THE CHOICE OF LOCATION IN PRODUCTION DECISION

Practical Considerations

The location of production is determined by a great complexity of practical considerations namely,

historical, economic, natural and often psychological. Choice of location is, therefore, the result of
a balance of these factors.

Historical: In many cases, historical accidents have played an important part in affecting the
location of industry. For example, the cotton manufacture was located in Lancashire not because
of economic reasons but because of historical and accidental factors.

Availability to raw materials: The proportion of the localized materials to the final product which
has been called the “material index” by Weber is an important factor influencing the degree of
concentration. The higher the index, the greater the concentration of that industry at the centre of
raw material. The cotton textile industry during its initial stage was greatly influenced by the raw
material, though degglomerating tendencies acted against concentration in Bombay and
Ahmadabad later on. The Tata iron and steel industry provides another illustration of location
near the deposits of raw materials.

Access to markets: Industries whose product is costly to carry on account of fragility, perish
ability, or bulk are located in close proximity to market. This tendency becomes more emphasized
if the raw materials are less costly than transport or are derived from diverse sources, ad loose
little weight in the process of manufacture. The pull of market-the evolution of new market is an
important factor behind the dispersal of industries.

Transportation costs: The industries require transport facilities not only to get the raw materials
but also to send the final products. The industry tends to get localized in a place where transport
cost, are minimum. If the industries do not do so, it may be due to the fact that the place of
minimum transport costs is not the place of minimum production cost. The role of business
entrepreneur is to consider both production and transportation cost. The more rapid construction
of railway after 1880 synchronized with the growth of cotton, jute and coal-mining industries. The
cheap transport facilities, both for internal and external markets, led to initial concentration of
cotton mills in Bombay. The early railway freight policy was largely responsible for the congestion
of industries in the port towns.

Power resources : Nearness to coal deposits has been an important consideration for the various
industrial units since coal involves high transport costs. But with the advent of electricity a more
flexible source of heat and power has become available. In other words, electricity has
undermined the influence of coal except in those industries in which it is still one of the chief
ingredients e.g., iron and steel industry. The development of electric power induces the dispersal
and decentralization of industries.

Labour : The availability of workers in the interior of Bombay region was one of the factors
responsible for the initial concentration of textile mills. The importance of labour in influencing the
location of industry is difficult to assess since non-availability of local labour is not likely to prevent
a site which has great natural advantages for an industry. Labour can always be provided by
immigration from other areas. The fact that labour can be obtained at lower wage rates has lost
much of its importance these days because of national agreements relating to minimum wage,
social security benefits, etc.

Site and Services: Cheapness of the value of sites and the existence of public utility service
attract industries to regions offering these facilities. On the basis of this consideration, the
Government of India has launched the scheme of developing Industrial Estates in various parts of
the country to disperse industrial activity. Social amenities offered by the ‘Backward Areas’ as
regards housing and medical facilities other an attraction to industrial enterprises. In the pre-
independence days, there was a considerable shift of industries from British India to native states
as the ruling prices provided a great deal of encouragement and help to industries in the form of
few legal formalities, lower level of taxation and less stringent labour laws. Further, when an
industry concentrates itself within a relatively small area, important advantages often occur to it
as a result of what have been called “economics of concentration.”

Financial facilities : Financial consideration is not likely to exercise much influence on location of
industrial units. Capital is a highly mobile factor of production and it is likely to be equally
available for use in any part of the country. But under certain special circumstances this factor
may be important. The government may influence the banks to withhold financial assistance
unless the entrepreneurs concerned locate their units with regard to the national interest, such as
backward area development etc.

Natural and climatic considerations: Factors like the level of ground, topography of a region and
climate play an important role in the determination of the location of industries associated with
agricultural raw materials. Humid climate may provide an additional advantage to certain regions
to attract cotton textile industry since the frequency of yarn breakage is low. On the other hand,
artificial humidifiers have been used in areas with non-humid climate but that use has involved
additional cost.

Personal factor: Industrial entrepreneurs are not always guided by purely economic
considerations in deciding location of their industrial enterprises. Personal preferences and
prejudices of these persons are equally important.
Strategic considerations: During the recent years strategic considerations have been emphasized
in industrial location. Experience has shown that the main targets of air attack are armament
factories and industries supplying products for war purposes. Such industries should naturally be
located at places comparatively immune from air attacks. The Carlow Commission in the U.K.
Stated : “The risks of air attack, and the best means of countering them, sought of the future to be
a vital consideration not only in connection with broad issues of the location of industry generally,
but for each individual entrepreneur or manufacture.”

FACETS OF PRODUCTION DECISIONS

In conventional economic analysis of production, the firm’s decision variables are classified into
two categories: input and output. An input is anything which the firm requires for use in its
productive process. An output is any commodity or service which the firm produces or processes
for sale in the market.

Related to these two categories of variables, Management’s production decision problems may
be considered to fall into five types:

(1) Where shall the production unit be located?

(2) How much, in total, shall be spent on the purchase or ire of inputs including the location site?

(3) How shall this budgeted amount the divided among the various types of inputs?

(4) How much of each type of input be allocated to each type of output?

(5) How much and what quality of each final output shall the firm produce?

