Weber’s Model Industrial Location
Weber’s Model• Aim: find out the optimum location of
a factory• Optimum location = least cost location• Assumptions
– isotropic surface / uniform plain
– different labour cost at different locations but labour is not mobile
– single mode of transport and transport cost is direct proportion to distance and weight
– perfect competition(same product, same quality, same price)
– entrepreneurs are economic rational (minimize cost)
– resources (raw materials) • ubiquitous (everywhere)• localized (fixed)• pure (no weight change)• gross (weight loss)
Material index=Weight of localized raw materialsWeight of finished product
Procedures for finding optimum location
• Stage 1 - Least Transport Cost
• Stage 2 - add in Labour Saving
• Stage 3 - add in Agglomeration Economies
One market and Single raw material
Situation 1
R.M. Market
$ $
distance
Pure raw material
Assembly cost
Distribution cost
Total transport
cost
One market and Two raw materials
Situation 2
Market
RM2RM1100 km
100
km
100 km
Both RM1 and RM2 are localized and pure
Stage 2 - add in Labour Saving
2 sets of isotim
assembly cost
+distribution
cost
Total transport cost
Isodapane
$20
$25
$30
Exercise• Assembly cost• A=land (114)x$1x4 +lake (160+120)x$0.5x4
= $1016
• B=lake (120+120)x$0.5x2+land (176)x$1x4 = $944
• C=lake (120+160)x$0.5x2 + land(114)x$1x2 = 508
• M= lake (120+120)x$0.5x2+land (118)x$1x2 + land (176)x$1x4+ land(118)x$1x4
• =$1652
Exercise
• Distribution cost• A to M = lake (120+120)x$0.5x1+land
(118)x$1x1=$238
• B to M = land (118)x$1x1=$118
• C to M = land (176)x$1x1+land(118)x$1x1=$294
Exercise• Total Transport Cost
• A = $1016+$238=$1254
• B = $944+$118=$1062
• C = $508+$294=$802
• M=$1652+$0=$1652
Optimal Location
Price Production Cost
Transport Cost
Profit
A $2200 $1000 $1254
B $2200 $1000 $1062
C $2200 $1000 $802
M $2200 $1000 $1652
Criticism • Unrealistic
assumptions• uniform plain• transport cost• labour mobility• economic man• Single market• competition
• Important factors neglected
• profit• diseconomies• technology• institutional factors• behavioural factors
Labour
• Spatial mobility of labour• industrial mobility of labour• structure of labour cost - wages,
holiday, fringe benefit, training cost
• other than cost, quantity and quality
Labour Intensity Ratio
shipment of ValueemployedNumber
L.I.R.
Scatter diagram=Scattergram
shows correlation of 2 variables
Transport cost/freight rate• Structure of transport cost
Distance
Freight rate Weber’s ideaReal world
Terminal cost
Haulage cost
Break of bulk/Transhipment point
• A point where there is a need to change mode of transport due to
• physical reason - port• artificial - national boundaries
Impact of technologyProduction technology
use less amount of raw materials and/or power
use of substitutes (raw materials or power) e.g. use of scrap in iron and steel industry
Transport technologylower freight rate
refrigerationstandardization(use of containers)
Automation - less labour and skilled labour
Impact of Information technology• What are the uses of computers and
internet in manufacturing?• Computer aided design CAD• Computer controlled production• Computer controlled logistics
– getting raw materials, products to market
• e-business / e-commerce– buying raw materials, sale of products
• e-recruitment
Impact of Information technology
• Impact on getting raw materials?• Impact on seeking labour?• Impact on mobility of capital?• Impact on transportation and
logistics?• Impact on market?• Impact on industrial location?
Impact of information technology– Information about price and supply of raw
materials is widely spread– More information for labour to seek
employment– Recruitment and online interview over internet– Information on job vacancies is widely spread– Decrease the reluctance of labour to migrate
to othre countries– Increases mobility of labour– Increase demand for skilled labourTNCs shift to countries with cheap labour
Impact of information technologyPromotion of world tradeBetter monitoring of investmentMobility of capital is greaterLean production method and Just-in-time
production is possibleIndustries may be shifting away from
sites closed to raw materials and power resources or nodal points of transportation as the influence of transport cost is diminishing
Better flow of market information
Impact of technology• Information technology
– With the ease of making foreign investment, it may become more and more popular to set up new factories in other countries, especially in the less developed countries, for the sake of lowering the production cost with cheaper land and labour
– Decrease the need to move industries to other countries for labour with special skills
– Development of Transnational corporations / cross-border production is more common
– Clustering / agglomeration of industries
Locational change• Declining importance of traditional
factors• relative importance of other factors rise• more flexible / footloose • importance of research and
development• market / large urban centres• Cross-border production / international
division of labour / TNCs
Behavioural Factors• Not all decision-makers are economic
rational• perception , knowledge and information• satisficers rather than optimizers• psychic income• advantages :
– lower rent because of weaker competition– reduce over-concentration-pollution, etc.– provide employment to inferior areas
Institutional FactorsCauses
Strategic reasonsEconomic reasonsPolitical reasonsSocial reasons
Waysprovision of infrastructureprovision of landredistribution of population
Favourable terms of trade
e.g. Shenzhen Special Economic Zone
tax holiday / concession rate
land use planning / zoningprotection of local industries
e.g. tariff, quota
Anti-pollution laws and traffic control regulations