11.3 Manufacturing and related service industry

Revised

Table 11.2 outlines the important factors controlling industrial location.

Table 11.2 Factors controlling the location of industry

Site: the availability and cost of land Large factories need flat, well-drained land on solid bedrock. An adjacent water supply may be essential. Raw materials Industries requiring heavy and bulky raw materials will generally locate as close to these raw materials as possible. Energy At times in the past, industry needed to be located near fast-flowing rivers or coal mines. Today, electricity can be transmitted to most locations. However, energy-hungry industries, such as metal smelting, may be drawn to countries with relatively cheap hydroelectricity. Natural routeways and harbours Many modern roads and railways still follow natural routeways. Natural harbours provide good locations for ports and related industrial complexes. Climate Some industries such as aerospace benefit directly from a sunny climate. Indirect benefits such as lower heating bills and a more favourable quality of life may also occur.

Capital (money) Business people, banks and governments are more likely to invest money in some areas than others. Labour The quality and cost of labour are key factors. Reputation, quantity, turnover and mobility can also be important. Transport and communications Transport costs in real terms have never been lower, but remain important for heavy, bulky items. Accessibility to airports, ports, motorways and key railway terminals may be crucial factors for some industries.

Markets The location and size of markets is a major influence for some industries.

Government influence Government policies and decisions can have a big direct and indirect impact. Governments can encourage industries to locate in certain areas and deny them planning permission in others. Quality of life Highly skilled personnel who have a choice about where they work will favour areas where the quality of life is high.

Industries that use raw materials directly are known as processing industries. The processes involved in turning a raw material into a manufactured product usually result in weight loss. If weight loss is substantial the location of the factory will be drawn towards the raw material that is most costly to transport. Tidewater locations are particularly popular with industries using significant quantities of imported raw materials, such as flour milling and oil refining. Tidewater locations are break-of-bulk points.

Where the cost of distributing the finished product is the greater part of total transport costs a market location is logical. A small number of industries, including soft drinks and brewing, are ‘weight gaining’ and are thus market oriented. However, there are other reasons for market location. Industries where fashion and taste are variable need to be able to react quickly to changes demanded by their customers.

The Industrial Revolution was based on the use of coal, which is costly to transport. Thus, industrial towns and cities developed on coalfields, which became focal points for the developing transport networks. The investment in

Weight loss refers to industries for which the finished product is lighter than the weight of the raw materials required to manufacture it. Tidewater locations are port locations where freight can be transferred between road, rail and pipeline to water transport. Break of bulk refers to a location, such as a seaport, where freight has to be transferred from one mode of transport to another. The Industrial Revolution involved the transformation in the late eighteenth and nineteenth centuries of first Britain and then other European countries and the USA from agricultural into industrial nations.

both hard and soft infrastructure was massive, so that even when new forms of energy were substituted for coal, many industries remained at their coalfield locations, a phenomenon known as industrial inertia. During the twentieth century the construction of national electricity grids and gas pipeline systems made energy virtually a ubiquitous resource in the developed world. As a result most modern industry is described as footloose.

The share of industry’s total costs accounted for by transportation has fallen steadily over time due to: l major advances in all modes of transport l great improvements in the efficiency of transport networks l technological developments moving industry to the increasing production of higher-value/lower-bulk goods

The cost of transport has two components: fixed (terminal) costs and linehaul costs. While water and pipeline transport have higher fixed costs than rail and road, their line-haul costs are significantly lower. Air transport, which suffers from both high fixed and line-haul costs, is only used for high-value freight or for goods, such as flowers, that are extremely perishable.

Technological advance has made modern industry much more space-efficient. However, modern industry is horizontally structured (on one floor) as opposed to, for example, the textile mills of the nineteenth century with four or five floors. In the modern factory transportation (car parks etc.) takes up much more space than it used to. During the Industrial Revolution entrepreneurs had a relatively free choice of where to locate in terms of planning restrictions. However, over time more and more areas have been placed off limits to industry.

That part of capital invested in plant and machinery is known as fixed capital, as it is not mobile compared with working capital (money). In the early days of the Industrial Revolution the availability of capital was geographically constrained. This was a significant factor in the clustering of industry. This factor has a minimal constraining influence in the developed world today. However, in LEDCs the constraints of capital are usually much greater. Virtually all industries have over time substituted capital for labour in an attempt to reduce costs.

Although all industries have become more capital intensive over time, labour still accounts for over 20% of total costs in manufacturing industry. The cost of labour can be measured in two ways: as wage rates and as unit costs. The former are the hourly or weekly amounts paid while the latter are a measure of productivity, relating wage rates to output. Certain skills sometimes become concentrated in particular areas – the sectoral spatial division of labour. l Variation in wage rates can be identified at different scales. By far the greatest disparity is at the global scale. l There are wide variations in non-wage labour costs. l The availability of labour as measured by high rates of unemployment is not an important location factor. l Both the geographical mobility of labour and the occupational mobility of labour are limited. l The reputation of a region’s labour force can influence inward investment.

