Selection of Location for Industries (8 Factors)

Some of the major factors for the selection of industrial location are as follows: 1. Market 2. Materials Supply 3. Transportation 4. Labor 5. Capital 6. Government Planning 7. Other Considerations 8. Human Factor.

The pattern of industrial location in Asia, as indeed elsewhere, can be better under­stood if we analyze the factors that are responsible for the distribution of manu­facturing activity. It is perhaps possible to recognize several of these individually, such as market, transportation, supply of materials, labor, capital cost, or the role of government, and above all the “human fac­tor” that finally decides the precise location of individual manufacturing plants.

But all these factors are interactive, and almost never operate singly or sepa­rately, although any one may be more important than the others in different situ­ations. Taken together, they enable us to understand the complex web of operations that defines the spatial patterns of indus­tries.

1. Market:

The triad of close-related fac­tors: market, availability and supply of raw and semi-finished materials, and transport are, of course, of greatest importance in ex­plaining the location of industrial activity anywhere in the world. Most critical of these generally is the market factor. Bar­ring other compelling circumstances, industry will tend to locate closest or ac­cessible to market outlets, thus reducing the shipping costs, as well as being in a po­sition to adapt quickly to changes in the market.

“Market” can also imply, in some in­stances, proximity to large populations, presumably with some purchasing power, as for example, the cities. Industries pro­ducing consumer goods have thus been located in, or near urban areas. As these ur­ban areas have expanded, so have their usefulness to still more industry.

Cities thus attract industry which in turn attracts additional labor, and services creating a larger city which becomes a bigger market for the expanding and proliferating indus­tries. This concept in modern economic development is now being applied in the sense of revitalization of backward re­gions. Several new industrial towns and townships in India (near Delhi) and China (near Beijing) and Indonesia were devel­oped on this economic theory.

Cities are also likely to have a greater variety of specialized markets and to repre­sent greater wealth (i.e., purchasing power) than smaller communities or rural areas. Cities thus generate an exclusive and a greater range of manufacturing activity. The concentration of high-fashion cloth­ing and luxury goods as manufactured products in Tokyo, Mumbai, Hong Kong, and Singapore is an example of the rela­tionship between cities and manufacturing. It is thus no surprise to learn that the growth of industry and the expansion of cities have been contemporary phenom­ena.

Even though accessibility to market is a crucial factor in industrial location, mar­kets may not always be domestic, but may be thousands of miles away. In such cases manufacturing tends to be concentrated in or close to the parts that are well con­nected to the outside world.

The parts usu­ally contain banking and trading facilities enabling the manufacturer to reduce ship­ping costs in comparison to the inland locations for the industry. Many of Asia’s manufacturing regions are located close to its major ports such as Tokyo-Yokohama, Osaka, Shanghai, Mumbai, Kolkata, Jakarta, Bangkok, and Hong Kong.

In some instances, “market” represents something entirely different from simple concentration of people. In cases where manufacturers may have little appeal to vast majority of urban population, and manufacturing plant may have nothing to do with urban location, as for example, the basic production of pig iron or the produc­tion of several types of chemicals. Such manufacturing plants will locate to market for reasons other than the proximity to ur­ban consumers. For these manufacturers, “market” assumes a different concept than for the maker of consumer goods.

2. Materials Supply:

While accessibility to materials used in manufacturing process is of vital interest to the manufacturing plant, sometimes markets may be half a world away from the source of material supply. The factor of “materials supply” is sometimes identified as “raw materials,” but this term is misleading as it implies strictly unprocessed materials (coal, iron ore, wood, etc.) whereas in reality, materi­als used by a majority of manufacturing plants are already at least semi-finished (steel plates, cables, refined chemicals, elec­trical wires or semiconductor elements, etc., the last one used in the manufacture of electronic equipment).

Generally speaking, if the materials used in manufacturing process are bulky, heavy or low in value, it is advantageous to locate the industry as near as possible to the source of material, to reduce the exces­sive costs to transport the items to the markets. A good example of this type of location is the manufacturing of cement, which is nearly always located near the quarry from which the product is made.

