Economic Location Theory and Practice

Lonnie L. Jones
Mike D. Woods

February, 2002

Abstract
This publication reviews the development of industrial location theory from early
contribution to recent times. Highlights and important contributions are included.
Individual location factors considered important are discussed. From the very earliest
studies, location relative to a market has been recognized as a key factor in determining
land and other resources use.
Hence, manufacturing is a basic industry, the location of which in a community
brings new income and employment and stimulates the residential sector of the local
economy. Location theory can tell us a great deal about the requirements of the
community (or region) that may or may not make it as attractive location site for a
particular industry. Said differently, location theory can help identify those basic
industries upon which a community may wish to focus their economic development
efforts and resources, the attracting manufacturing plants is one means for communities
seeking economic development and growth.
This publication is intended as a general reference for persons interested in
industrial location. It can also be used as a teaching aid by Extension specialists or other
professionals. Figures for overheads are included in this publication. Further questions
concerning content can be directed to the authors.

Keywords: Location Theory, Economic Development, Location Factors.

TABLE OF CONTENTS
PAGE
Development of Industrial Location Theory

The von Thnen Theory

Webers Theory of Location
Additions to Location Theory

3
4
6

Elements of Modern Location Theory

Profit-Maximization
Personal Factors
Location Factors
Raw Materials
Transportation
Markets
Labor
Water
Capital
Industrial Energy
Community Factors

8
9
10
11
12
13
15
16
16
17
18

Changing Factors Affecting Plant Location From a Practitioners View

19

Conclusion

20

References

22

Figure 1
Figure 2
Figure 3
Figure 4

23
24
25
26

Economic Location Theory*

by
Lonnie L. Jones and Mike D. Woods**

The location of manufacturing plants is a major decision facing industry. It is also

a major concern to cities and communities seeking economic development and, in recent
years, with discussions of a national growth policy and land use policy, industrial
location has become an important item on the national agenda. Hence, it is essential that
location theory, which attempts to explain the process by which economic activity is
located and distributed in space, be understood.
For over one and one-half centuries, economists have attempted in incorporate
regional and locational analysis into the framework of economic theory. The problem
confronting economists was well stated by Alfred Weber (1929), an early contributor to
location theory:
The economic causes determining the location of an industry seem to be a
network of complex, diverse elements often in individual instances so
arbitrarily, or at least incidentally, composed that there appears to be no place
for more than an analysis of the individual case. It seems impossible to make
any general statement for most industries concerning the places to which their
factories go or concerning the causes upon which their locations depend.
(Weber, 1929, p. 17).
This conclusion by Weber presents quite a challenge to academic and business
interests in developing an economic theory to explain why an industry tends to locate
within any given area.
However, casual observation of the structure of our cities and regional economies
reveals great similarities from place to place. Hence, there is ample reason to believe that
the location of economic activity in space has certain determents. The most obvious basis

for explaining the distribution of economic activity in space is geography and the
disposition of natural resources. With limited knowledge of climate, we know it is better
to grow oranges in South Texas and wheat on the High Plains rather than the other way
around. Indeed, these simple and direct relationships to natural resources such as climate,
land and water were the primary factors that guided the earliest theories purporting to
explain the location of economic activity. However, such relationships do not take us
very far toward explaining the development and concentration of modern industry. More
subtle factors play an important part in shaping the location patterns of industry. It is the
continuing study of numerous influences on industrial location decisions that has led to
modern location theory.
Location theory attempts to account, in a consistent and logical way, for the
distribution and location of economic activity in space and for the manner in which the
various facets of economic activity are interrelated. Thus, location theory is an attempt to
address the problem noted by Weber many years ago. Modern theory of location has
evolved over many years and is a accumulation of the contributions by many economists
and businessmen. In remaining sections of this paper, the contributions of certain
individuals within each stage of development of our current theory are reviewed. Finally,
important factors of modern industrial location are noted and examined.
Development of Industrial Location Theory
Significant contributions to location theory can be divided into several distinct
stages. During the initial stage, primary attention was directed toward identifying factors
that affected production costs. Land rent and raw materials were considered important
factors in theories of the location of economic activity. In later stages, the influence of

