Optional Assignment

The Location Decision

Author: Dr. Jean-Paul Rodrigue
Adapted by: Dan Snyder

Read the article, investigate and learn the concepts, and answer the questions at the end of the article.  This optional assignment is worth a maximum of 3 extra credit points.

1. The Importance of Transport in Location

In addition to being a factor of spatial organization, transportation is linked with the location of socioeconomic activities, including retail, manufacturing and services. In a market economy, location is the outcome of a constrained choice where many issues are being considered, transportation being one of them. The goal is to find a suitable location that would maximize the economic returns for this activity. There is a long tradition within economic geography in developing location theories with a view to explain and predict the locational logic of economic activities by incorporating market, institutional and behavioral considerations. The majority of location theories have an explicit or implicit role attributed to transport. As there are no absolute rules dictating locational choices, the importance of transport can only be evaluated with varying degrees of accuracy. At best, the following observations concerning transportation modes and terminals and their importance for location can be made:

• Ports and airports. Convergence of related activities around terminals, particularly for ports since inland distribution costs tend to be high. The location and the level of activity of ports and airports is reflective of global trade patterns.
• Roads and railroads. A structuring and convergence effect that varies according to the level of accessibility. For rail transport, terminals also have a convergence effect.
• Telecommunications. No specific local influence, but the quality of regional and national telecommunication systems tends to ease transactions.

Globalization has been associated with significant changes in business operations and markets. Managing operations in such an environment has become increasingly complex, especially with the territorial extension of production and consumption. Manufacturing strategies tend to use different locations for each component of a product in order to optimize respective comparative advantages. Transport requirements have proportionally increased as well in order to organize the related flows. The requirement of faster long distance transport services has propelled the importance of air transport, especially for freight. Air terminals have thus become a significant location factor for globally oriented activities, which tend to agglomerate in the vicinity. Additionally, the surge in long distance trade has made logistical functions, namely transport terminals and distribution centers, at the forefront of locational considerations. Technological changes have also been linked with the relocation of industrial and even service activities. Global telecommunication facilities can favor the outsourcing of several services to lower cost locations, such as the case of call centers in India indicates.

2. Location Factors

The location of economic activities is a priori dependent on the nature of the activity itself and on certain location factors such as the attributes of the site, the level of accessibility and the socioeconomic environment. Although each type of economic activity has its own set of location factors, some general factors can be identified by major economic sector:

• Primary economic activities. Their dominant location factor is related to environmental endowments, such as natural resources. For instance, mining takes place where economically recoverable mineral deposits are found and agriculture is subject to environmental constraints such as soil fertility, precipitation and temperature. Primary activities are thus characterized by the most basic location factors but have a strong reliance on transportation since their locations rarely are close to centers of demand. Substantial investments in extraction and distribution infrastructures must thus be made before resources can be brought to markets. The capacity to transport raw materials plays a significant role in the possible development of extractive activities at a location.
• Secondary economic activities. Imply a complex web of location factors which, depending upon the industrial sector, relate to labor (cost and/or skill level), energy costs, capital, land, markets and/or proximity of suppliers. Location is thus an important cost factor (cost minimization). Considering the wide variety of industrial and manufacturing activities, understanding the rationale of each sector is a difficult task that has been subject to many investigations in economic geography. Globalization, recent developments in supply chain management and global production networks have made the situation even more complex with the presence of many intermediaries and significant locational changes. The industrialization of China has been supported by several strategies trying to multiply locational advantages, such as the setting of export-oriented special economic zones and large investment in transport infrastructure.
• Tertiary economic activities. Involve activities that are most bound to market proximity, since the capacity to sell a product or service is their most important location requirement. As many of these activities are retail-oriented, consumer proximity (as well as their level of income) is essential and is directly related to sale levels. The main focus is to maximize sales revenues. Location is thus an important revenue factor (revenue maximization). The retail industry has significantly changed with the emergence of large retail stores that maximize sales through economies of scale and local accessibility. E-commerce (through the Internet) also provides a new dynamic where information can easily be traded and where niche retailing markets can be developed in a situation of high product diversity.
• Quaternary economic activities. Imply activities not linked to environmental endowments or access to a market, but to high level services (banking, finance, insurance, real estate) focused on information and capital (data and dollars); dominantly the high technology sector. With improvements in telecommunications, many of these activities can be located almost anywhere as demonstrated by the recent trend to locate call centers offshore. There are still some strong locational requirements for high technology activities that include proximity to large universities, research centers, and to a pool of highly qualified workers (as well as cheap labor for supporting services). Availability of venture capital, a high quality of life (cultural amenities) and access to excellent transportation and telecommunication facilities are all examples of locational influences on quaternary activities. However, as telecommunication infrastructures are becoming globally ubiquitous and accessible, such proximity is of lesser importance.
• Note: many of the same considerations for quaternary activities can be applied toward quinary economic activities, such as healthcare, research and development, and high level management.

