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Industrial Location

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Published in: Economics
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Subject of this note is Industrial Location.

Nehal A / Delhi

1 year of teaching experience

Qualification: M.A (Amity University, Uttar Pradesh - 2015), B.B.A (Maharshi Dayanand University , Rohtak - 2013)

Teaches: Economics

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  1. INDUSTRIAL LOCATION In setting up a factory a manufacturer has to take three interrelated decisions simultaneously: 1. The scale of operations 2. The technique to be adopted which involves the selection of the appropriate combination of factors of production. 3. The location of factory. The conventional theory of the firm provides the rules or norms for taking the first two types of decisions but it ignores the third one completely. A separate branch of economics bordering with the discipline of geography which is known as Industrial location or Vocational Analysis, deals with the element of the locational or spatial decision making. A manufacturer has to consider several technical economic and institutional factors for this. THE GENERAL DETERMINANTS OF INDUSTRIAL LOCATION Technical factors These are the physical factors which are more or less geographical in nature related to soil, RM, people, climate, etc. The important factors in this category are: 1. 2. 3. 4. 5. 6. 7. 8. availability of land nature & quality of raw material from lande.g forest, agricultural products geographic situation of the factory site in relation to the transport facilities by rail, road, water and air quantity & quality of human resources energy resources availability of water for drinking and industrial uses waste disposal facilities climate Economic and infrastructural factors Input prices, taxes, markets, skill of labor forces, availability of adequate infrastructural facilities, finance, etc. constitute together the category of economic factors. The general list of factors for this would be as follows: 1. 2. 3. 4. 5. 6. 7. 8. 9. local market situation in relation to export markets cost of land and building Cost of infrastructural facilities such as transport charges, power tariffs, water rates etc. salaries and wages in relation to skills local cost of living taxes and subsidies cost and availability of finance structure of existing industries 1
  2. 10. industrial relations and trade union activities around the proposed location sites 11. demographic factors such as age and sex composition of local population , literacy and professional skills 12. local medical facilities 13. housing facilities 14. cultural facilities such as schools, clubs and other recreation centers 15. communication facilities Other factors All other miscellaneous location factor may be put in this category like govt. policies towards location of new plans and personnel factors. APPROACHES TO LOCATIONAL ANALYSIS The theoretical material on industrial location is very much diversified. Significant contributions were made to it by geographers and economists. The geographical contributions It examines the form of the earth, its physical features, natural and political divisions, climate, production and population. It does make changes on industry existing therein. The central place theory This was developed by Walter Chris taller as the first systematic geographical theory of location to determine the no., size and distribution of town and cities. Using certain simplified assumptions, he was able to demonstrate graphically the spatial arrangement between hinterland and central places, mainly service centre. Thus, theory proposed that towns with lowest level of specialization would be equally spaced and surrounded by hexagonally shaped hinterland. It has relevance for location of a manufacturing industry in a special case where production tends to be centralized in the market is areally extended. However the major limitations of this theory is that it fails to encompass the development of belts of industrial concentration and the agglomerative factors which are common features of industrial factors. Renner's theory Renner classified industry into four categories 1) extractive 2) reproductive 3) fabricative 4) facilitative 2
  3. To undertake any one of these six ingredients are required 1) raw material 2) market 3) labour and management 4) power 5) capital 6) transportation Renner postulated the law of location for fabricative (i.e. manufacturing) industry according to which any manufacturing industry tends to locate at a point which provides optimum assess to its ingredients. It will, therefore locate near to raw material or market or power or labour. Renner also gave us scheme for industrial symbiosis with three diff. types 1) disjunctive symbiosis 2) conjunctive symbiosis 3) conindustrilisation This approach is considered quite realistic as it tries to bring together the major determinants for industrial location. However, he has not been able to go into deep in analysis the effects of agglomeration on industrial location. Rawstron's principles He has developed his theory of industrial location in terms of three restrictions- physical, economic and technical. 1) PHYSICAL RESTRICTIONS will be operative when some raw materials mainly natural resources are to be produced at the proposed site of the plant. 2) ECONOMIC RESTRICTIONS embodies the concept of spatial margins to profitability. The sum of expenditure on labour, material, land, marketing and capital varies from place to place resulting in a spatial variation in profitability for a firm. 3) TECHNICAL RESTRICTIONS examines the effect of the level of technology on location. Rawstron emphasize on technical restriction as an imp. Aspect of location decision as with changing technology t may be difficult to link the choice of plant location with technology. 3
