LOCATION CONDITIONS ANDLOCATION FACTORS

PATRICIA CALLEJA PLAZA&

MICHAL GLONDA

November 2009

• Characteristics which vary from place to place and affect the viability of factories.

•Tendency to interpret condition and factor like synonyms.

•Nishioka and Krume make a distinction:

Location factors: specifics interpretations made by individual firms of more general location.

Location conditions: differences among locations that exists for all industries.

What places offer industry: a typology of location conditions

Eleven broad categories of location are recognized:

1.Transportation

2.Materials

3. Markets

4.Labour

5.External economies

6.Energy

7.Community infrastructure

8.Capital

9.Land

10.Environment

11.Government

FIRST- Location condition are complex comprise characteristic of a tangible and not-tangible nature.

SECOND- Location conditions are hard to measure. Tangible cost can be quantified precisely but non-tangible features can be mapped precisely.

THIRD- Caution needs in the interpretation of individual location conditions.

FOURTH- Various categories of location condition are not mutually exclusive

FIFTH- Non-tangible features of location condition are real and important.

Materials, market and transportation

• Factories which utilize materials from a variety of sources incur transportation costs

•Locations vary in terms of accessibility to materials and markets

•Transportation cost are determined by distance or mode of transportation

•Total cost tipically increase with distance and weight

•Freight rates decrease with distance•Rail, water and pipeline transportation have high fixed costs•Fixed cost are much lower for road transportation

• Primary manufacturing activities costs can be reduce by close acces to the raw materials.

•Manufacturing activities that utilize imputs which increase in bulk perishability reduce costs locating near markets.

Labour

• Germany 22.17• Canada 17.31• US 15.45• France 15.26• Japan 14.41• UK 13.42• Taiwan 4.42• Brazil 2.55

•Labour costs comprises wages and non-wage benefits.•Recent report revealed that Germany pays the highest manufacturing wages.

•Industries requiring abundant hand work location in underdeveloped countries.

•Industries who need qualified workforce location in developed countries.

• Respect non-tangible features unionization is an important characteristic.

•US has low levels of unionization just 12% of the workforce compared to 36 % in Canada at 1980s.

•Skill is another important intangible characteristic.

•Skilled workers engage in task which require a long time to learn.•Unskilled workers engage in task that require little time to learnt.

•Skills also change over time for the technological change.•Labour as a location condition is complex .

•The migration of people creates option for firms to attract labour characteristic

External economies of scale

• Adavantages of locating in larger city rather than a smaller one.

• Acces more diversified, reliable and cheaper transportation services, acces to alarger labour pools….

• Larger cities imposse diseconomies of scale in the form ogfcongestion, pollution and crime.

• Industrial districts which offer positive externalities.

Energy

• Energy sources were a significant locative condition for traditional idustries.

• Electricity energy can be transmitted over very long distances cheaply.

• Energy decline as a location

Comunity infrastructure and amenity

• All manufacturing activities require acces to comunity.

• In some instances manufacturing investment occurs in ares where new infrastructure has to be provided.

• Existing centres of industry have sought to create “industry parks” which provide infrastructure.

• Industrial park have expanded rapidly since the 1950s.

• Industrial parks increasingly cater for contemporary life styles regarding health, recreation and aesthetics.

Capital

• Fixed capital are measured by costs of construction and related desing costs.

• Financial capital is highly mobile and while interest rates vary by location, systematic geographical variations are not evident.

• US is the pre-eminent supplier of venture capital for high-tech companies.

Land

• Land cost varies among countries

• Highest cost being in metropolitan areas.

• Land prices constitute an important location condition.

• Non-tangible features associated with land: shape, accessibility and serviced

Environment

• Spatial variations in environmental amenities and spatial variations in environmet policies and regulation.

• Growing interest in environment regulations with respect to air and water pollution.

• Legislation has required new factories to incorporate technology to restrict pollution.

