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 possiblity 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.