47578493 industrial-economics


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47578493 industrial-economics

  1. 1. Lesson 5: Theories of industrial location - IStructure: 5.1 Introduction5.2 Weber’s theory of Industrial location 5.2.1 Regional factors 5.2.2. Secondary causes. 5.2.3 Influence of Transport Cost 5.2.4 Influence of labor cost 5.2.5 Critical Appraisal of Weber’s theory5.3 Sargent Florence’s Inductive Analysis 5.3.1 co-efficient of Localization 5.3.2 Location Factor 5.3.3 Critical Appraisal of Sargent Florence’s theory5.4 August Losch’s theory of industrial location5.5 Summary
  2. 2. Objectives:After studying this lesson, you will be able to understandMeaning of industrial locationFactors for industrial locationImportance of different Location theories
  3. 3. 5.1 Introduction:Industrial location is a field of study that interests both economists and geographer,because the location of industries is of particular importance in studying the internalstructure of regions and in many cases, guides the pattern of spatial development.The theory of industrial location attempts to explain answers for three importantquestions. They are;Why the industries are located where they areWhy the locations are shifted,And what can be the best location for a particular industry keeping in view theresource endowments of different regions, transport network , existing demand,potential demand etc.,There are different versions developed by different economists on the theory ofindustrial location. Each one of them tries to find out the reasons for industriallocation in an economy. Among them, the first attempt in developing a theory oflocation was made by a German scholar, Von Thunen, in regard to agriculturallocation. Thunen, considered the problem of location for various forms of agriculturalproduction in relation to markets.
  4. 4. But our interest in this chapter is on industrial location,therefore let us concentrate immediately on industriallocation theories. Important location theories in industrialsector are:•Weber’s theory of location•Sargent Florence’s theory of industrial location•August Losch’s theory of industrial location
  5. 5. 5.2 Weber’s theory of Industrial Location :The first comprehensive effort at developing a theory of location was made byAlfred Weber in 1909 in his book “Theory of the Location of Industries”. Weber’stheory is to be considered as a deductive theory. And he emphasized the costfactors in affecting the location of industry.He assumed competitive pricing (a situation where individual firms werepowerless to influence the price of their product which was the sameeverywhere).Therefore, according to him, to achieve the maximum profit, they had to minimizecost. It follows that a rational producer would choose a location where lowestcosts were incurred. This is the reason why Weber’s approach is known as theleast cost approach to the theory of industrial location.
  6. 6. Weber classified the causes influencing industrial location into twocategories:a) Regional factorsb) Secondary causes5.2.1. Regional Factors:Weber points out three general regional factors of location. They are:•the relative price range of deposits of materials•the costs of labor•the costs of transportationBy assuming that the influence of material cost can be reduced tothat of transportation cost, only two regional factors, namely,transportation and labor costs remain. These two are termed as theprimary causes of industrial location.
  7. 7. 5.2.2. Secondary causes:To the above primary causes, Weber adds two secondary causes:they are:•Agglomerating factors•Degglomerating factorsAgglomerating refers to an advantage or cheapening of productiondue to the concentration of industry. For instance, availability ofexternal economies in the form of cheap availability of labor, finance,at one place causes industry to ‘concentrate’ at one place.Degglomeration implies dispersal or decentralization of industryOne more interesting information which we should learn that Weberdivides all raw materials into two groups, namely “ubiquitous” and“localized materials”. First one are those materials that are availableeverywhere, so they have very little influence on location. Localizedmaterials are those that tare available in certain areas only thereforeexcerpt an important influence on location.
  8. 8. Weber explained his theory interims of influence of each factor on industriallocation. Thus, now let us consider the influence of following costs separatelyon industrial location: they are:•Transportation costs•Labor costs•Agglomeration•Degglomeration costs
  9. 9. 5.2.3. Influence of Trasportation Costs:Weber shows the impact of transportation costs on location and then demonstrates howlabour costs and agglomeration and degglomeration may change this situation.Assuming that transport cost is directly proportional to the distance covered and weightcarried, Weber gives his famous locational triangle as shown in fig.1M and N are two material sources and C is the consumption centre. The entire weight ofthe material from M has to traverse a distance ‘a’ and material N a distance’b’ to reachthe point of location T. the weight of the product has to move the distance C to reach theconsumption point. To determine where the location will actually lie, Weber calculatesthe ratio between the weight of localized material and the weight of the product. This hedesignates as the material Index. If the Index is less than one, the location is orientedtowards the consumption centre, while if the index is greater than one, the location ismaterial oriented.
