Chapter Seven

Industrial Location
Analysis

1
 Introduction
In setting up a factory, a manufacturer has to take three
interrelated decisions simultaneously:
I. The scale of operation;
II. The technique to be adopted, which is the appropriate
combination of the factors of production; and
III. The location of the factory: the place where an industry
is located, which is one of the major determinants of
firm’s performance.
 The task of decision-making about industrial location
requires consideration of several technical, economic
and institutional factors.
2
 Determinants of Industrial Location
 Suppose a factory is a technical unit whose
function is to convert a set of raw materials
into some output with the help of men and
machines, i.e., the factors of production.
 The inputs required by the factory for
production will be rarely available at a place.
 Inputs are procure from different places
which involve transportation and
procurement costs.
 Similarly, the output of the factory will be
rarely sold at a single place.
 It has to be sent to different places which
3
involve transportation and selling costs.
 Cont…
 Given the spatial distribution of inputs and outputs
markets, the owners of the factory will have to take the
decision about the place where the factory should be
located.
Several factors have to be considered simultaneously

while taking the decisions of industrial location, such as

1. Technical,

2. Economic and Infrastructural Factors

3. Other factors
4
 1. Technical Factors
 These are physical factors which are more or less geographical in
nature related to soil, raw materials, people, climate, etc.
 The factors includes:
 Availability of land.
 Nature and quality of raw materials from land, e.g. forest
products, agricultural inputs, minerals, and semi-finished products
from existing industries.
Geographic situation of the factory site in
relation to the transport facilities by rail, road,
water and air.
 Quantity and quality of human resources.
Energy resources.
Availability of water for drinking and industrial
5
uses.
 2. Economic and Infrastructural Factors
 Input prices, taxes, markets, skills of labor forces, availability of
adequate infra-structural facilities, finance, etc., constitute
together the category of economic factors.
 The general list of factors includes:
 Local markets.
 Situation in relation to export markets.
 Costs of land and buildings.
 Costs of infra-structural facilities such as transport charges,
power tariffs, water rates, etc.
 Salaries and wages in relation to skills.
 Local cost of living.
 Taxes and subsidies.
6
 Cont…
Cost and availability of finance.
 Structure of existing industries.
Industrial relations and trade union activities around the
proposed location sites.
 Demographic factors (age and sex composition).
 literacy, professional skills, etc.
 Local medical facilities.
 Housing facilities.
 Cultural facilities such as schools, clubs and other
recreation
 Communication facilities.
7
 C. Other Factors
All other miscellaneous location factors may be put in
this category
1. Government policies towards location of new plants
2. Personal factors.
Most of the governments pursue the policies of rapid
industrialization of their states.
 They provide several facilities for locating new plants in
some places or regions.
 An entrepreneur has to evaluate the facilities given by
the government very carefully before taking a decision
on location of his factory.
8
 Cont.…
Personal factors also play important role in
location decision, a manufacturer may prefer
to locate his factory at his birth place-
disregarding all economic factors.
Again may set up his factory close to a golf-
club in order to keep up his interest of
playing golf.
Industrial location based on such personal
factors will entirely be a matter of chance or
which is called as historical accident.

9
 Cont…
Most of the factors, mentioned above are self-
explanatory.
 In some industries firms are located near to sources of
major raw materials such as iron and steel, and pulp
etc, while in other industries, they are located near
markets.
 All factors together provide a spatial configuration
which is to be analyzed very carefully for the optimum
location of a factory.
 The choice of location will not be independent of the scale of
production and the technique to be used for that.
 They are interrelated aspects which are to be decided together.
10
 Approaches to Industrial Location Analysis
There are several theoretical and applied

approaches for location analysis based on

the above-mentioned factors.
In order to understand the precise relevance

of the various location factors and the

interactions among themselves, let us
examine the leading theoretical approaches
to industrial location analysis.
11
 Cont.…

I. The geographers, adopted intuitive

conceptual base and case studies approach to
arrive at some generalization about the
industrial location patterns.

II. The economists, followed a more formal,

abstract or deductive approach for location
analysis, an integration of these two diversified
approaches led to develop some operational

12
models for location studies.
 1. The Geographical Theories of Industrial
Location

o It examines the form of the earth, its physical

features, natural and political divisions,

climate, production, and population, etc.
o A complete review of all geo. Studies on

industrial location is not intended here, we

consider only the Renner’s theory which
has some theoretical relevance.

