HKDSE Geography/M3/Industrial Agglomeration, Industrial Inertia and Footloose Industries

The Least Cost Theory The Least Cost Theory states that a firm will locate in an area where the labour and raw materials are cheapest. However, it makes many assumptions. In particular: Firms have no perfect knowledge about costs. Firms are affected by personal preferences, especially small, new and family-run firms. For example, a family-run firm is more likely to operate in the family's hometown, even if it is not the most profitable there. A maximiser has perfect knowledge about costs, and will located in the least-cost area. A satisficer, by contrast, is satisfied with the profits made even if it is below the maximum. Industrial Agglomeration Industrial agglomeration refers to the clustering of a large number of firms in a related area. Agglomeration economies Agglomeration economies are the economic benefits brought by agglomeration: Infrastructure is better developed. Skilled labour of that particular industry is attracted to the area. It encourages more investment in that area. Firms can purchase similar inputs in bulk, and have a closer relationship with suppliers and buyers. Information can be exchanged between firms. The possibility of joint ventures is higher. They can share sources of innovation. All of the above can cut production costs and increase productivity. Agglomeration diseconomies However, there are also disadvantages: Traffic congestion Pollution ↑ Wages and land rent Existing facilities may become inadequate Industrial Inertia Sometimes, even though the original locational advantage of locating a plant in an area is gone, the plant still decides to stay in that area. There are many reasons to explain this: Pull factors of the old site: Existence of large markets Existence of a pool of specialised labour Existing infrastructure is good Good transport network Agglomeration - linkages with related firms Push factors of the new site: Moving incurs high costs, especially for fixed capital like machines The personal preference of the owner is also significant, especially for small-scale firms employing single-point production. Sometimes, government policy also discourages moving away as this will lead to unemployment. Footloose Industries A footloose industry is one that can be located in most places because locational factors are not very important.