Hard infrastructure involves the basic utilities (e.g. road, rail, air links, water, sewerage and telephone systems) which provide a network that benefits business and the community. Soft infrastructure involves other services such as health, education, banking and retailing that are important to business and the community. A footloose industry is one that is not tied to certain areas because of its energy requirement or other factors. Fixed (terminal) costs are those accrued by the equipment used to handle and store goods, and those of providing the transport system. Line haul costs are those of actually moving the goods, which are largely composed of fuel costs and wages.

Capital represents the finance invested to start up a business and to keep it in production.

Students sometimes confuse fixed capital, which is that part of capital invested in plant and machinery, with working capital, which is the money used to pay for regular expenditure on factors such as labour and raw materials.

Sectoral spatial division of labour is the concentration of specific industrial skills in particular regions or countries. Geographical mobility of labour is the relative ability of labour to move from one geographical region to another.

Economists recognise five types of internal economies of scale: l bulk-buying economies l technical economies l financial economies l marketing economies l managerial economies

However, it is possible that an increase in production at some stage might lead to rising unit costs. If this happens, diseconomies of scale are said to exist (Figure 11.3).

Economies of scale Diseconomies of scale

C 2

C Long-run average cost

O Q Q 2

Figure 11.3 Economies and diseconomies of scale

External economies of scale (agglomeration economies) can be subdivided into: l urbanisation economies l localisation economies

However, when an urban-industrial area reaches a certain size, urbanisation diseconomies may come into play. For example, high levels of traffic congestion may push up transport costs and intense competition for land will increase land prices and rents.

In the old-style communist centrally planned economies the influence of government on industry was absolute. In other countries the significance of government intervention has depended on: l the degree of public ownership l the strength of regional policy in terms of restrictions and incentives

Governments influence industrial location for economic, social and political reasons.

Technology can influence industrial location in two main ways: l The level of technological development in terms of infrastructure and human skills. l Technological advance may attract a company or industry to new locations.

Internal economies of scale occur when an increase in production results in a lowering of unit costs.

(agglomeration economies) are the benefits that accrue to a firm by locating in an established industrial area. External economies of scale can be subdivided into urbanisation economies and localisation economies.

Be clear about the distinction between internal and external economies of scale. The former relates to reducing costs because of changes inside a company, while the latter relates to a fall in costs due changes outside of the company.

Investment in car manufacturing has shifted from western to eastern Europe in recent years as countries like Slovakia have joined the EU. Slovakia can manufacture cars at a lower cost due to: l relatively low labour costs and company taxation rates l a highly skilled workforce, particularly in areas once important for heavy industry l a strong work ethic resulting in high levels of productivity l low transport costs because of proximity to western

European markets

l very low political risk because of the stable nature of the country l attractive government incentives l good infrastructure in and around Bratislava and other selected locations l an expanding regional market for cars as per capita incomes increase

Major car manufacturers operating in Slovakia include Volkswagen, Hyundai and Peugeot.

Industrial agglomeration can result in companies enjoying the benefits of external economies of scale and industrial (functional) linkages. Industrial linkages are the contacts and flows of information between companies that can happen more cheaply and easily when companies locate in close proximity. Three types of linkage are generally recognised: backward, forward and horizontal.

Industrial estates can be found in a range of locations from inner cities to rural areas. The logic behind industrial estates includes: l concentrating in a delimited area to reduce the per-business expense l attracting new business by providing an integrated infrastructure in one location l separating industrial uses from residential areas l providing for localised environmental controls l eligibility of industrial estates for grants and loans under regional development policies

There are a number of different types of export processing zones (EPZs) which include free trade zones and free ports. EPZs have evolved from initial assembly and simple processing activities to include high-tech and science parks, finance zones, and logistics centres.

Revised

Industrial agglomeration is the clustering together and association of economic activities in close proximity to one another. An industrial estate is an area zoned and planned for the purpose of industrial development. Export processing zones are industrial zones with special incentives set up to attract foreign investors, in which imported materials undergo some degree of processing before being re-exported.

Formal sector jobs generally provide better pay and much greater security. Fringe benefits such as holiday and sick pay may also be available. Formal sector employment includes government workers, and people working in established manufacturing and retail companies. Employment in the informal sector is generally low paid and often temporary and/or part-time. While such employment is outside the tax system, job security is poor, with an absence of fringe benefits. About three-quarters of those working in the informal sector are employed in services. Typical jobs are shoeshiners and market traders. The size of the informal labour market varies from an estimated 4–6% in the high-income countries to over 50% in the low-income countries.

Revised

Formal sector jobs are known to the government department responsible for taxation and to other government offices. The informal sector refers to that part of the economy operating outside official government recognition.