transportation costs and proximity to markets as well as raw materials were incorporated
into cost minimizing theories. Finally, the concept of competition, profit maximization
and personal factors were added to modern location theory.
The von Thnen Theory
One of the earliest scholars in location theory was Johann Heinrich von Thnen of
Germany. He was both a scholar and a farmer. In 1826, he introduced his work, Der
Isolierte Staat, (The Isolated State). In this study he explored the economic forces that
affect agricultural prices, land rent and the relationship of these forces to the pattern of
land use. von Thnens analysis is based upon the presumption that the geographical
pattern of agricultural production was directly related to the competition among
alternative uses (timber, crops, livestock) for a single plot of land and the use that earned
the highest rent determined land use at that location. He assumed that a single, central
city located on a homogeneous plane purchased all agricultural produce and that labor
and capital were not mobile (Figure 1).
Distance from the central market place was the prime determinant of land use.
Land near the city would be used for the most intensive agricultural production such as
dairying and garden vegetables. As distance increased from the center, transportation
costs increased and land prices declined because only less intensive uses could be
supported. von Thnen constructed concentric rings around the city center, each
dominated by a different economic activity. Examples of need activity locating in the
concentrated zones is shown in Figure 2.
There is still much validity to von Thnens theory today. His major contribution
was to introduce the space dimension and the effect of transport, distance and cost on the

location of economic activity. Certainly, examination of any modern city will identify
zones of economic concentrations and rent gradients spanning out from the central
markets. The major weakness is that his theory is dated. Modern firms have many
interdependent factors affecting location. It is no longer possible to observe a simple
homogeneous plane surrounding a single market center and devoted to agricultural
production and exploitation of natural resources as was the case in Northern Germany in
1826. Nevertheless, von Thnens theory established the concept that economic
advantage (search for a highest land rent site) determines the location of economic
activity and so serves as the major springboard from which modern location theory is
derived. This spatial dimension is the foundation of much of our current theories of the
effect of location on land utilization patterns. (Barlowe)
Webers Theory of Location
The second major phase in the development of modern location theory came
nearly 100 years later with the writings of another German economist Alfred Weber
(1929). In his famous work, Theory of Location of Industries, Weber (1929) argued that
industrial location would be based on minimization of labor costs, transportation costs
and materials cost. Consideration of varying combinations of transportation costs would
lead plants to locate either (1) near the source of consumption, (2) near the source of raw
materials, or (3) at intermediate points. The location selected by a given plant depends
upon which cost is most important to the type of process in question. Writing in the early
decades of the industrial revolution, Webers focus turned to manufacturing rather than
agriculture.

In his analysis of transportation costs, Weber (1929) looked at what happens to a

raw material during processing as being the determining feature in plant location. He
classified raw materials as:
1.

Weight losing raw materials

2.

Pure raw materials

3.

Ubiquitous raw materials

Weight losing raw materials lose bulk or weight in processing and transport cost
will be less for finished goods than for raw materials. A factory processing such materials
will be drawn near their source. Examples of such processes include many agricultural
processes, timber for pulp, sugar processing and coal or lignite when used as a fuel for
electrical power generation. All such processes tend to locate nearer to sources of raw
materials than markets if other costs (labor, materials) are more or less the same. A
interesting case of this principle occurred recently near College Station, Texas. The Texas
Municipal Power Authority (TMPA) located an electrical generating plant at Carlos,
Texas to use lignite as fuel in the early 1980s. In the late 1990s, the plant ceased using
lignite, substituting coal from Montana and Wyoming, because of differences in energy
efficiency of one two fuels. The gains in the value of productivity from coal over lignite
more than offsets the transportation costs from Wyoming to Texas.
Pure raw materials are those that do not lose weight or bulk during processing.
Examples include rubber processing (either natural or synthetic) and cloth or clothing
production. Since there is no difference in the bulk or weight that must be transported
before and after processing, the plant may be located at the source of raw materials or
markets, thus accommodating some other cost factor.

