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Location theory

International Business Environment

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Location theory

Alfred Weber (1909):

1. A part of the costs are stable

2. To gain as much as possible

3. Cost depending of the geography

4. Transportation costs

5. Agglomeration

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Location factors

1. raw materials

2. energy

3. working force

4.size of the market

5. transportation

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Location economy

1. How important is the place?

2. Why do some regions do better than the others?

3. One sector and one place - why?

4. Why is one place/region specialised?

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Competitive advantage of nations

Michael Porter:

Factor conditions

Related andsupportingindustries

Demand conditions

Firm strategy, structure and

rivalry

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Competitive advantages of nations

Factor conditions:

• capital, land, jobs and raw material

Demand conditions:

• not the size of the market but the quality of

the demand

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Competitive advantages of nations

Related and supporting industries

• distribution

co-operation - cluster

Firm strategy, structure and rivalry

• many companies, same branch, same region

competition innovation

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Uneven growth

What is important for economic growth?

• geography: harbours, raw materials

• a specific economical, political, technological or social situation

• historical factors

• in the beginning outside factors, later inside factors

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What is growth and welfare?

• Traditionally: BNP growth of 5-7% or more

• BNP / capita is growing faster than population

• non-economical factors( literate rates, healthcare, unemployment)

• minimising poverty and employment

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The unindustrialised countriesDifferences

• size (geography, population, incomes)

• history

• natural resources

• relation between public and private sector

• structure of industry

• external political, economical and cultural factors

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The unindustrialised countriesSimilarities

• low standard of living

• low production

• population growth

• unemployment rates are high

• dependency of exporting primary products

• dependency on international relations

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Location factors today

• the importance of innovations

• innovations are more than high-tech

• innovations in co-operation with the industry

• closeness

• know how is more important than raw materials

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Geographical blocks

1. The “first world”: North America, West Europe, Japan, Oceanic

2. The “second world”: China, Russia and the former East Europe

3. The “third world”: Latin America, Africa, Arab world, rest of the Asia

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Different types of regional economies

1. High technology

2. No diversified economical structure

educated inhabitants

3. Old structure in economics

uneducated inhabitants, low wages

ex. textile industry

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Regionalism

• control on this level

• co-operation

• networks

• barriers against others (trading blocks: EU, NAFTA, PAFTA…)

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AgglomerationCompanies and people concentrated to one

place

ex. Silicon Valley, Detroit, The City of London

Esbo, Uleåborg och Salo in Finland

• background in traditional location factors

• when one is successful, others follow

• industry: concentration to one place

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Advantages of agglomeration economy

1. Cost efficiency in production

2. Cost efficiency in transportation

3. Specialised working force

4. Stimulating environment

-dynamic, flexibility

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The agglomeration “cycle”

1. Traditional location factories

2. Imitation

3. Local networks

4. Local culture,

infrastructure,institutions

5. City = “brand”

6. External attraction

7. Consolidation

8. Stagnation and crises

9. A new start?

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The role of IT

• base to internationalisation and globalisation

• a new arrangements of the economic activities

• creativity and innovations - concentration

time and space have a different meaning

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The role of IT

Transports and communication:

• faster, specialised (ex. stocks)

Production and processes

• new machines and new products

• a shorter product life cycle

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The role of investments

Who & where?

• The biggest investors: USA, United Kingdom, Germany and Japan

Sectors:

• finance, marketing, telecommunication, business services and consumption

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The role of the MNC

• to take advantage of geographical differences

more effective places for production

• political reasons

• the role of space becomes different

but we still need special knowledge

(ex. international marketing)

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Product life cycleStages in the product life-cycle

Time

Sal

es

Introduction

Growth

Maturity Decline

0

A B

C

D

E F

G

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Product life cycle

I New market; introduction

II Fast growth, big investments, more production

III Peak, the demand does not grow

IV Demand is going down

• under the periods III and IV the production will be changed/moved to an other area

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Product life cycle

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Environment

Very high degree of desertification hazard

High degree of desertification hazard

Present distribution of forest area

Area originally forested

4.0 most acid

4.5

5.0 least acid

DESERTIFICATION RAIN FOREST DESTRUCTION ACID DEPOSITION

(Estimated acidity of precipitation in the northern hemisphere)

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Economic Strength

17,500 or more15,000–17,499

12,000–14,999

10,000–11,9997,500–9,9995,000–7,499

2,500–4,999

1,000–2,499Less than 1,000

Data not available

GDP PER HEAD(In US Dollars)

American SamoaAndorraAnguillaBahamasBarbadosBermudaCape Verde IsCayman Is

ChristmasCocos IsComoros IsCook IsDominicaFaeroe IsFijiFrench Polynesia

GibraltarGrenadaGuadeloupeGuamGuernseyHong KongIsle of ManJersey

KiribatiLiechtensteinMacaoMaldivesMaltaMauritiusMayotteMontserrat

St. Pierre & MiquelonSt. VincentSan MarinoSao Tome & PrincipleSeychellesSingaporeTongaTrinidad & Tobago

NauruNetherlands AntillesNiueNorfolk IsReunionSt. HelenaSt. Kitts & NevisSt. Lucia

Turks & Caicos IsTuvaluUK Virgin IsUS Virgin IsVanuatuWallis & FortunaWestern Samoa

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Industrial Production

8.0 or more6.0–7.94.0–5.9

2.0–3.90–1.9Less than 0Data not available

AVERAGE INDUSTRIAL GROWTH RATE

(In percent)

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Energy Consumption

10,000 or more6,000–9,9993,000–5,9992,000–2,9991,000–1,999500–999Less than 500Data not available

ENERGY CONSUMPTIONPER CAPITA, 1982

(Kilograms coal equivalent)

NorthAmerica30.5%

SouthAmerica

3.0%

Europe24%

Africa2.5%

FormerUSSR19%

Asia20% Oceania

1%