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Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
Factors of Location
(Labor, Land, Capital, Managerial & Technical Skills)
• Labor
1) The most important factor in Location
2) In countries with high BR, the supply of labor tends to be
relatively high and labor costs are low.
3) In developed countries the BR is low and labor is
relatively expensive.
4) These trends shape the wiliness of firms to become
more capital-intensive, when labor is cheap – not.
5) As labor is relatively mobile factor, regional differences
in the supply and demand for labor (wage rates) should
move towards equilibrium by labor migration.
3
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
Labor
6) Unemployment payments and workers’
compensation can reduce the labor migration
7) Firms will pay relatively high wages for skilled,
productive labor (human capital) if the cost is justified
by higher output and profits
8) Myth: Firms always want the cheapest labor
possible
9) Relative contribution of labor varies by industry
10) Labor is the only input that is able to resist the
conditions of exploitation, to go on strike or to unionize
(labor unions)
4
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
Labor
11) In addition to the cost of labor, firms must
consider working conditions, health standards,
pensions and health benefits, vocations and
holidays, worker training
12) Advantages can be gained by companies
that relocate to or purchase from newly
industrializing countries
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
Factors of Location (continued)
• Land
– At the local level, availability and cost of land are the
most important locational factors affecting firms location
decisions
– Accessibility (nearness to city) is primary determinant of
the cost of land
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
Land
1) Firms that must have accessible land – to labor, to
each other, to specialized pools of information, to
urban services, such as legal firms – will pay very
high rents in order to locate near the city center.
2) Firms that do not require access to clients,
suppliers and services (large manufacturing firms)
locate on the urban periphery where land costs are
low but transportation costs are high
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
Capital
– Fixed capital: machinery, equipment, plant buildings
– The age of the capital stock of a region and how recent
the technology is greatly affect its overall productivity
levels.
– Financial capital: revenues, corporate profits, savings,
loans, stocks, bonds, etc.
• Most mobile factor of production
• Can be transferred instantaneously, with almost no cost
• Finance sources
– Personal funds, family, friends
– Banks, lending institutions
– Sale of stocks and bonds
– Capital intensification: when capital substitutes for labor
– Advantages and disadvantages of capital intensification? 8
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
Factors of Location (continued)
• Capital (continued)
FIGURE 5.4 The process of capital intensification is a long-term trend under capitalism.
When labor costs are low or jobs are hard to automate, this is less likely to occur. 9
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
Managerial and Technical Skills
– Management
• Allocates resources,
• raises capital,
• negotiates financial markets,
• monitors competition,
• government rules and
policies,
• makes investments,
• personnel decisions,
• marketing, etc.
• Skilled and well paying labor
• Requires linkages to other
firms (cluster) 10
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
Factors of Location (continued)
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
Technical skills
– Innovation, research and development (R&D)
– The R & D required for new products is a large and
expensive process, involving long times between
invention and production, that is impossible for small firms
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
U. S. expenditures for R&D 2.6% of GDP
Japan 3.4%
South Korea 3.2%
Germany 2.5%
UK 2.3%
France 2.1%
China 1.4%
13
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
The Weberian Model (Alfred Weber, 1929)
• Emphasizes transportation costs in industrial
location decisions
• Assumptions:
– Transportation costs are a linear function of distance
• Who knows what this means?
– Producers face neither risk nor uncertainty
– Implies that demand for a product is infinite at a given
price
• Elements
– Raw materials and finished goods (products)
– Location (site of raw material, market)
14
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
The Weberian Model (continued)
• Elements with raw materials (continued)
FIGURE 5.7a One localized raw material
located at RM. Total transport costs (TTC) are
lowest at RM, as in primary sector activities.