If a raw material is ubiquitous (found everywhere) then a plant would locate at the
market since at that point the lowest transport cost would prevail for raw material and
product. Sand, gravel and water are generally ubiquitous raw materials, so cement
factories, beverage plants and breweries are generally market oriented.
Webers (1929) contribution to location theory included more than an
examination of raw materials or transportation costs because he also addressed labor
costs as a determinant in location. Weber (1929) recognized that labor costs varied
spatially and in some locations high transportation costs may be offset by lower labor
costs. Hence, Weber (1929) was the first to introduce the trade-off that must be made by
decision-makers as they simultaneously consider labor and transportation costs.
A third variable introduced by Weber (1929) in his location theory is the
agglomeration factor. This factor is defined as an advantage that lowers the cost of
producing or marketing a product at a particular place or area. These are factors that
attract competing and non-competing industries to a particular area. Such cost advantages
are generally enjoyed in urbanized, industrialized areas where investments in the public
and private infrastructure necessary to support industry have already been made. Certain
types of industries that require ready access to communication, transportation and other
services are usually attracted to areas offering the agglomeration advantage. The prime
example of this factor is the Silicon Valley of California and similar high tech locations.
Deglomerating or decentralizing forces are those that detract from otherwise
favorable locational advantages because costs are increased in areas of industrial
concentration. High land prices and high taxes resulting from increased demand as
industry expands illustrate decentralizing forces. These combined with plant

obsolescence in dominant industries help to explain the migration of industry from the
Northeast to the Sun Belt states in the latter half of the 20th century.
Since its original publication in 1929, Webers theory of industrial location has
received many reviews and his assumptions have been attacked. Despite criticisms, his
approach is commended. He recognized that different industrial processes must give
varying weights to cost factors in selecting a location and contributed the concept that the
site for location may offer advantages that are external to the industry itself. Weber
(1929) noted the concept of substitution among various factors of production as an
important influence for industrial locations. Weber (1929)said that he intended his book
to be a beginning and not an end and as such it has been valuable in the development of
modern location theory. Extensions and refinements of Webers (1929) theory (by
Hoover, 1948 and others) led to location theory as it existed until the early 1950s.
Additions to Location Theory
Hoover noted that the factors of production, land, labor and capital are not
completely mobile or divisible. The producer will seek to minimize processing costs
comparing weight loss with transfer costs. Hoover (1949) felt that a producer would
compare economies obtained by large scale processing with the increased cost of
transferring production factors over a wide area. He also noted diseconomies associated
with larger administration control units. Hoover (1948) isolated land as a factor of
production and discussed the price a producer would pay for a site:
The value of a site, which can neither be replaced nor moved, merely reflects the
bids of various would-be users for that particular location. (Hoover, 1948, p. 68)
Land, as a factor of production, is then a key to the industrial location decision.

Lsch (1954) later presented the argument that a specific site cannot be identified.
Lsch (1954) argued that a firm will choose the market area that provides the greatest
profit. This indicates a geographic region where more in-depth analysis can be made.
Locating the market area of greatest profit depended on assumptions of uniform
distribution of raw materials, equal costs of transportation and an even population
distribution. Then total production and transportation costs are minimized. These
assumptions are common to early location theory and present some limitations.
Elements of Modern Location Theory
While the earlier theories of location include important factors that are still
relevant, their simplistic approach is clearly not adequate to explain the location of
industrial activity in our modern economy. Some of the most obvious weaknesses of
these theories include:
1) A preoccupation with minimizing transportation, production, raw materials
and wage costs.
2) Disregard for the profit maximizing motives of industrial decision makers.
3) Disregard for the market structure within which the locating firm operates and
its effect on the demand for products compared with its competitors.
Profit-Maximization
By focusing attention on cost factors only, earlier theories either implicitly or
explicitly assumed that perfect competition existed within the marketplace and that a
producer need not consider the influence of plant location on the quantity of product that
could be sold or its price. In reality, a firm seeking to maximize profit (a basic
assumption of all economic theory) may choose a certain location to gain a competitive

