Feb 12: Economic Geography, Location Theory and Theories of Firm Location

Feb 12: Economic Geography, Location Theory and Theories of Firm Location

Alonso, William. "Location Theory," in Regional Policy. Cambridge: MIT Press, 1975, pp. 35-63. [Library reservesNelson, Arthur C. et. al. “Exurban Industrialization: Implications for Economic Development Policy” Economic Development Quarterly 9, 2 (May 1995) [Library reserves]Carlson, Virginia L. "Identifying Neighborhood Businesses: a Comparison of Business Listings." Economic Development Quarterly, Vol. 9, No. 1, February 1995, pp. 50-59. [Library reserves]see also:Edgar M. Hoover and Frank Giarratani, An Introduction to Regional Economics (on-line edition)

• Basic issue: how do you find accurate information on local businesses?

• Comparison of various sources:– Dun’s Market indicators– Harris directory– Covered Employment and Wages file (ES202)– Manufacturers Directory– A local database

Carlson, Virginia L. "Identifying Neighborhood Businesses: a Comparison of Business Listings." Economic Development Quarterly, Vol. 9, No. 1, February 1995, pp. 50-59. [Library reserves]

• Where are industries locating? Neither urban • nor rural hinterland, • but somewhere in between: “middle area exurbia”

Nelson, Arthur C. et. al. “Exurban Industrialization: Implications for Economic Development Policy” Economic Development Quarterly 9, 2 (May 1995)

1. Bike Messenger Land/Urban Hipster Zone (within city) Lower East Side (NYC), Little Five Points (Atlanta), Pioneer Square (Seattle), Wicker Park (Chicago)

2. Crunchy/Progressive Suburbs (urban exiles who still identify with city life) Takoma Park (MD).

3. Professional Zone (affluent inner-ring suburbs, old-line communities) Bethesda (MD), Greenwich (CT), Tarrytown (NY), Winnekta (IL), Santa Monica (CA), Shaker Heights ( OH)

4. Immigrant Enclaves (semi-residential, semi-industrial, often serving the professional zone) San Gabriel Valley (east of LA); Middlesex County (NJ)

5. Suburban Core (the heart of suburbia; mid-ring)6. The Exurbs (big box malls, exit-ramp office parks)

Location Quotients for Durable Goods

Jobs peoplefollow

follow

Where are the jobs (firm location/relocation)? industrial economics + geography = location theory

Where are the people (labor force concentrations and migration)?

labor economics + geography = economic demography

+ policy & politics+ policy & politics

Ideas in location theory, economic geography,

business siting

CONCEPTS•Agglomeration economiesCentral place theory•Spatial division of labor [update graph about division and clustering – i.e., from vertically-integrated to vertically disintegrated]•Input-oriented and output-oriented activities (e.g., weight-gaining and weight-losing sectors) •Hotelling Model•Tendencies to spread (decentralize) and tendencies to cluster (centralize) [e.g., corner convenience stores vs. jewelry stores•Product cycle/profit cycle theory•Active vs. passive locational attributes

Gunnar Myrdal (1898 – 1987)

“Spread and backwash effects”

spreadback wash

Starting conditions

How to explain uneven development?

Gunnar Myrdal (1898 – 1987)

“Spread and backwash effects”

spreadback wash

after the effects take place

How to explain uneven development?

3 basic questions in location theory

1. Why does economic activity cluster? (e.g., why are there cities, industrial districts, etc.?)

2. Why does it initially cluster in a specific location? (e.g., steel in Pittsburgh, computers in the SF Bay Area, autos in Detroit, music in Nashville, etc.)

3. Why does the initial cluster remain or instead disperse and/or relocate? (e.g., the aerospace industry moved from the east coast and Midwest to Los Angeles, San Diego, Seattle, etc.)

The connection between economic era and human settlement patterns

centripetalcentripetal sentri.pital, a. [f. mod.L. centripet-us (Newton) centre-seeking + -al1.]Tending toward the centre;

centrifugalcentrifugal sentri.fiugal, , a. [f. mod.L. centrifug-us (Newton, f. centrum centre + -fugus fleeing, avoiding) + -al1.]Flying or tending to fly off from the centre

two opposing forces

urbanization economies

clustering across sectors (and sharing urban infrastructure, etc.)

