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.