advantage over other firms. For example, an intermediate supplier of components to a

major customer may choose an otherwise uneconomic location to protect a market. Even
if the selected location is not the least cost location, it may still be the most profitable
location. Both cost and demand factors are involved in the decisions. Melvin Greenhut is
one of the leading exponents of the profit maximization approach. He argues that the
more competitive the market, the more industry will be inclined to seek and adjust to the
maximum profit location. The location selected will depend in part upon such demand
factors as:
1)

Elasticity of product demand (responsiveness to price change).

2)

Location of competitors.

3)

Importance of proximity to customers.

4)

Importance of direct contact with customers.

5)

Extent of market area (regional, national, international).

6)

Relative competitiveness of the industry.

As industry moves into the new millennium, industry structure trends are toward
fewer and larger firms. Mergers, takeovers and consolidations are driving most major
industries toward a structure of oligopoly. As this occurs, the relative importance of
strategic planning for plant locations to maximize profit increases.

Personal Factors
Greenhut (1956) also included the influence of personal factors in his profit
maximizing theory of location. Personal factors have become an important influence in
industrial location decisions in todays society. Industry evaluations of alternative

locations involves a detailed analysis of not only factors contributing to production

requirements of the plant, but also characteristics of a community as a place to live and
work. Such factors typically include community facilities and services, cultural qualities
of the community, community leaders cooperation, recreational facilities and quality of
schools.
The influence of personal factors grow in those cases where the owner or manager
is personally involved in selecting plant locations. Carrier and Shriver (1968) analyzed
factors influencing plant location decisions of large corporations. They concluded that
most location decisions were based on cost and profit considerations with extraordinary
attention being directed toward intangible personal factors and characteristics of the site
(Carrier and Shriver, 1968, p. 453). Personal factors have become increasingly important
in recent years with the shift in industrial organization away from owner-manager firms
and toward the corporate structure. In modern corporations, management and ownership
are separated. Corporation owners (stockholders) do not make location decisions
managers do. Managers live with and operate plants owners dont. Clearly, corporation
management must select plant locations that will be profitable and earn sufficient net
revenues for long term growth of the firm and to yield stockholders a satisfactory and
competitive return to their investments. Bad location decisions can threaten profitability.
Beyond this constraint of satisfactory profit, corporate managers may tend to
emphasize personal factors (since they must live with the location). The modern decisionmaking framework tends to increase the influence of desirable characteristics of plant
location as a place to live and work more than would be expected in the owner-manger
framework of the past. Also, worker productivity is affected by these personal factors.

This leads to attraction of quality labor and management in a particular geographic area.
Management is aware of these factors when considering plant location.

Location Factors
The accumulation of theoretical concepts developed over many years leads to an
identification of important location factors that enter into the decision making process of
modern industry. The location factors approach was first introduced by Fredrich Hall
when he included his List of Location Factors in the Census of Manufacturers in 1900.
Since then factors have been evaluated and added. Today, identification of industrial
location factors is basic to most community and area industrial development programs. It
is essential in a self evaluation of what a community has to offer to industry as well as
identifying types of industry where there may be potential for future attraction.
Although it may appear simple for the businessman, to make location decisions,
this is only because of an intimate knowledge of the requirements and location factors of
his business. A systematic analysis of plant location factors is generally made by firms
that are searching for a new plant site. This is particularly true of when larger firms are
seeking locations. The number and definition of factors affecting location vary in each
case and they sometimes run into the hundreds. The breakdown of location factors
examined usually included the following:
Raw materials
Transportation
Markets
Labor