  10. 10. 5.2.4 Influence of labor costs:The changes of location can take place only if the rise of cost of ton ofproduct which it causes is compensated, or more than compensated, bysavings of labor costs. A location can be moved from the point of minimumtransportation cost to more favorable labor location only if the savings inthe cost of labor which this new place makes possible and larger than theadditional costs of transportation which it involves.5.2.5 Agglomerative and Deglomerative Factors:Weber discusses the influence of agglomerative and deglomerative factorson location of industry. The two tendencies of agglomeration anddeglomeration work in opposite direction and the final determination restson the side of greater economy. Here the technique of Isodapanes is appliedand agglomeration is supposed to take place whenever the saving in cost isgreater than the extra transport charges involved.
  11. 11. If the deviation occurs from a point of lower labor costs theexpected economy from pure agglomeration should more thanoutweigh the economy of labor and of any accidentalagglomeration at the labor centre. However, the actual behavior ofparticular industries will depend on the index of value addedthrough manufacture. If we relate this index of value to the weightto be transported we get the “coefficient of manufacture’.Whenever it is high, an industry has a tendency to agglomerate.
  12. 12. 5.2.6 Critical Appraisal: The assumption of Weber is oversimplified and unreal. With regard to labor deviation Weber assumes fixed labor centers, but Dennison points out that location is not only the result but the cost of distribution labor. Weber thinks only in terms of external economies and excludes a discussion of internal economies. Weber assumption of fixed points of consumption does not square well with the actual market conditions in a competitive structures. Austin Robinson points out that in reality there is a widespread market served by competitive producers. Besides, potential market is said to depend not only on the situation of consumers but on the situation of competitors. Andreas Predohl has pointed that Weber’s theory is more a selective theory than a deductive theory. August Losch has criticized Weber for vomiting the demand considerations. He says; “Weber’s solution for the problem of location proves to be incorrect as soon as not only costs but also sales possibilities are considered. His fundamental error consists in seeking the place of lowest cost. This is an absurd as to consider the point of largest sales as the proper location. Every such one sided orientation is wrong. Only search for the place of greatest profit is right.”
  13. 13. 5.3 Sargent Florence’s Inductive AnalysisSergeant Florence’s mode of analysis is inductive in character. Onaccount of the very tangible results it yields regarding the trends ofindustrial distribution, Florence’s analysis has acquired great popularity.Sargent Florence has introduced two new concepts in the theory oflocation, namely “Location Factor” and Co-efficient of Localization”5.3.1 co-efficient of localization:Co-efficient of Localization measures the degree of geographicalconcentration of a given industry. Judging the extent of the industrialactivity by labor inputs, the formula for the coefficient of localization canbe written as follows:The value of C varies from 0 to 1 and the relative magnitude of Ccharacterizes the dispersal or localized nature of a given industry.
  14. 14. 5.3.2 Location Factor:The location factor is an index of the degree of concentration of anindustry in a given region and is given by the following formula:If the location factor is unity, the industry is evenly distributed over awhole country because the proportion of the total industrial workersengaged in industry in the region would be equal to the proportion ofthe total industrial workers engaged in the same industry in thecountry as a whole.If the location quotient is greater than one, the region has a highershare of the industry compared with the country as a whole and if it isless than one, the region has a lower share than the country as awhole.
  15. 15. 5.3.3. Critical Appraisal:a) According to BAL Krishna, Sargent Florence contribution cannot be placedin the category of a theory of location. Indices provided by him can onlyreveal the existing state of distribution of industries in a particular country.They are incapable of assigning reasons for a particular form of concentrationand much less through any useful light on the question of a correct allocationof industries among different regions. Therefore, Sargent Florencecontribution cannot serve as a guide in framing any policy for the futurelocation of industries in a country.b) The Co-efficient of localization is based essentially on the pattern ofdistribution in each country so that it would vary from country to countyaccording to local conditions and may also vary within each country withfurther industrialization. It would be difficult to conclude merely on the basisof coefficient whether an industry has a tendency for concentration. At best itcan have only a verification value.c) the location factor is based on the number industrial workers employed ineach area but a numeric reckoning of this nature is not always a sure guidethe degree of concentration of an industry. A better basis of comparisonwould be the output in each area. For instance a combination of higherproportion of capital in the form of more unto date machinery andconsequently a smaller proportion of labor might yield a higher output thananother region with a larger proportion of labor.