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
The Weberian Model (continued)
• Elements with raw materials (continued)
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
The Weberian Model (continued)
• Weber today
– Transportation costs are
declining
– Brainpower is displacing
muscle and machines,
and transforming natural
resource
– Real-world patterns are
evolving
17
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
Technique and Scale Considerations
• Establishing a manufacturing plant in a market
economy involves the interdependent decision-
making criteria of…
– SCALE (the size of the total output) and
– TECHNIQUE (the particular combination of inputs that
are used to produce an output)
• Firms can substitute among inputs to minimize their costs
(e.g., machinery for labor)
– Limits to substitution vary by industry
18
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
Technique and Scale Considerations
(continued)
• Scale considerations
– Economic scale: level of output
– Principles of Scale Economies
• Division of labor
– Speeds up production
– Allows use of relatively unskilled labor
– Requires larger scale and larger labor pool
– Increasing number of shifts uses capital more efficiently
• Economies of Scale (scale economies) refer to the reductions
in costs associated with the production of output in large
quantities
• Large firms usually pay less for material inputs than small ones
19
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
Technique and Scale Considerations
(continued)
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
Technique and Scale Considerations
(continued)
21
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
Technique and Scale Considerations
(continued)
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
Technique and Scale Considerations
(continued)
23
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
Technique and Scale Considerations
(continued)
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
How and Why Firms Grow
• Firms expand for two reasons: survival and growth
– Today, small firms have less chance of becoming a
corporate giant than they did 100 years ago
– Growth strategies are either integration or diversification
• Horizontal integration predominated from 1890s to early 1900s
• Diversification predominates since 1950s
• Removal of competition through absorption leads to oligopoly
(control of a market by a small number of firms or producers)
25
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
How and Why Firms Grow (continued)
• Methods to grow are internal (retention of funds,
etc.) or external (acquiring assets)
– Often involve additional factories and a change in
geography
– Backward integration: firm takes over responsibilities
that previously belonged to suppliers
– Forward integration: firm begins to take control of
outlets for its products
– Firms usually expand in geographically adjacent or
culturally similar environments
26
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
Geographic Organization of Corporations
• Organizational Structure
– Firms are usually
hierarchically
organized
– Several basic
formats or
models
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
Geographic Organization of Corporations
(continued)
• Administrative Hierarchy
– Even in manufacturing, a large proportion of employees
are involved in nonproduction activities; this occurs
because of…
• Substitution of capital for labor
• Growth of activities associated with administration,
management, research, advertising, finance, legal services,
etc.
• Strategic head-office functions tend to cluster in a relatively
small number of metropolitan areas
– Access to other firms, clients, suppliers, advertisers, repair, etc.
– Face-to-face contacts and business meetings needed
28
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
Economic Geography and Social Relations
• The production of goods is a social (not purely
individual) process
– Crucial social relation of production is between owners of
the means of production and the workers employed to
operate these means
• Relations among owners
– Capitalists make independent production decisions under
competitive conditions
– Competition requires producers to apply a minimum of
resources to achieve higher outputs
– Competition is the source of capitalism’s immense
success as a mode of production
29
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
Economic Geography and Social Relations
(continued)
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
The Product Life Cycle
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
Business Cycles and Regional Landscapes
• Capitalism is a society and economy that is
notorious for its instability (booms and busts)
FIGURE 5.15 Kondratiev waves of economic activities. Each wave lasts approximately
50 years and has four phases of activity: boom, recession, depression, and recovery. 32
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
Business Cycles and Regional Landscapes
(continued)
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
Business Cycles and Regional Landscapes
(continued)
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
The State and Economic Geography
• The economic landscapes of capitalism are not simply
the products of “free markets”
• The extent of state involvement varies historically and
geographically
• Legal system shapes economies
• Governments also set fiscal and monetary policies
– Fiscal policies: determine how governments spend money
– Monetary policies: determine the money supply, almost all
nations use a national bank to manage their money supply
– Construction of infrastructure (transportation and
communication networks)
– Agent in international issues
35
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
The State and Economic Geography
(continued)
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
The State and Economic Geography
(continued)
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
The State and Economic Geography
(continued)
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
1. How is labor different from other inputs that firm
use?
2. What determines the amount and type of an
industry’s demand for labor?
3. Do firms always purchase the cheapest labor?
Why or why not?
4. What is human capital and why it is important?
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Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
Home work:
Factors of Location
1.Labor,
2. Land,
3.Capital,
4.Managerial & Technical Skills
5. The Weberian Model
6. Principles of Scale Economies
7. Vertical integration (examples)
8. Horizontal integration (examples)
9. Diversification
10. Agglomeration economies
11. Organizational Structure (examples)
12. The Product Life Cycle
13. Business Cycles
14. Fiscal and monetary policies (examples)
40
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.
15. How does land influence the location of a firm?
16. How does input intensification influence the location of a
firm?
17. Compare and contrast scale and agglomeration
economies.
18. Contrast horizontal and vertical integration.
19. What is the product life cycle model and how does it
influence the location of firms?
20. Where to allocate the production of: clothes, computers,
soft drinks, finance institutions, banks, beauty salons? Urban or
rural region? Developing or developed countries? Why?
41
Stutz & Warf; The World Economy, 6th Edition © 2012 Pearson Education, Inc.