In fact, it is often cheaper to build a new plant near the site where material supply is avail­able than to transport the material an extra few hundred miles. An industrial nation like Japan for example must import a large share of its unprocessed materials (oil, iron ore, food grains and wood). A major share of Japanese industry dealing with these items has become concentrated in urban areas around ports along much of the southern coast and the Inland Sea from Tokyo to Shimonoseki.

However, the source of supply may not always be the determining factor in the location of manufacturing activity. For ex­ample, if the manufacturing activity deals with the utilization of materials that are small, light-weight, or of a high value, there may not be any compelling reason to consider location on the source of supply, since any shipping costs are likely to be a minor item in the total price structure of the finished product.

Many high-tech in­dustries that might use such “raw” materials as electronic components or silicon chips by having those transported to the manufacturing sites by airfreight. Thus, unshackled from basic locational constraints such industries will locate to other locally desirable facilities. Several Japanese firms have located their branches all over the world utilizing the locally available facilities.

On the other hand, sev­eral European and American companies have their manufacturing plants in Thai­land, Malaysia, Indonesia, Pakistan (and more recently in India) where locally avail­able skilled labor and “local market” more than offset the costs of transporting the “raw materials” or the finished products to other parts of the world.

3. Transportation:

In determining indus­trial location manufacturing plants tend to be sited where a variety of readily accessi­ble transport choices are generally available. Transport facilities thus are im­portant links that bridge material supply and market. Railroads, highways, and air­ports close at hand are important considerations for the location of certain industries.

Often of great importance in the decision regarding the type of trans­port most desirable for location of manufacturing plant is the cost involved in the infrastructure and cost of moving goods to and from manufacturing site. Those areas where transport network is most dense have thus a built-in advantage in attracting new industries provided suit­able conditions of “material supply” and “market” exist.

In general, river ways and railroad transport are of special usefulness in hauling low-value and high-weight ma­terials as these are usually the cheapest means of moving goods around, particu­larly where time pressure is not a weighty consideration. Secondly, the relatively flat areas (the plains) have an advantage over mountainous regions, because the moun­tainous areas generally lack in transport infrastructure.

The railroad and road trans­port usually offer greater flexibility and faster service. Railroad is generally pre­ferred for long-distance hauling, and road transport for shorter distances. Air freight is generally the most expensive means of transport and used mostly for high-value, low-weight products, where the materials transported are very valuable and time de­mands are critical.

4. Labor:

There was a time when labor supply was an important factor in indus­trial location. Increased industrialization meant a greater demand for workers, and industrial location in cities was a necessity. The city was at once a market and a source of labor, and a close relationship between urban growth and industrial expansion ex­isted. This was particularly true when industrial location did not depend on high-­tech infra-structural facilities.

During the past half a century or so, therefore, the role of labor supply as a factor of industrial location has significantly declined, but by no means disappeared, at least in most Asian nations. Moreover, labor has be­come migratory. Through the media (radio, television, newspapers) the news of job opportunities quickly reaches qualified workers where they may be located. Labor will then tend to move to industry rather than forcing industry to seek out labor.

In yet another setting, in centrally planned economies such as China, North Korea, and Myanmar, government will move workers to industrial location. As a net re­sult of these present-day happenings, there has been an almost universal decline of the “labor factor” in industrial location.

5. Capital:

The importance of capital as a factor of industrial location has consider­ably diminished as vast amounts of capital have now accumulated in the developed countries. But capital remains scarce in de­veloping countries of Asia where capital may be provided either by the government or a few affluent entrepreneurial classes.

For much of modern Asian history capital has been a rare commodity, concentrated in the hands of a few banking families, all having special interests. The classic exam­ple is that of Japan where most industries are in the hands of a few banking families, the Zaibatsu cartels, which have histori­cally given priority to their family interests in determining the location of Japanese industries.

Much of modern Ja­pan’s industrial rise has been due to the rapid growth of capital investment of the Zaibatsu clans and the administration. An important aspect of the Japanese financial system is the high degree of independence between the Central Bank (the Govern­ment’s bank), the commercial banks (owned mostly by the few banking families) and industry.

In centrally planned economies, all locational decisions of manufacturing plants are determined by the governments as in China, and Myanmar, because capital is en­tirely provided by the state. In nations like India and Indonesia where there is a mix of private and public enterprise, industrial lo­cations may often be distributed over several regions of the nation in order to bring out a “balanced” regional develop­ment.