Agglomeration Economies

+ =scale economies

Savings due to producing on a large scale (e.g., mass production of a Model T Ford)

“economies” = savings

Spatial dimension

Applying the concept to economic geography

agglomeration economies

Savings due to clustering of economic activity in one place

localization economies

clustering among the same sectors (e.g., apparel)

two parts:

Christaller, Walter. 1933. Die zentrale Orte in Süddeutschland. [Central Places in southern Germany]

The larger the city,

• the larger the market area

• the greater the offering of goods and services

• the greater the number of specialized economic activities

Type Market areaRadius, km

Population oftown

Population ofmarket area

M (Marktort) 4.0 1,000 3,500A (Amtsort) 6.9 2,000 11,000K (Kreisstadt) 12.0 4,000 35,000B (Bezirkstadt) 20.7 10,000 100,000G (Gaustadt) 36.0 30,000 350,000P (Provinzstadt) 62.1 100,000 1,000,000L (Landstadt) 108.0 500,000 3,500,000

Sources: GaWC Research Bulletin 59 (A): 'Christaller for a Global Age: Redrawing theUrban Hierarchy' (P. Hall) Christaller, W. (1966 (1933)) Central Places in SouthernGermany. Translated by C.W. Baskin. Englewood Cliffs: Prentice-Hall. Dickinson, R.E.(1967) The City Region in Western Europe. London: Routledge & Kegan Paul.

How big is your market area? (a function of production costs and transportation costs)

How big is your market area? (a function of production costs and transportation costs)

tc - starting condition

How big is your market area? (a function of production costs and transportation costs)

tc’ - firms A and C lower production costs

How big is your market area? (a function of production costs and transportation costs)

tc’’ - all three firms lower per mile transportation costs

Global cities have the prerequisite of the spatial division of labor, with the concentration of specialized, advanced service sectors (that pay high wages and control global capital flows). And the spatial division of labor goes hand in hand with trade. so the new international division of labor (NIDL) goes hand in hand with international trade.

R&D Corporate headquarters

production distribution

Once all located under one roof Single location: Boston, Mass.

Global cities have the prerequisite of the spatial division of labor, with the concentration of specialized, advanced service sectors (that pay high wages and control global capital flows). And the spatial division of labor goes hand in hand with trade. so the new international division of labor (NIDL) goes hand in hand with international trade.

Spatial dispersion by

function

R&D Corporate headquarters

production distribution

Cambridge, Mass. Midtown Manhattan

Guangdong, China Phoenix, Hong Kong, Frankfurt

Spatial dispersion by

function

R&D

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Spatial dispersion by

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•WHERE DO YOU LOCATE PROCESSING? CLOSE TO THE RAW MATERIALS OR THE MARKET – OR A MID-POINT COMPROMISE?

Raw Materials Market

process

? ??

•Input-oriented and output-oriented activities (e.g., weight-gaining and weight-losing sectors)

Raw Materials Market

Weight gaining: Beer, bread,Soft drinks, cement, newspaper printing

process

process

Weight losing: Iron ore processing, lumber milling, meat packing, raisin production, wine making, fruit canning,

•The mid-point rarely makes sense…

Raw Materials Market

process

• Transshipment Point

Raw Materials Marketboat road

•Except…

The declining significance of transportation (time and money costs as a percent of total costs) – and therefore as a factor in industrial location

•Hotelling Model•2 ice cream sellers at the beach•Customers evenly distributed on beach•Customers have one criterion of where to buy ice cream: which stand is closer?•QUESTION: where do the two stands locate?

•Hotelling Model•2 ice cream sellers at the beach•Customers evenly distributed on beach•Customers have one criterion of where to buy ice cream: which stand is closer?•QUESTION: where do the two stands locate?

•Hotelling Model•2 ice cream sellers at the beach•Customers evenly distributed on beach•Customers have one criterion of where to buy ice cream: which stand is closer?•QUESTION: where do the two stands locate?