Water
Capital
Industrial Energy
Community factors

The importance of these factors vary widely from one industry to another.
Moreover, with changing technology and economic conditions, their role will vary within
a given industry and from one time period to another. They are also interrelated and
interdependent so that the desired location usually requires a compromise among factors.
The important factors to a firms location decision may be attainable in several places. In
these cases, subjective judgments and attitudes enter into making the final decision and
can be influenced directly by activities of industrial development groups in promoting
their community.
Raw Materials
In recent years, raw materials have been less important than labor and markets in
attracting industry to a particular site. This is because most industrial growth has been in
light industry such as electronics and in service industries. Moreover, modern, efficient
transportation systems have increased the feasibility of transporting raw materials over
longer distances.
Nevertheless, raw materials remain an important factor in location decisions of
certain types of industry. Throughout the South, the local availability of agricultural
products, forest resources, minerals, natural gas and petroleum have been significant in
recent industrial growth of rural areas and small towns. Availability of lignite as a fuel for
electrical power generation in central Texas was a significant factor affecting growth in
this area of the State over the last 20 years. Lignite is a relatively low BTU form of coal
that is not amenable to transportation over long distance. This characteristic combined
with high oil and gas prices of the 1980s and the fact that eastern and central Texas also
enjoy favorable advantages in proximity to markets, labor, water, and environment,

means that lignite mining for power generation created a growth boom in this area of the
state.
This and other examples indicate that certain industrial processes still find it
advantageous to locate plants near the source of raw materials. If the process involves
significant amounts of material that travel poorly or that lose significant weight or bulk
during processing, this will be a determining factor in locating the plant near the source
of materials. This is the transportation cost factor for raw materials that was introduced
by Weber (1929).
Transportation
As noted earlier, transportation cost has always been a central focus in location
theory. New transportation technology and changing cost patterns have tended to improve
the advantages for certain areas in recent years. The development of truck transportation,
which has had a revolutionary impact on transport costs and transport patterns, has tended
to decentralize industry in the United States. For instance, the relative decline in the cost
of short hauls and large lots has helped the South and West in their industrialization. The
National Interstate Highway System has opened industrial possibilities to practically
every rural town in America. Other innovations such as piggy-back and seatrain
service, air transportation, extension of waterways and pipelines have broadened market
areas for local industries.
Two transportation objectives are important to businessmen in selecting a plant
location low cost and satisfactory service. Where transportation costs are of major
significance and competition among firms is active, an attempt will be made to locate
where the cost of assembling materials and delivering finished products are at a

minimum. In less competitive industries, pressure to reduce transportation costs may be

less although rising fuel costs have increased the concern for transportation in virtually
all industries.
Quality and dependability of transportation services are sometimes more
important in the location of industry than achieving lowest possible transportation costs.
Location of plants may be conditional upon the availability of regular shipments with
certain time limits. Fortunately, the two transportation objectives are usually consistent.
Low cost and satisfactory service can usually be attained at a large number of locations.
One aspect of transportation sometimes given inadequate attention is transporting
business executives by air. Executives make extensive use of air transportation using both
commercial and private aircraft. This is especially important to light manufacturing and
service industries. Business flying already accounts for about half of the miles flown by
general aviation aircraft, and its fleet included two-thirds of the multi-engine planes
registered in the general aviation category. Transportation by air of both executives and
cargo should become more important in the future and local availability of facilities may
be significant consideration for local industrial development.
Markets
The importance of nearby markets for industrial-products was recognized rather
early in the development of location theory and location factors. Industrialization patterns
of the United States reflect this in that concentration of industry matches the centers of
populations and expanding centers. Initially, market oriented industries were
concentrated in the Northeast and the Atlantic seaboard. As the population center of the
United States shifted westward, manufacturing followed. More and more, manufacturing

