized labor forces, educational institutions, research operations, or venture capital that are present where there are concentrations (agglomerations) of facilities in the same industry.  Some of these industry-specific agglomerations are world famous:  electronic semiconductor components in California’s “Silicon Valley,” broadcast and movie entertainment in California’s “Hollywood,” corporate financial services in New York’s “Wall Street,” pharmaceutical drug research and production in New York and New Jersey.  (See notes from another lecture on agglomeration economies.)

We analyze the effects of agglomeration in the same way as labor and taxes:  if the benefits from being in an agglomeration are greater than the costs of being away from the transport-minimizing, wage-minimizing, and tax-minimizing locations, then locate in the agglomeration.

Not surprisingly, certain kinds of industrial activities benefit from agglomeration:  activities where information and technology is embodied in people more than in equipment.  You can buy equipment and the technology it embodies (for steel making, automobile assembly, or computer assembly), but you have to be near specialized people or institutions to capture the information and technology they embody.
 

INDUSTRIAL  LOCATION  OVER  TIME
Over the past century, four major trends have affected the relationship among the three considerations of cost-minimizing industrial location.

1. Transportation costs have declined precipitously, in terms of price and time.  Therefore, it becomes easier and easier for other considerations (labor wages, tax rates, agglomeration) to determine the location of industrial production.  The massive industrialization of the southeast U.S. and (more recently) southeast Asia reflects the increased relative attraction of low-wage production locations.

2. Most of the increase in the economy has come from industries that use pure and ubiquitous inputs.  Heavy, weight-losing processes are still important, but are a decreasing share of the economy.  Therefore, raw-material locations (e.g., Pittsburgh) and transport-shipment locations (e.g., Buffalo, Baltimore) have become less important to industry.

3. Information has become even more important in production and marketing, especially in newer sectors of the economy.  While it’s too simplistic to say that information intensity is the only source of agglomeration economies, these two factors are closely related.  Some of the most rapidly growing industrial centers in the U.S. (Los Angeles, Santa Clara County (California), even Seattle) are the centers of industry-specific agglomerations.   This reflects, in part, the fact that technologies in these sectors is largely embodied in highly skilled people, who are more prevalent in localized agglomerations of the particular industry.

4.  On the other hand, technologies in "mature" sectors can be embodied in machinery and equipment, reducing the skill level of the labor required -- and assisting the ease with which a labor-oriented process can be "deflected" to low-wage labor locations.