•Hotelling Model•2 ice cream sellers at the beach•Customers evenly distributed on beach•Customers have one criterion of where to buy ice cream: which stand is closer?•QUESTION: where do the two stands locate?

•Hotelling Model•2 ice cream sellers at the beach•Customers evenly distributed on beach•Customers have one criterion of where to buy ice cream: which stand is closer?•QUESTION: where do the two stands locate?

equilibrium

•Hotelling Model•2 ice cream sellers at the beach•Customers evenly distributed on beach•Customers have one criterion of where to buy ice cream: which stand is closer?•QUESTION: where do the two stands locate?

NO equilibrium with three…

•Hotelling Model•BUT WHAT IS THE SOCIALLY OPTIMAL?•(e.g., minimize the average distance walked (over hot sand)•or minimize the deviation of distance walked?

•Tendencies to spread (decentralize) [e.g., corner convenience stores]

•Tendencies to cluster (centralize) [e.g., jewelry stores]

Profi

t and

pro

duct

cyc

les

http://www.fairchildsemi.com/graphics/productLifeCycle.gif

http://people.hofstra.edu/geotrans/eng/ch5en/conc5en/img/productlifecycle.gif

http://people.hofstra.edu/geotrans/eng/ch5en/conc5en/img/productlifecycle.gif

Add geography…

Geographically concentrated

Geographic dispersion

Either furtherdispersion and/or reconcentration (but also restructured)

Do you export production ….

Or import labor?

Passive or mechanistic or quantitative locational attributes:•Taxes•Transportation costs•Labor costs•Material costs•Land costs•Etc.

Active or dynamic or qualitative locational attributes:•Business culture, entrepreneurial culture•Strength of growth machine•Residential amenities and culture•Governance regarding permits, codes, etc.

Component First Wave Second Wave Third Wave

Location assets Discount them to attract outside business

Reduce taxes and provide incentives to all businesses

Build regional collaboration

Business focus Outside firms Assist all local firms

Create context for better relations among firms

Human resources

Create jobs for local unemployed people

Develop training programs

Utilize workforce training to build businesses

Community Base

Physical resources

Social and physical resources

Leadership and development of quality environment

Three Waves of Economic DevelopmentSource: Blakely, Edward J and Ted K Bradshaw. 2002. Planning Local Economic Development Theory and Practice: Third Edition. Sage. Page 45: Table 2.3

Another historical view….Fitzgerald, Joan and Nancey Green Leigh. 2002. Economic Revitalization: Cases and Strategies for City and Suburb. Sage. pp. 10-26

PHASE Selective characteristics

1. State Industrial Recruitment (starting in the 1930s)

Create good business climate (taxes, loans, infrastructure, etc.) • “greasing the skids” for business • corporatist paradigm

2. Political Critiques of Local Economic Development Activity (starting in the late 1960s)

Focus on who is paying and who benefits. ED actors as political agents • political economic analysis • critique of “smokestack chasing” • recognition of tension between footloose capital and communities •

3. Entrepreneurialism and Equity Strategies Two separate movements: Promoting high tech (mimic Silicon Valley) and pushing equity/redistribution (e.g., Mayor Harold Washington’s initiatives in Chicago, 1980s).

4. Sustainability with Justice Balancing economic development, social justice and environmentalism. Brownfield development.

5. Privatization and Interdependence Market solutions (e.g., Michael Porter’s competitive inner cities) and regional/metropolitan strategies.

If time, also cover these concepts(von Thünen, etc.)

Source: James Heilbrun, Urban economics and public policy, St. Martin’s Press.

Von Thünen

Twenty Really Useful Concepts in Understanding Local Economic Development

• agglomeration economy• cumulative causation vs.

equilibrium models• cyclical versus structural change• deindustrialization• equity vs. efficiency

• Externalities (both positive and negative)

• “leaky bucket” theory of money flows in local economies

• globalization• growth vs. development• innovation (process versus

product)

• linkages (forward and backward)• location theory• market failure• multiplier (and basic vs. non-basic

employment)• opportunity costs

• public-private partnerships• spatial division of labor• supply-side vs. demand-side

approaches• value added• zero-sum game