concerns are seeking locations further south and west taking advantage of changing
market conditions, abundant resources and relatively low cost labor. Since World War II,
the older market relationships have changed rapidly as major new regional markets have
lessened the comparative advantage of previous concentrations.
It is important in industrial development efforts to distinguish between consumer
markets and industrial markets. Consumer markets are generally related to population
concentrations and income levels while industrial markets are related to centers of
manufacturing a specific product. The variety of goods and services consumed in
consumer markets is extremely wide and competition for a share of the market of most
products is national or even international in scope. The producer of a particular product
for this market must recognize this fact since it directly affects his volume of sales and
product price. Most new plant locations in the Southwest that manufacture goods for the
consumer market are branch plant operations of existing corporations seeking to service
the growing regional markets of the area.
The needs of industrial markets are generally more specific than consumer
markets. Industrial development should not overlook the market potential arising the
needs of new or existing local industry that may be acquiring production inputs from
distant areas. Often these needs can be met more efficiently by local production that
would enjoy a natural locational advantage. For instance, as the lignite related industries
develop in eastern and central Texas, new markets will open for a variety of production
inputs and services required by these plants which provide opportunity for further
development of intermediate goods producers.
Labor

Though a supply of labor is fundamental, the importance of labor in location

decisions varies widely from industry to industry. Even where labor is not a factor of
major concern, few firms will be indifferent to labor considerations. A firms will
normally wish to be assured of an adequate supply of the kinds of labor required for its
process in a prospective location. By locating in an area with an existing labor pool, the
employer also finds other essential amenities such as housing, schools and community
services. In some instances, the nature of the raw material dictates that processing occur
at a remote site. And construction may precede the existence of necessary labor. This is
an extravagant undertaking and can be justified only in special circumstances.
It is important to recognize that wage levels may not be the only, or even the
main, consideration by industry in valuing a prospective location. Of equal importance
are such factors as labor attitude, turnover rates, fringe benefits, absenteeism and
competition from other employers. All these affect productivity and employers are
primarily concerned with balancing the productivity of labor with labor cost.
Perhaps the most important job of a community industrial development team is to
identify and accurately describe the area labor force. This involves much more than the
physical existence of labor. The type of labor, its age and sex structure and skill levels are
all important considerations that need to be analyzed and documented. Ideally, the labor
image to be created is one of adequate supply of productive labor at a reasonable cost to
industry.
Water
Water is the most widely used natural resource in industry. It may be incorporated
into the product, used in processing, in steam generation, in cooling and in normal

sanitary uses. The main concerns are with the quantity and quality of the water supply.
Surface water is more widely attainable in most areas of the United States although for
most purposes water from underground sources is preferred because of higher quality.
About 75 percent of all industrial water demands are met from surface sources. In recent
years, stricter Federal and State standards relating to environmental consequences of
water use and waste water disposal have had an effect on industrial water considerations.
For instance, an increasing number of industries who normally consider treating their
own waste water are looking for locations where public sewage disposal systems are
adequate or can be constructed to meet their needs. Or, they seek an open-space location
where they will be responsible only for their own pollution. The attractiveness of a
community can be greatly enhanced by assuring industry of adequate water supplied and
effective waste water disposal.
Capital
Capital is the lifeblood of industry, and the availability for capital can affect the
location of industry as well as costs and methods of production. An outstanding example
is the movement of a number of small aircraft manufacturers to Texas, Oklahoma and
Kansas attributed to willingness of local oil financiers to put up the needed money.
There are two kinds of capital required for industry. These are fixed capital
(goods and equipment) and working capital. These two are closely connected since the
purpose of acquiring working capital is to purchase equipment, inventories and cover
other operating costs. They differ in that fixed capital is relatively immobile once put in
place and its value is derived from the output it produce or from scrap. Because of this
immobility, heavy investments in capital equipment are not readily written-off until a