• Resolving environmental problems at existing location is normally extremely expensive

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LOCATION FACTORSLOCATION FACTORS

Location factors express how firms assess places Location conditions have different implications for individual

firms contemplating investment in new facilities Firms interpret location conditions as location factors reflecting

their specific requirements for specific investment decisions Firms may assess the same location condition in different ways

depending on which tangible or non-tangible features are considered important

Location factors are influenced among other things also by the organizational constraints, value systems and preferences of individual decision-makers

As one way of recognizing the “wide range of factors“ influencing location, the product cycle model is reviewed

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The product cycle modelThe product cycle model

The PCM was developed in the 1960s to explain international investments by US-based multinationals that were manufacturing consumer durables such as electronic products

Since then the PCM has been widely adapted to link product cycle and location dynamics

The central (locational) thesis of the PCM is that as products are researched, developed and standardized, the optimal bundle of location conditions shifts from high-wage regions to low-wage regions

According to this model, products evolve through various “life-cycle“ stages analogous to human beings

Stages of a product cycle: invention, R&D, innovation, rapid growth, maturity, obsolescence, (death)

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The product cycle model and production inputsThe product cycle model and production inputs

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The product cycle modelThe product cycle model

During this evolution, technology shifts from laboratory equipment and pilot plants to relatively small-scale operations to large-scale plants utilizing standardized machinery designed for mass production. That is, over time, products shift from (skilled) labour-intensive activities to capital-intensive activities employing unskilled labour. From a geographical perspective, as products evolve through the various stages, the underlying input conditions change, which in turn may lead to related shifts in location conditions and factors

The product cycle model argues that during the R&D and innovation stages the optimal location conditions are found within the US, particularly in locations providing access to scientists, engineers, technicians, skilled labour and various kinds of external economies of scale in the form of universities and their expertise and skills, specialized engineering and machine tool firms, the machinery manufacturers themselves and, if required, supplies of venture capital

In the late stages of the product cycle, when the product is standardized and mass produced, increasingly strong competiton encourages firms to seek lower costs, for example, by building large-scale factories which fully exploit any available economies of scale. In this mature stage, firms can replace skilled labour with relatively unskilled labour operating sophisticated bud proven technology. If labour is the cost component that geographically varies the most, the optimal bundle of location conditions shifts to low-wage regions at this stage

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Control functionsControl functions

For single-plant firms – production, head-office and R&D activities are combined in one location

- location decisions are made by individual owner-managers

For multi-plant firms – head-office and R&D activities, are typically geographically separate from production activities

- locations are chosen by professional managers who may or may not work in the same location

The geographical separation of head-office and R&D activities also permits firms to locate specialized functions according to more specific location factors

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Head-office location factorsHead-office location factors

Corporate head-offices are located in major metropolitan centres and in downtown cores or central business districts

The key locational attraction for the geographical concentration of head-offices is to facilitate person to person contact in the exchange of information

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RR&&D location factorsD location factors

The location of R&D laboratories is influenced by a wide range of factors which, for the most part, are difficult to cost precisely for individual firms

Location factors of R&D facilities are, for example, enviromental quality, quality of public education, availability of professionals, community business attitudes, proximity to major airport, cost of housing etc.

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Ratings of Location Factors by Management and Employees: R&D Facilities of Ratings of Location Factors by Management and Employees: R&D Facilities of Large US CorporationsLarge US Corporations

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Innovative manufacturingInnovative manufacturing

Generally speaking, high-tech activities are associated with the early stages of the product life cycle, which emphasizes the importance of access to skilled scientific, engineering and factory workers and to external economies

Location factors by high-technology companies are, for example, labour skills/availability, universities, transportation, overall bussiness climate, goverment incentives, labour costs etc.

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The Rankings of Location Factors by High-Technology Companies in 4 North American SurveysThe Rankings of Location Factors by High-Technology Companies in 4 North American Surveys

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Branch plantsBranch plants

There are a lot of locations factors underlying new secondary manufacturing plants in particular regions, including those of branch plants controlled by head-offices based outside of the region

Location factors of branch plants are labour factors, accessibility factors, community factors, business climate factors, utility factors, plant site factors, financial and special factors

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Location Factors for Branch Plants in North CarolinaLocation Factors for Branch Plants in North Carolina

ConclusionConclusion

The results from location surveys are admittedly not easy to interpret and measure in precise ways, while the non-standardized nature of research designs also creates difficulties for comparisons of surveys

Anyway, there are many factors which influence factory locations and, it might be added, many of these factors are of a subjective nature

Labour costs have frequently been revealed to be important location factors, but other factors invariably have to be taken into account which affect location choice

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Thank you for your attentionThank you for your attention