  16. 16. 5.4 August Losch’s Theory:We are aware that Weber theory concentrated only on supply and costconsiderations and leaving out demand completely. In contrary to it, Losch theorytended to neglect supply almost to the extent that Weber had neglected demand.In his theory, therefore, Losch tried to incorporate demand by considering thesize of the market and maintained that the best location would be that whichwould command the largest market area since this would bring in the highestsales revenue.Losch assumes an isotropic plane, that is a homogeneous land surface with anevenly distributed population of self-sufficient farm households each having thesame tastes and similar technical capabilities; in short, a surface from which allirregularities and non economic factors have been abstracted. He further assumesidentical production, identical demand curves for each buyer of each product, andthat transportation cost are proportional to distance. In such a situation, theshape and size of market area will depend on the price of the product and the rateof transport cost.
  17. 17. To take an illustration, let us consider the example given by Losch. Supposethere is a farmer who produces beer over and above his requirements. If OPis the price at the (Fig—1)
  18. 18. (Fig—2)Brewery, which at P (see fig 1); those living there will buy PQ bottles of beer. Furtheraway the price is higher by the amount of the frieght and the demand consequentlyshrinks. When the weight costs are PF, the total price rises to OF and the demandshrinks to zero. Thus PF will be the “extreme sales radius” for bear. By rotating thetriangle PQF on PQ as an axis we abstained the demand cone (see fig 2) whosevolume gives the total sales of the brewery at point P and thus denotes the marketarea of brewery
  19. 19. It is possible that other farms may also produce surplus beer which they wouldlike to sell in the market. As long as profits are made, new breweries will cometo be established, each brewery having a circular market area. As the number of breweries increase the circular areas touch other but evennow the whole space is not covered, and some area remains unnerved the onlypossibility by which the total area can be covered is through overlapping circlesin the former cases, firms will continue to be set up to serve the unnervedmarket while in the latter, consumers in the shaded region will choose a centrethat is nearest to them and leave others. Ultimately hexagons of the shapes areformed.The hexagonon form is the most efficient one since among all the possibilitiesof utilizing the corners; the hexogon retains the most of the advantages of thecircle.Each product will have a different network of market areas. When weconsidered different products each having its own network of market area, wecan see the emergence of an economic region or landscape.
  20. 20. 5.5 SummaryThe theory of industrial location attempts to explain answers for three importantquestions. They are; Why the industries are located where they are, Why the locationsare shifted, And what can be the best location for a particular industry keeping in viewthe resource endowments of different regions, transport network , existing demand,potential demand etc.,The first comprehensive effort at developing a theory of location was made by AlfredWeber. Weber’s theory is to be considered as a deductive theory. And he emphasizedthe cost factors in affecting the location of industry. He assumed competitive pricing (asituation where individual firms were powerless to influence the price of their productwhich was the same everywhere). Therefore, according to him, to achieve the maximumprofit, they had to minimize cost. It follows that a rational producer would choose alocation where lowest costs were incurred. This is the reason why Weber’s approach isknown as the least cost approach to the theory of industrial location.Sergeant Florence’s mode of analysis is inductive in character. On account of the verytangible results it yields regarding the trends of industrial distribution, Florence’s analysishas acquired great popularity. Sargent Florence has introduced two new concepts in thetheory of location, namely “Location Factor” and Co-efficient of Localization”August Losch tried to incorporate demand by considering the size of the market andmaintained that the best location would be that which would command the largest marketarea since this would bring in the highest sales revenue.
  21. 21. 5.8 Self-Assessment QuestionsShort answer type questions:1. What is meant by industrial location?2. Define the Agglomerative and Degglomerative factors.3. What is coefficient of localization?4. Enlist the assumptions of August Losch’s theory.Long answer questions:1. Critically evaluate Weber’s theory of industrial location.2. Examine the importance of location factor in Florences’s theory.3. Discuss August Losch’s theory of location