useful term of life has been served. In contrast, working capital is much more mobile,
although its mobility depends upon numerous economic, social and personal
considerations.
One problem with capital for industry, particularly in smaller cities and rural
areas, is not insufficient capital but rather that capital which is available is not used for
local development but invested outside the area. Often the lack of experience with
industrial loans causes banks to shy away. Rural bank loan/deposit ratios are generally
much lower than banks in more urbanized areas. This situation available but unused
capital suggests that with an effort to develop expertise it may be possible to make
capital available locally and increase effectiveness of local development efforts.
Industrial Energy
Energy is a location factor that has been important to relatively few industries in
the past but for some it is crucial. A number of these industries appear to have potential
for Texas because of the relative abundance of accessible energy sources. The cost of
energy has primacy in the production of chemicals, primary aluminum and electrical
power generation. It has greater-than-average importance for pulp and paper, timber
products, meat packing and steel production. These industries are significant in the Texas
economy and will likely be a source of growth in the future. Fernstrom (1974) states that
when thinking of energy costs the businessman is sometimes like the housewife who
drives 10 miles to save three cents on a can of corn. That is, they tend to think of energy
costs in absolute terms and give it more weight than it actually represents as a cost factor
in the total production process. In any case, energy costs are rising and will likely become
a significant location factor in the future.

Community Factors
The process of reaching a final decision on the location of a plant includes all the
factors discussed plus many more. In the process of evaluating alternative locations,
several communities may remain in the running after consideration of raw materials,
transportation, markets and other factors. It is at this point that the attributes of
communities under consideration come into prominence in the final selection. These
attributes can be described best in terms of community leadership and attitudes, taxes
(both industrial and personal), inducements, facilities, services and amenities. As
indicated earlier, these attributes probably have more weight given todays industrial
organization and corporate structures than in earlier times. It has been noted in working
with large corporations planning new plant construction and considering alternative
locations that community attribute favorable to acceptance of the plant and its managers
and employees are most important in the minds of the decision makers who will
ultimately live and work at the location. These considerations go well beyond the
operation of the plant and include all those community factors that affect the lifestyles of
the plant operators and their families. Most large companies are concerned about their
corporate image and they want to be a good corporate neighbor. Their impressions of a
potential location can be greatly enhanced if community leaders create an image of
acceptance, cooperation and fairness. This is a much easier task if community leaders can
exhibit a history of creating a favorable environment for existing industrial plants. This is
one location factor over which a community or area has a great deal of control over.

Changing Factors Affecting Plant Location

From A Practitioners View
Robert Ady is a senior officer in the Fantus Company, an industrial location
consulting firm. Recently, Ady presented a very good summary of factors considered by
Fantus clients. Comparisons were made between historical and expected future trends.
Ady divides factors affecting location into cost and noncost items. Cost items are
those that can be measured and quantified in dollar terms, these include labor costs,
transportation costs, utility costs, occupancy or financing costs and taxes. These have all
been mentioned in one form or another previously in this paper. Noncost items include
labor availability, labor attitudes, electric power, natural gas reliability and dependability,
site suitability, and living conditions. These items are all more intangible in nature.
Ady presents a relative comparison of the importance of the cost items,
comparing percent of total cost for each item in 1970 and 1990.

Percent of Total Cost

1970
1990
Labor Cost
Transportation Cost
Electric Power
Occupancy Expense
Local Tax

60%
35%
1%
3%
1%
100%

48%
44%
4%
3%
1%
100%

As seen, labor costs are expected to decrease in importance because regional

wage differences are closing. Transportation costs gain in relative importance as a result
of rising costs of fuel.
However, Ady notes that as a group the cost factors are becoming less important.
Decision makers will be expected to pay more attention to noncost factors in the next
decade. Past Fantus clients were concerned with such noncost factors as unionism,
natural gas availability, nearness to highways and support services (Ady). However the
article noted that 1980 clients were more concerned with environmental issues, living
conditions, and electrical power availability and reliability. This emphasizes the changing
nature of industrial location factors as the economy and society change.
New concerns and issues are also noted by Ady. The potential for skilled and
unskilled labor shortages are emphasized. Also, availability of grants and subsidies as an
enticement are considered important issues that Texas communities should consider.
Finally, the importance of water in industrial development is mentioned. Water as a
location factor has already been discussed in this paper. Ady feels (along with others) that
this natural resource will be a key point of concern in future years for agricultural,
residential, commercial, and industrial development. The rapidly depleting Ogallala
Aquifer in Texas and other states is an example of the potential water shortage that could
occur.
In summary, Ady presents a very practical up-to-date discussion of location
factors that are mentioned in location theory literature throughout the years.