13
 A. Renner's Theory
 Renner developed some general principles
concerning industrial location. He classified industry
into four categories;
1. Extractive
2. Reproductive
3. Fabricative
4. Facilitative
To undertake anyone of these, six ingredients
are required raw material, market, labor and
management, power, capital and
transportation.
 Renner postulated any industry tends to
14
locate at a point which provides optimum
 Cont…
 It will, therefore, locate near to:
1. Raw Materials, if it uses perishable or highly
condensable raw substances, or
2. Market, where the processing adds
fragility, perishability, weight, or bulk to the
raw materials or where its products are
subject to rapid changes in style, design, or
technological character; or
3. Power, where the mechanical energy costs
of processing are the chief items in the total
cost; or
4. Labor, where its wages to skilled workers
15
are a large item in the total cost.
 Cont…
Apart from the above tendencies or laws,

Renner gave a scheme for industrial symbiosis.

Three different types were mentioned for this:

(a).Disjunctive symbiosis: where different

industries having no organic (i.e. economic or
technical connections among themselves),
gain advantages by existing together at a
particular place;
16
 Cont.…
(b).Conjunctive symbiosis: where different
industries with some organic connection
among themselves (i.e. inter-connections) are
located together; and
(c) Co-industrialization: which is an advance
stage of the conjunctive symbiosis leading
thereby to a huge industrial belt of
interconnected industries.
Renner's approach on industrial location is
quite realistic as it tries to bring together the
major determinants for that.
17
 Cont…

However, he has not been able to go into

deep in analyzing the effects of spatial cost

variation and industrial symbiosis, i.e.
agglomeration on industrial location.
He merely describes the tendencies of
industrial location based on these factors.

18
 The Economic Theories of Industrial Location
Some of the pioneering works from some
celebrated economists in the field of
industrial location are discussed in this
section, such as
a) Weber's Theory
b) Tord Plander's theory of Market Area
c) Losch's Theory of Central Place

19
 a) Weber's Theory
Weber's main interest was to construct a general
theory of location which could be applied to all
industries at all times.
In his theory he followed Launhardt's principle of
industrial location based on minimum transport cost.
 For this he has taken into account the general
factors of location which were relevant to all
industries.
 He consider two groups factors
I. Those influencing inter-regional location of
industries (i.e. regional factors) and
II. Those influencing intra-regional location (i.e.
agglomerating factors).
20
 CONT..
 He found three general factors which vary
regionally;
i. Raw material costs,
ii. Transport costs and
iii. Labor costs.
The approach followed by Weber was to explain
industrial location in terms of transport cost
first and then to examine the effects of changes
in labor cost and agglomerative factors on it.
He made some simplifying assumptions for his
analysis such as
21
 Cont….
 The locations of raw materials including fuel are
fixed
i. Situation and size of consuming canters are given;
and
ii. There are several fixed labor supply centers; labor
is immobile and unlimited in supply at fixed wage
rate.
iii. The institutional factors like taxation, interest,
insurance, etc., are insignificant locational factors.
iv. The economic culture and political system are
treated to be uniform and stable across the
locations.
v. On the whole, perfect competition for his model.
22
 Cont…
Weber started his analysis with the
proposition that a manufacturing unit tends
to locate at the place where cost of
transportation is minimum.
Weber used the locational triangle of
Launhardt to find the place of minimum
transport cost.
He assumed a simple spatial situation in
which there is only one consumption
Center(C) and two fixed supply centers (M1
and M2) for two most important raw materials

23
 CONT…

Fig.7.1The location Triangle

There may be other consumption points and raw
material supply centers but Weber did not consider all
of them together.
According to him, the least cost point will be located
within the triangle CMM2 such as the one shown by P.
The three corner points of the triangle will be pulling
the location point (P) towards themselves.
24
 Cont…
The position of the point will depend on the
balance of the pulls exercised by them.
If the pull of anyone corner is greater than
the sum of the pulls of the other corners,
production will be located at the point or
corner of origin of the dominant force.
The force exerted by each corner on
production point is in the form of ton-mile
weight to be moved from that point (M1 and
M2) and to the point (C).

25
 Cont.…
 Let x and y be the requirements of materials
M1 and M2, in tons per ton of output and let
one unit of output, i.e. finished product be
transported from point P to C.
The distances of the corner points from the
production point (P) are unknown.
Let them be a, b and c between P and M1, M2,
and C points respectively.
The total ton-miles of transport per unit output
would then be
ax + by + c
26
 Cont…
 This is to be minimized in order to find the
position of point P, i.e. the location of
production.
 The distances a, b and c and hence the point
P are easy to be found by applying the
theorem of parallelogram of forces in
geometry.
An industry may be material-oriented or
market-oriented from location point of view.
Weber used the 'material index' for
identifying such nature of the industry.

