CHAPTER 8

Industrial Location Analysis

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 8.1 The General Determinants of Industrial Location
 Given the spatial distribution of the inputs and outputs
markets, the owners of the factory will have to take the
decision about the place where the factory should be
located
 A large number of factors have to be considered
 These include Technical, Economical and
Infrastructural Factors and other factors
A) Technical Factors
• These are the physical factors which are more or less
geographical in nature related to soil, raw materials,
people, climate, etc.
 Availability of land
 Nature and quality of raw materials from land like forest
products, agricultural inputs, minerals, and semi-finished
products from existing industries.
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 Cont…
 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 uses
 Waste disposal facilities
 Climate
B) Economic and Infrastructural Factors
• Input prices, taxes, markets, skills of labor
forces, availability of adequate infra-structural
facilities, finance, etc., fall under this category
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Some of the factors are
Cont…
• 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
• Cost and availability of finance
• Structure of existing industries
• Industrial relations and trade union activities around the proposed
location sites
• Demographic factors such as age and sex composition of local
population,
• Literacy, professional skills, etc.
• Local medical facilities
• Housing facilities
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 Cont…
• Cultural facilities such as schools, clubs and other
recreation
• Communication facilities
C) Other Factors
All other miscellaneous location factors may be put
in this category includes
1/ Gov’t policies towards location of new plants
2/Personal factors
 governments pursue the policies of rapid
industrialization of their states
 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
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 Cont…
• Industrial location based on such personal factors
will entirely be a matter of chance or which is
called as historical accident
8.2 Approaches to Industrial Location Analysis
significant contributions were made by
geographers and the economists
geographers adopted intuitive conceptual base
and case studies approach to arrive at some
generalization about the industrial location
patterns
economists, on the other hand, followed a more
formal, abstract or deductive approach for
location analysis
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 1. The Geographical Contributions
• The discipline geography examines the form of
the earth, its physical features, natural and
political divisions, climate, production, and
population, etc
• Industries appearing on the earth's source do
make some changes in its physical features and
production patterns.
• In this regard we have three theories
– The Central Place Theory
– Renner's theory
– Rawstron's Principle
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 The Central Place Theory
• developed by Walter Christaller
• Mainly to determine the number, size, and
distribution of town and cities
• He was able to demonstrate the spatial
arrangement between hinterland and central
places, mainly service centers
• This theory proposed that towns with lowest level
of specialization would be equally spaced and
surrounded by hexagonally shaped hinterlands
• Relevance: locating manufacturing industry
where production tends to be centralized and the
market is extended
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 Cont…
• Limitation: fails to encompass the dev’t of belts of
industrial concentration and agglomerative
tendencies which are common features of the
modern industrial structures
Renner's Theory
• He classified industry into four categories:
Extractive, Reproductive, Fabricative and
Facilitative
• Identified six ingredients as raw material, market,
labor and management, power, capital and
transportation
• Renner postulated the law of location for fabricative
industry i.e. industry should be located at place w/c
have access to its ingredients
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 Cont…
Renner gave a scheme for, industrial symbiosis.
(a) Disjunctive symbiosis where different industries
having no organic i.e. economic or technical
connections among themselves
(b) Conjunctive symbiosis where different industries
with some organic connection among themselves (i.e.
inter-connections) are located together; and
(c) Conindustrialization which is an advance stage of
the conjunctive symbiosis leading thereby to a huge
industrial belt of interconnected industries.
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 Cont…
Rawstron's Principles
• He developed his theory of industrial location in terms
of three restrictions which impede the choice of location
• The restrictions are:
Physical restriction,
Economic restriction, and
Technical restriction
• physical restriction are raw materials and natural
resources
• economic restriction embodies the concept of spatial
margins to profitability and cost of production
• technical restriction examines the effect of the level of
technology on location i.e. location decisions will be
important with stable technology
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 Cont…
2. The Economic Approaches of Industrial Location
• Economic theory in the field of industrial location
include
a) Weber's Theory
b) Plander's theory of Market Area
c) Losch's Theory of Central Place
A/ Weber's Theory
 industrial location based on minimum transport
cost
 Considered general factors of location which were
relevant to all industries
 factors considered by him were divided into two
groups;
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 Cont…
 Those influencing inter-regional location of
industries (regional factors) and
 Those influencing intra-regional location
( agglomerating factors)
 general factors which vary regionally include
• Raw material costs,
• Transport costs and
• Labor costs
 He made some simplifying assumptions
 The locations of raw materials including fuel are
fixed
 Situation and size of consuming center are given
 There are fixed labor supply centers;
 labor is immobile & unlimited SS at fixed wage rate
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 Cont…
 The institutional factors like taxation, interest,
insurance, etc., are insignificant factors
 The economic culture and political system are treated
to be uniform and stable across the locations
 perfect competition
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.
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 Fig. The location Triangle