These questions are inter-related. First is the location decision. To locate the plant and to obtain
the factors to operate the plant, the firm has to spend money-the firm’s capacity to finance fixed
capital and working-capital expenditure is limited y the budget constraint. In fact, the total budget
decision precedes rather than follows location decisions. At the same time, we find that in
deciding the total budget, the firm takes into consideration the location factor, the size of the
plant, the scale of capacity output, the input requirements, etc. Once the size of total budget is
decided, the next question is allocation of the budget between fixed investment and investments
in working capital like raw materials, labour and other inputs. The allocated budget and the
available market price for the inputs together would help management in deciding the quantity
and quality of inputs available for the productive process. Normally the firm produces a
combination for two or more outputs rather than a single output. Some firms produce a main
product and a by-product. Firms may look apparently specialized in one output, but it does run
many activities. As such, depending upon the size, efficiency and specificity of available factor,
the firm has to decide on the allocation of those factors among different activity lines. It is this
resource allocation decisions which will ultimately help the firm. Deciding on the production
possibilities-combination of output to be produced. The point remains; there are a number of
input-output decisions underlying the production decisions. Each of these decision problems
involves a question of choice-the choice of production site, the choice of budget size, the choice
of technique, the choice of product-mix, so on and so forth.

he Choice Of Location In Production Decision

Theories

A very important decision affecting production is the location and layout of the production
unit. Based on investigation and analysis. Alfred Weber classifies the causes influencing location
into two categories : (1) Primary causes of regional distribution of industry : ‘regional factors’ and
(2) Secondary causes responsible for redistribution of industry – ‘agglomerating and
degglomerating’ factors.

Looking at the cost structure of different industries, Weber discovers the regional factors affecting
industrial orientation – (a) transportation costs, determined by (i) weight to be transported and (ii)
distance to be covered, and (b) labour costs. The actual basis on which production will get
oriented within a location figure depends upon two conditions-the type of raw materials used and
the nature of third transformation into product. Some raw materials water, clay and bricks are
‘ubiquitous’ i.e., available everywhere; some like coal and iron are ‘localized’. The localized
materials, exercise a greater influence on location than ubiquitous materials. Some raw materials
are ‘pure’ (e.g. cotton), others are ‘weight losing e.g. minerals). The production unit tends to get
localized near the source of ‘localized’ and ‘weight losing’ materials. On the basis of these
observations, Weber deduces the laws of transport orientation. The proportion of the weight of
localized materials to that of final product is called the ‘Materials Index.’ If the material index is
high, production tends to be attracted to the places of deposit of the materials. If low, it tends to
be attracted to the market where the product is sold. Any deviation of the production unit from the
centre of least transportation costs so decided, is caused by labour costs. The extent of deviation
is determined by the ratio of ‘Labour Cost Index’ (=the proportion of labour costs to total weight of
the product) to the ‘Location Weight’ (=weight to be transported during the whole process of
production); this ratio is called “labour co-efficient.”
A deviation from the centre of the least transportation cost may also take place due to the
operation of agglomerative and degglomerative factors. Agglomeration refers to advantages due
to concentration of an industry. The opposite tendency of degglomeration leads to cost-reduction
due to decentralization. The power of agglomlocations depends on the ratio of ‘Location Weight’
to the ‘Index of Manufacture’ this ratio is called the “co-efficient of manufacture. (=manufacturing
costs)/(total weight of the product) A high coefficient of manufacture encourages agglomeration
and vice versa. Weber has also considered the possibility of a split in location, particularly when
different stages or processes of production in an industry or firm, can be carried on independently
and at different places.

Weber’s deductive theory has provoked many criticisms. Dennison thinks that location must be
explained in terms of price cost considerations rather than technical co-efficient. Weber presents
a mechanical model. Predohl argues that Weber’s theory is more selective than deductive: why
should ‘labour costs’ and ‘transportation cost’ alone be regarded as “general factors”, and the
“capital costs” or “management costs” should also be considered. Robinson does not accept
Weber’s raw material classification, because in reality materials are drawn from a large number of
alternative unrealistic. For example, labour centers and consumption centre are never ‘fixed’ ;
these centres constitute cause as well as effect of the locational change. Florence thinks that a
proper location theory must consider the role of social and historical factors; the approach must
be inductive and analytical.

Sargent Florence’s inductive analysis of industrial location has assumed a great practical
significance recently. He does not accept location to mean “a relation between industry and
geographical is not so important as the relation of the industry to the distribution of the occupied
population as a whole.” Basic to his theory of location, two new concepts have been introduced:
“Location Factor” and “Co efficient of Localization”.

Location factor: It is an index of the degree of concentration of an industry in a particular

place. This index is arrived at by taking the percentage of all workers in a particular industry found
in a certain region and dividing it by the proportion in that particular region of the total industrial
workers in the country. The underlying idea of such an index is that location should be explained
as the degree of dissimilarity between the geographical distribution of the industry and the
population of the country. If an industry is evenly distributed over the whole country, the location
factor for each region would be unity, because the proportion of the total industrial workers of the
region would be equal to the proportion of workers in a particular industry. In case industry is not
evently distributed; the location factor will be either above or below unity.