  4. THE ECONOMIC THEORY OF INDUSTRIAL LOCATION WEBER'S THEORY In order to set up a factory a number of interrelated decisions have to be taken. In the normal course , manufacturers take three interrelated decisions simultaneously(i) scale of operation, (ii) technique of production to be adopted and (iii) the location of the factory. Among these the choice of industrial location plays an important role . Max Weber , a german economist , attempted an analytical approach to the problem and gave a comprehensive and systematic theory of location. According to weber, certain technical coefficient play a major rather than a decisive role in determining the location of a industry. An industrialist woukd prefer a region where raw material, labour and transport charges are competitive. Therefore difference in raw material costs due to distance over which they are transported, transport cost was also to be considred. This leave two general factors influencing location-labour cost and transportation cost. Therefore an industry has to choose a location where transport cost will be minimum. Fundamental factors which determine transportation cost are what to be transported and distance to be covered . To Weber , every industry has a "lacational figue" of least transportation cost consisting of points of raw material deposits and consumption centres. Weber classifies raw material into two categories (i) localized material(i.e materials which are confined to a particular region —cotton, wool, wood pulp etc). In process of manufacture localized material may be either pure(materials which do not loose weight during production-cooton & wool) or gross(do loose weight-menirals) (ii) ubiquities material which are available everywhere(brick, clay, wateer, etc). Former exerts a greater influence on location than latter. Weber make use of locational triangle of launhrdt to find the place of minimum transport cost. Diagram.. 4
  5. 7 x x Any point within triangle CMIM2 would be least cost point. Weber contends that location of manufacturing industry is determined by material index(ration between weight of localized material and weight of product). Higher is the ratio , greater will be the degree of concentration of industries at centre of consumption . It is pointed out that minimum transport point may not be the point of minimum production cost. One of the reasons for this may be (I) Favorable labor locations. The attraction power of labor depends on two factors-labor cost index(ratio between cost of labor per tonne of product) and locational weight(total weight to be transported during he whole process of production.) The ration of these two determine the extent of variation caused by vrying labor cost which has been called by weber "Labor Coefficient". Thus when labor costs are varied industry deviates from its transport location in proportion to size of its labor coefficient. (Il) factors which are themselves partly caused by those direct or primary factors just discussed. These indirect factors are agglomerative(reduces marketing cost which result from the fact that production is carried on at one place) and deglomerative(cheapning of production which results from the decentralization of production). Thus we may conclude that the industries with higher proportion of manufacturing expenses in their TC have a strong tendency to move towards agglomerative factors. 5
  6. CRITICISM 1. 2. 3. 4. Florence says that its assumptions are unreal and its arguments oversimplified Austin Robinson says that Weber distinction of raw material into ubiquities and fixed is too artificial. The theory does not appear to be in harmony with conditions in actual life assumptions of fixed labor centres and unlimited supplies of labor are untenable However Weber's theory can be considered as description underlying some factors responsible for industrial location CENTRAL PLACE THEORY OF LOCATION August losh developed the theory of location. He assumed broad homogeneous plain with uniform resource endownment i.e rejecting all cost difference factors affecting industrial location. The right approach to decide about the location is to maximize total revenue and thus profit maximization. To explain his theory a simple situation in which there is only one producer who is located at central place is taken.. he sells his products around the location point in circular belt, the extent of which depends on the economies of scale accruing o the producer and the transportation. The demand for the product falls with the distance. The maximum extent of the market area for the producer is given by the distance when demand falls to zero because of high price for the product. Diag.. It is a general spatial equilibrium theory.it is not giving anything about the factors which determine the location of individual firms. The rejection of cost differences as locational factors is a maor weakness of the theory. 6

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