The government usually makes decisions regarding the location of heavy industry like metallurgical installations or industries of strategic importance like the petrochemical industry or the manufactur­ing of railroads, aircraft, defense-related material, and leave out light industries like textile manufacturing and food processing, etc. for private enterprise.

Public funding may also be provided in the form of subsi­dies or imposition of import restrictions to spur industrialization. India is a good ex­ample of nations that have followed this policy. Nonetheless, the final selection of a manufacturing site owes its location at least partially to where the needed money could be obtained.

6. Government Planning:

The role of government in determining the location of modern industry is of vital significance in nearly all Asian nations. This is in marked contrast with the United States, for exam­ple, where this factor plays almost no part in determining plant locations. China and the Soviet Union are, of course, the classic cases, where all means of production have been controlled (liberalized in the Soviet Union since 1990) by the state, which makes all locational decisions.

But even in several parliamentary democracies such as India, Indonesia, and Pakistan govern­ments’ influence is surprisingly pervasive. In these nations, as in several other Asian nations, all public utilities are nationalized. Power production (coal mining, electricity generation, nuclear plants) is mostly a gov­ernment monopoly, as is the manufacture of iron and steel for railroad transporta­tion, aircraft production and shipping. Financial institutions (banks, etc.) that provide capital to private industry are also nationalized by nearly all nations in Asia, although there has been a trend toward de­nationalizing (or “privatizing”) them recently.

What this clearly means is that by con­trolling much of the necessary infrastructure, Asian governments, like most of the European ones, are in a strong position to influence the location of new industries. Industrial policy has also be­come a tool that governments can employ to fight unemployment or equalize re­gional imbalance. Governments also influence location of manufacturing plants in the private sector by providing incen­tives for privately-controlled industry to locate in selected parts of the country that can be identified as lagging behind national norms.

Such “development zones” receive special privileges such as tax abatement, and the provision of infra-structural facili­ties (utilities, transport low cost or free land, low interest rates, etc.). India, Paki­stan, Indonesia, Singapore, Saudi Arabia, Kuwait, Israel, Taiwan, South Korea are among the several nations that follow this policy. But it must also be noted that no amount of government encouragement can make an industry profitable unless its location is economically and geographi­cally sound.

7. Other Considerations:

Power & Fuel Costs remain important factors for indus­trial location for most nations. For example, in certain industries such as alu­minum refining, power costs are of greater significance than some other factors be­cause fuel costs form a major share of the price-structure of the finished product.

An abundant supply of hydroelectric or ther­mal power has become an important factor in modern industry in general. Countries with good supply of cheap power have a decided advantage over others in their in­dustrial output. Modern Japan’s industrialization, for example, owes its de­velopment significantly to the abundant, cheap supply of power.

Space:

Space as a factor in industrial location has lately been a factor of some impor­tance. Modern industrial plants require much larger space in order to accommo­date the growth of assembly-line operations than the traditional ones which were located in sites highly impacted by dense urban growth.

Many industries have moved away from their locations within the heart of the city to the countryside where land costs are much lower. In the re­location process, however, they remain close to the city in order to make use of the urban market and the infra-structural facilities like transport connections, utilities, etc. that the city generally provides.

Many of the new industrial ownerships (industrial estates) have been established by the Indian government near the urban places. This has generated further indus­trial activity and the growth of smaller cities around such townships in the private sector as well. A string of small industrial cities around Delhi belongs to this cate­gory.

A purely government controlled industrial development utilizing vacant space near Beijing (China) is another exam­ple of modern industry fanning out in the countryside. The need for more efficient and spacious design has thus become an important factor in industrial expansion.

8. Human Factor:

A final statement with regard to industrial location may now be made. While the foregoing discussion helps us to understand the broad patterns of in­dustrial location, clearly the individual locations of industrial sites cannot always be explained by the factors described above. Many of the manufacturing plants may be sited in locations which in princi­ple will defy the considerations enunciated above.

These operations owe their exist­ence to nothing more than a personal decision taken earlier by the founder un­der circumstances much different than prevailing now. In many cases such plants may once have been suitably located. Thousands of such plants survive, based on inertia, and a sense of family loyalty. The human factor, however, irrational it may appear in the present context, is responsi­ble for such decisions.