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 Cont…
According to him, the least cost point will be P
The three corner points of the triangle will be
pulling the location point (P) towards themselves
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)
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 Cont…
• Let x and y be the requirements of materials (M1 and
M2) in tons per output and let z be output, i.e.
finished product be transported from point P to C
• Let the distances of the corner points from the
production point (P) be a, b and c between P and M1,
M2, and C
• The total ton-miles of transport per unit output
would then be ax + by + zc.
• This is to be minimized in order to find the P, or the
location of production
• The distances a, b and c and hence the point P are
found by applying the theorem of parallelogram of
forces in geometry
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 Cont…
• from location point of view, industry can be
material-oriented or market-oriented
• Weber used the 'material index' (MI) for
identifying such nature of the industry
• MI= Weight of localized material / Weight of
finished product
• If MI > 1, an industry is raw materials oriented
eg. iron and steel industry
• If MI < 1, an industry is market (consumption
place) oriented
• The assumption of a uniform transportation rate
for each distance was relaxed by Weber
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 Cont…
• He converted the weight to be transported into an
ideal weight
• Ideal weight is a product (or a function) of actual
weight and the rate of transportation cost, for a
material or finished product
• Let t1, t2 and t3 be the transportation rates per ton-
mile for material M1, M2 and finished product
(C) respectively
• The total transport cost per ton would be then
equal to t1ax + t2by + t3zc.
• The location of production point (P) can be
determined now by minimizing this cost instead of
the sum of ton-miles
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 Cont…
• Weber also extended his analysis to labor
availability and labor cost
• According to Weber an industry will choose a cheap
labor site if the labor cost saving is greater than
the increment in transport cost
• He used the isodapanes to explain the effect of
labor cost on the least-transport-cost location of a
plant
• An isodapane is the locus of the points having equal
additional transport cost around the least-transport
cost location
• There will be several isodapanes forming rings
around the location fill different levels of
incremental transport cost
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Figure, Isodapanes and equilibrium location with cheap source
of labour

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 Cont…
• Let P1 be the least-transport-cost location and L1 be a
cheap labor site
• let also suppose that there will be a saving of labor cost by
Birr 4 if plant is located at L1 instead of at P1
• Should the location be shifted from P1 to L1?
• Point L1 lies with the isodapane of Birr. 4.
• It implies that it is economical to shift the location from P1
to L1
• In general, let d1and d2 be the total ton-miles of transport
services per ton of product at P1 and L1 sites respectively,
and
• let W1 and W2 be the hourly wage rates at these two sites
respectively,
• ' h' is the number of man-hours required to produce one ton
of product
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 Cont…
• 't' is the cost of transportation per ton-mile.
• The cost of production and transport at site P1
would be (tdl +W1h) and
• at site L1 it would be (td2 + W2h).
• The cheap labor site (L1) would be chosen if
• (tdl +W1h) > (td2 + W2h) Or (W1-W2) h > t (d2 - dl)
• This shows saving in labor cost exceeds the
increment in transportation cost
• For every level of saving in labor cost there will be
a critical isodapane within which the cheap labor
cost site must lie for economic viability from
location point of view
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 B/Market Area Theory of Palander
• Tord Palander started his market area theory of
industrial location analysis by posing two
different but interrelated questions
1/Given the price and location of materials and the
situation of the market, where will production
take place?
2/Given the place of production, the competitive
conditions, factory costs, and transportation rates,
how does price affect the extent of the area in
which a particular producer can sell his goods?
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• demonstrates 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
• 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 α and β respectively
• These are shown by the vertical distance AA' for
firm A and BB' for firm B.
• The consumers who are situated away from the
location points of the firms will be paying higher
prices for the product of the firms
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• 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. Where da and db are distances
• 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. 4.3.
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Figure 4.3 Determination of market boundary for two firms in a
linear market

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• The gradients are linear because of fixed
transport rates for the product over distance
• This implies that consumers would be paying
same price for the product of the firms
• The point X defines the boundary between the
market areas of the two firms.
• 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
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• The determinants of market boundary or area for
the firm are prices at the locations, transport rates,
and the distance between the firms
• 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).
• There may be several combinations of the above
variables
• For each combination there will be one boundary
between the firms.
• For example if α > β and ta = tb, it will give us one
boundary, and if α > β and ta > tb, then we will have
the other and so on
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• The intersections of the gradients of the two firms
will give the market boundary line for them
• Gradient is the rate at which a physical quantity of
output decrease or increase relative to changes in
distances
• 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
cost are lower or decline
• The size of market area will influence the profit of
the firm
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• The market area and hence sales and total profits
of anyone firm will be influenced by the
locational decisions and
• other actions of the competing firms.
C) Central Place Theory of Losch
• The advocator of central place theory August
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 the location is to
maximize total revenue
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• An individual locates his plant at that particular
site, where revenue is maximum
• The maximization of revenue implies profit
maximization because of the assumption of
uniform cost conditions across the locational
plain in his model
• there is only one producer who is located at a
central place
• He sells his product around the location point in
circular belt,which depends on the economies of
scale accruing to the producer and the
transportation, i.e. distribution cost of the product
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• 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
(see figure below)

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• The circle with OF as radius defines the market
area for the producer
• O 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
• There is no restriction for that since resources
are available
• The entry of new producers gradually reduces
the market area of the existing firms.
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• Losch's theory is a general spatial equilibrium
theory, and it is not giving anything about the
factors which determine the location of individual
firms
• The rejection of cost differences as locational
factors is a major weakness of Losch's theory

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