Weber’s Model

Industrial Location

Locational Model

• What is a model?

– Simplified– representative / common key

features

Weber’s Model• Aim: find out the optimum location of

a factory• Optimum location = least cost location• Assumptions

– isotropic surface / uniform plain

– different labour cost at different locations but labour is not mobile

– single mode of transport and transport cost is direct proportion to distance and weight

– perfect competition(same product, same quality, same price)

– entrepreneurs are economic rational (minimize cost)

– resources (raw materials) • ubiquitous (everywhere)• localized (fixed)• pure (no weight change)• gross (weight loss)

Material index=Weight of localized raw materialsWeight of finished product

Procedures for finding optimum location

• Stage 1 - Least Transport Cost

• Stage 2 - add in Labour Saving

• Stage 3 - add in Agglomeration Economies

One market and Single raw material

Situation 1

R.M. Market

$ $

distance

Pure raw material

Assembly cost

Distribution cost

Total transport

cost

R.M. Market

$ $

distance R.M. Market

$ $

distance

Weight loss material

Weight gain material

One market and Two raw materials

Situation 2

Market

RM2RM1100 km

100

km

100 km

Both RM1 and RM2 are localized and pure

The Varignon frameRM1 + RM2 + RM3 Product2kg 3kg 0.5 kg 1 kg

RM1

RM2

RM3

Market

Optimum location

Stage 2 - add in Labour Saving

2 sets of isotim

assembly cost

+distribution

cost

Total transport cost

Isodapane

$20

$25

$30

Stage 2 - add in Agglomeration Economies

Exercise• Assembly cost• A=land (114)x$1x4 +lake (160+120)x$0.5x4

= $1016

• B=lake (120+120)x$0.5x2+land (176)x$1x4 = $944

• C=lake (120+160)x$0.5x2 + land(114)x$1x2 = 508

• M= lake (120+120)x$0.5x2+land (118)x$1x2 + land (176)x$1x4+ land(118)x$1x4

• =$1652

Exercise

• Distribution cost• A to M = lake (120+120)x$0.5x1+land

(118)x$1x1=$238

• B to M = land (118)x$1x1=$118

• C to M = land (176)x$1x1+land(118)x$1x1=$294

Exercise• Total Transport Cost

• A = $1016+$238=$1254

• B = $944+$118=$1062

• C = $508+$294=$802

• M=$1652+$0=$1652

Optimal Location

Price Production Cost

Transport Cost

Profit

A $2200 $1000 $1254

B $2200 $1000 $1062

C $2200 $1000 $802

M $2200 $1000 $1652

Criticism • Unrealistic

assumptions• Important factors

neglected

Criticism • Unrealistic

assumptions• uniform plain• transport cost• labour mobility• economic man• Single market• competition

• Important factors neglected

• profit• diseconomies• technology• institutional factors• behavioural factors

Labour

• Spatial mobility of labour• industrial mobility of labour• structure of labour cost - wages,

holiday, fringe benefit, training cost

• other than cost, quantity and quality

Labour Intensity Ratio

shipment of ValueemployedNumber

L.I.R.

Scatter diagram=Scattergram

shows correlation of 2 variables

Independent variable

dependent variable

Scatter Diagram

Best fit line

Y=ax+b

b

a

positive correlation

Negative

correlation

No correlation

Transport cost/freight rate• Structure of transport cost

Distance

Freight rate Weber’s ideaReal world

Terminal cost

Haulage cost

Real world

Taper off rate

Distance

Freight rate

Diminishing marginal transport cost

Effect of Taper off rate

R.M. Market

$ $

distance

Assembly costDistribution

cost

Different modes of transport

Distance

Freight rate

Road/truck Rail

Water

Comparison

ModeTerminal

costHaulage

costTaper off

rate

Road/truck

Railway

Water/ship

Break of bulk/Transhipment point

• A point where there is a need to change mode of transport due to

• physical reason - port• artificial - national boundaries

R.M. Market

$ $

distanceTranshipme

nt point

Assembly cost

Distribution cost

Impact of technologyProduction technology

use less amount of raw materials and/or power

use of substitutes (raw materials or power) e.g. use of scrap in iron and steel industry

Transport technologylower freight rate

refrigerationstandardization(use of containers)

Automation - less labour and skilled labour

Impact of Information technology• What are the uses of computers and

internet in manufacturing?• Computer aided design CAD• Computer controlled production• Computer controlled logistics

– getting raw materials, products to market

• e-business / e-commerce– buying raw materials, sale of products

• e-recruitment

Impact of Information technology

• Impact on getting raw materials?• Impact on seeking labour?• Impact on mobility of capital?• Impact on transportation and

logistics?• Impact on market?• Impact on industrial location?

Impact of information technology– Information about price and supply of raw

materials is widely spread– More information for labour to seek

employment– Recruitment and online interview over internet– Information on job vacancies is widely spread– Decrease the reluctance of labour to migrate

to othre countries– Increases mobility of labour– Increase demand for skilled labourTNCs shift to countries with cheap labour

Impact of information technologyPromotion of world tradeBetter monitoring of investmentMobility of capital is greaterLean production method and Just-in-time

production is possibleIndustries may be shifting away from

sites closed to raw materials and power resources or nodal points of transportation as the influence of transport cost is diminishing

Better flow of market information

Impact of technology• Information technology

– With the ease of making foreign investment, it may become more and more popular to set up new factories in other countries, especially in the less developed countries, for the sake of lowering the production cost with cheaper land and labour

– Decrease the need to move industries to other countries for labour with special skills

– Development of Transnational corporations / cross-border production is more common

– Clustering / agglomeration of industries

Locational change• Declining importance of traditional

factors• relative importance of other factors rise• more flexible / footloose • importance of research and

development• market / large urban centres• Cross-border production / international

division of labour / TNCs

Behavioural Factors• Not all decision-makers are economic

rational• perception , knowledge and information• satisficers rather than optimizers• psychic income• advantages :

– lower rent because of weaker competition– reduce over-concentration-pollution, etc.– provide employment to inferior areas

Institutional FactorsCauses

Strategic reasonsEconomic reasonsPolitical reasonsSocial reasons

Waysprovision of infrastructureprovision of landredistribution of population

Favourable terms of trade

e.g. Shenzhen Special Economic Zone

tax holiday / concession rate

land use planning / zoningprotection of local industries

e.g. tariff, quota

Anti-pollution laws and traffic control regulations

Lean production / Just in Time