27
 Cont…
The material index (M I) is defined as:
MI= Weight of localized material
Weight of finished product
Industries displaying a high material index
 MI > 1 are attracted towards the sources of
raw materials such as iron and steel industry,
Industries displaying a material index less
than one
 MI < 1 are attracted towards the place of
consumption.

28
B. The Market Area Theory of Tord Palander
To demonstrate how the market boundary
between firms can be determined, Palander
took a simple case of two firms making the
same product and selling that in a linear
market, which is depicted 7.2, the firms are
located at two different places, A and B, which
are on a horizontal line which defines the
market area of the firms.
Let the prices charged by the firms at their
locations be a vertical distance AA' for firm A
and BB' for firm B
The consumers who are situated away from
29 the location points of the firms will be paying
 Cont…
 The addition in price will be the transportation cost.
 Let ta and tb be the average transport costs for the product
per unit distance for the two firms respectively.
The price for the product at a point other than
location would be α + ta (da) for firm A and β+ tb
(db) for firm B, da and db are the distances of the
point from the location of firm A and firm B
respectively.
The transport cost is a function of distance for each
firm
The gradients of total price paid by the consumer for
the product are shown by the lines forming cones at
points A' and B' for the two firms in Fig. 7.2.
30
 Cont..

Figure 7.2 Determination of market boundary for two

firms in a linear market
The gradients are linear because of fixed transport
rates for the product over distance.
At point X, the gradient lines of firm A and firm B
intersect.
 This implies that consumers would be paying
same price for the product of the firms.
 Point X defines the boundary between the market
31
areas of the two firms.
 Cont…
Algebraically, at point X we have:
α + ta (AX) = β + tb (BX)
Since AX + XB =AB, i.e. the distance between
the firm, we can therefore write
α + ta (AX) = β + tb (AB-AX) Or
AX = [(β - α)/ (ta+tb)] + [(tb)/ (ta+tb)]. AB

32
Example
Let α = Birr.100, β = Birr. 90, ta=tb = Birr. 2 and
AB = 100 km.
So, AX = [(90 – 100) / (2+ 2)] + [2/ (2+2)] [100]
= -2.50 + 50
= 47.5 km.
Firm A can sell only up to 47.50 kilometers
toward firm B.
 The rest of the distance between- them, i.e.
52.50 kilometers defines the market area of firm
B.
 The determinants of market boundary or area
for the firm are prices at the locations, transport
33 rates, and the distance between the firms.
 Cont…
Given the location of the firms and hence the
distance between them, the boundary of their
market areas will depend on the relative
magnitudes of the location price (α and β) and the
transport rates (ta and tb).
The intersections of the gradients of the two firms
will give the market boundary line for them.
 Palander calls such boundary line as 'isotante'.
 The shape and situation of the isotante depend on
the relative magnitudes of location prices and
transport rates for the firm.
The market area of a firm will be extended to
greater distance if its factory price and transport
34 cost are lower or decline.
 C. Central Place Theory of Losch
Losch started his analysis on a broad
homogeneous plain with uniform resource
endowment.
 This rejects all cost difference factors affecting
industrial location.
 In such situation, the right approach to decide
about location is to maximize total revenue.
 An individual locates his plant at that particular
site, where revenue is maximum.

35
 Cont…
The maximization of revenue implies profit
maximization because of the assumption of
uniform cost conditions across the locational
plain in Losch model.
Consider, only one producer who is located at
a central place.
 He sells his product around the location point
in circular belt, the extent of which depends
on the economies of scale accruing to the
producer and the transportation, i.e.
distribution cost of the product.
36
 Cont…
The demand for the product falls with 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. This is shown by OF in fig 7.3

37
 Cont…
The circle with OF as radius defines the market
area for the producer.
 0 is the location of the producer at which OQ is
the demand for his product.
The producer being only one in the market
makes profits.
 This attracts other competitors in the industry.
They put up their plants in the area.
The entry of new producers gradually reduces
the market area of the existing firms.
Their markets will not continue to be circular
but somehow irregular in shape.
38
 Summery
 Generally, economic theory about industrial location
broadly falls in 3 categories.
1. least cost school: emphasis on cost factor neglecting
effect of demand.
2. Market area school: considering the DD effect by
neglecting the cost factor.
3. Interdependent school: concerned with finding the
factors which attract producers towards each other.
Home exam
4. Evaluate each theory ? And suggest the way forward?
5. Explain different factors to be considered while taking the
decision of location for a factory.
6. Discuss briefly the different approaches to industrial
location.
7. In your opinion which approach is more important. Why?
39
 Thank
You!!!
40