Each of these sectors thus has its own criteria, which vary in time and space. However, basic location strategies appear to be dominantly a cost minimization or a revenue maximization endeavor. Understanding location factors enables a better overview of the dynamics of the global economy and the associated territorial changes at the global, regional and local levels.

3. Accessibility and Location

Since accessibility is dominantly the outcome of transportation activities, namely the capacity of infrastructures to support mobility, it presents the most significant influence of transportation on location. Hence, it appears that location (accessibility) and economic activities are intimately linked. Accessibility plays an important role by offering more customers through an expanded market area, by making distribution more efficient (in terms of costs and time), or by enabling more people to reach workplaces. While some transport systems have favored the dispersion of socioeconomic activities (e.g. automobiles and suburbanization), others have favored their concentration (e.g. airports and container terminals). All systems are bearers of spatial specialization and configuration. Among the main configuration forces are:

• Transportation costs. Refer to the benefits of a location that minimizes transport costs either for passengers or freight. This is at the core of classic industrial location theories (e.g., Weber) where transport-dependent activities seek to minimize total transport costs. With the expansion of transport infrastructures, shifts in manufacturing, new economic activities such as high technology, logistical management and an overall decline in transport costs, cost minimization is no longer a substantial consideration in location. However, transport costs cannot be easily dismissed and must be considered in a wider context where the quality and reliability of transport is of growing importance. It has been demonstrated that travel time, instead of distance, is the determining factor behind commuting ranges, a notion that increasingly applies to freight distribution.
• Agglomeration economies. Refer to the benefits of having activities locate (cluster) next to another, such as the use of common infrastructures and services. Clustering continues to be a powerful force in location as the reduction in transport costs favored the agglomeration of retail, manufacturing and distribution activities at specific locations. For instance, shopping malls are based on agglomeration economies, offering customers a wide variety of goods and services in a single location. Distribution activities, even unrelated, have also a tendency to cluster. The development of special economic zones, many export-oriented, also benefit from the clustering effect.
• Economies of density. Somewhat related to economies of agglomeration, but focus on spatial coverage and proximity. For instance, a retailer can achieve several types of cost savings by locating its stores in proximity to one another. Such a structure reduces logistics and delivery costs by sharing a distribution center. Other advantages may include the possibility to relocate part of the workforce between nearby facilities and having shared advertising. In such a circumstance, the locational strategies are based on proximity to existing facilities, even if this implies the selection of sub-optimal locations.

Because of the level of accessibility they provide, new transport infrastructures influence the setting of economic activities. It becomes a particularly strong effect when new infrastructure are added to an undeveloped (or underdeveloped) site and thus locational decision tend to be simpler and unhindered by the existing spatial structure. The locational effects on activities are not always automatic or evident. They are important however when infrastructure is accompanied by social, economic and urban transformations of space. New infrastructures therefore play a catalytic role, because they are capable of transforming space.

Questions/tasks:

1. The location of businesses is of prime importance in any era. Discuss how modern transportation and globalization influence the location decision (the best location) of modern business.

2. What are the dominant location factors for primary and secondary economic activities? How do they differ?

3. What are the dominant location factors for tertiary and quaternary economic activities? How do they differ?

4. Discuss the basic difference between cost minimization and revenue maximization. How do these concepts work together to help determine the location decision?

5. Define accessibility, and explain how it presents the most significant influence of transportation on location.

6. Discuss and summarize three configuration forces that influence the location decision.