Location Theory

Alfred Weber
• Location Theory –
predicting where a business
will or should be located.
• Location of an industry is
dependent on economic,
political, cultural features as
well as whim.
• Location Theory Considers:
– Variable costs-energy,
transportation costs & labor
costs
– Friction of distance-
increasing distance =increased
time & cost
Weber’s Model-The Least Cost Theory
Alfred Weber, (1868-1958) a German economists, published Theory
of the Location of Industries in 1909. His theory was the industrial
equivalent of the Von Thunen Model.
Manufacturing plants will locate where costs are the least.
Categories of Costs:
Transportation-the most important cost-usually the best site is where
cost to transport raw material and finished product is the lowest
Labor-high labor costs reduce profit-location where there is a supply
of cheap, non-union labor may offset transportation costs
Agglomeration-when a group of industries cluster for mutual benefit-
shared services, facilities, etc.-costs can be lower
Deglomeration-when excessive agglomeration offsets advantage-
eastern crowded cities
 Weber’s Least-Cost Theory
One of his core assumption is that firms will chose a
location in view to minimize their costs.
 The Basics
 Alfred Weber formulated a theory of
industrial location in which an industry
is located where the transportation costs
of raw materials and final product is a
minimum.
In one the weight of the final product is
less than the weight of the raw material
going into making the product.This is the
weight losing or BULK-REDUCING
industry.
Ex: Copper production
steel production
 BULK-GAINING
• In the other the final product is heavier than the raw material that
require transport.
• Usually this is a case of a raw material such as water being
incorporated into the product.

• This is called the weight-gaining or BULK – GAINING industries.

• What happens when a variety of materials is
needed for the production?

– Production point moves closer to the heaviest

raw material to balance transportation costs.
ENERGY SOURCE??

 The availability of an energy supply is another factor

in the location of industry, but the factor used to be
much more important than it is today.
 The early British textile mills were site-tied” because
they depended on falling water to drive the looms.
 Today, power comes from different sources and can
be transmitted or transported over long distances.
 Exceptions occur when an industry needs very large
amounts of energy, for example, certain metallurgical
and chemical industries.
• Hotelling’s Model-Harold
Hotelling (1895-1973) this
economist modified
Weber’s theory by saying
the location of an industry
cannot be understood with
out reference to other
similar industries-called
Locational
Interdependence
• Losch’s Model-August
Losch said that
manufacturing plants choose
locations where they can
maximize profit. Theory:
Zone of Profitability
How has Industrial
Production
Changed?
 How has Industrial
Production Changed?
dominant mode of mass production
during the twentieth century, production of
consumer goods at a single site.
– current mode of production with a
more flexible set of production practices in which
goods are not mass produced. Production is
accelerated and dispersed around the globe by
multinational companies that shift production,
outsourcing it around the world.
rather than keeping a large
inventory of components or
products, companies keep just
what they need for short-term
production and new parts are
shipped quickly when needed.

corporations can draw from

labor around the globe for
different components of
production.
 Modern Production
Outsourcing –
moving individual steps in the
production process (of a good
or a service) to a supplier, who
focuses their production and
offers a cost savings.

Offshore –
Outsourced work that is located
outside of the country.
 Nike (A Light Industry)-Headquartered in Beaverton,
Oregon, Nike has never produced a shoe in Oregon.
Beginning in the 1960s, Nike contracted with an
Asian firm to produce its shoes.

Skopje, Macedonia-The swoosh is ubiquitous, but where is the shoe

produced? Nike has a global network of international manufacturing and
sales.
 Outsourcing vs. offshoring wage growth?

Maquiladora Part 2
• Transportation-intermodal connections where
air, rail, truck, ship and barge connect-eases
flow of goods-e.g. container shipping… Break
of Bulk points.
• Regional and global trade agreements-WTO,
Benelux, European Union, NAFTA,
MERCOSUR, SAFTA, CARICOM, ANDEAN
AFTA, COMESA, etc. goal to ease flow of
goods by eliminating trade tariffs or quotas
• Energy-coal was replaced by natural gas & oil
after WW II-transported by pipeline or tanker
 • Europe-despite North Sea Oil-still must import
• Mexico & Canada oil and natural gas
• U.S. uses 27% if oil & 37% of natural gas produced in the world.
Dependent on imported oil… Impact of the Bakken???
• OPEC: Saudi Arabia, Kuwait, Iraq, Russia large oil reserves
 Deindustrialization –
a process by which companies move industrial jobs to
other regions with cheaper labor, leaving the newly
deindustrialized region to switch to a service
economy and work through a period of high
unemployment.
Abandoned street
in Liverpool,
England, where the
population has
decreased by one-
third since
deindustrialization
Liverpool
Detroit
The Rust Belt
vs
The Sun Belt
THE END