Conclusion
Industrial location theory is far from a static theory. It has emerged over many
years of research and study and it continues to change as industry and the general
economy change. In its earliest stages, the focus was on factors that affected costs of
production and marketing, namely raw materials, transportation, labor costs and
proximity to markets. These factors are still considered significant in todays economy,
but the list of significant influences has been expanded to include such factors as
competitiveness of markets, profit maximization, industrial organization, community
attributes, personal factors and other considerations.
There remains no singular theory that is capable of explaining all location
decisions. It may be unrealistic to expect one to ever emerge. Nevertheless, location
theory has lead to the identification of numerous factors relating to industrial needs and
community attributes that can serve as guides to evaluating the potential for the type of
industrial development feasible for any given location. A detailed analysis of these
factors if the key to a successful industrial development program.

References
The following references were used extensively in the development of this paper.
Appreciation is expressed to these authors. No further citation is provided.

Ady, Robert M., Shifting Factors in Plant Location, Industrial Development, 150, 6
(November/December 1981): 13-17
Alonso, William, Location Theory, Regional Development and Planning, Edited by J.
Friedmann and William Alonso, The M.I.T. Press, Cambridge, Massachusetts,
1964.
Barlowe, Raleigh, Land Resource Economics, Prentice-Hall, Englewood Cliffs, N. J.,
1986.
Carrier, Ronald and William R. Shriver, Location Theory: An Empirical Model and
Selected Findings, Land Economics 44, 4 (November, 1968):450-460.
Davis, Grant and Stephen W. Brown, Logistics Management, D. C. Heath and Company,
Lexington, Massachusetts, 1974.
Deaton, Brady J., Industrial Site Development Consideration for rural Communities,
Rural Industrial, Southern Rural Development Center, Mississippi State,
Mississippi, 1979.
Fernstrom, John R., Bringing in the Sheaves, Oregon State Extension Service,
Corvallis, Oregon, 1974.
Greenhut, M. L., Plant Location in Theory and in Practice, University of North
Carolina Press, Chapel Hill, North Carolina, 1956.
Hoover, E. M., The Location of Economic Activity, McGraw-Hill, New York, 1948.
Lsch, August, The Economics of Location, Yale University Press, New Haven, 1954.
Thnen, Johann Heirich von, Der isolierte Staat in Beziehng auf Landwirtschaft und
Nationalkonomie, Hamburg, 1826.
U. S. Department of Commerce, Basic Industrial Location Factors, U. S. Department of
Commerce, Washington, D. C., 1947.
Weber, Alfred, Theory of the Location of Industries, translated by C. Friedrich,
University of Chicago Press, Chicago, 1929.

FIGURE 2.
ZONES OF ECONOMIC ACTIVITY
--VON THNEN
ZONE 1. PRODUCTION OF
PERISHABLE ITEMS
ZONE 2. PRODUCTION OF WOOD
FOR FUEL AND LUMBER
ZONE 3. PRODUCTION OF GRAINS
AND OTHER FOOD AND
FIBER CROPS
ZONE 4. PRODUCTION OF
LIVESTOCK
ZONE 5. AREA OF HUNTING,
FURRING AND
PRODUCTION OF HIGH
VALUE MINERALS

FIGURE 3.
WEBERS CLASSIFICATION
OF RAW MATERIALS
1. WEIGHT LOSING RAW
MATERIALS
2. PURE RAW MATERIALS
3. UBIQUITOUS RAW MATERIALS
(FOUND EVERYWHERE)

FIGURE 4.
INDUSTRIAL LOCATION
FACTORS
RAW MATERIALS
TRANSPORTATION
MARKETS
LABOR
WATER
CAPITAL
INDUSTRIAL ENERGY
COMMUNITY FACTORS