Factory Location as a Cost- Minimising Exercise By Peder Martin Floe Fejerskov and Katherine Reid

Agenda i.Key Concepts ii.Historical theories iii.Transportation iv.Labour v.Access to markets vi.Short and long-term planning vii.Differences between small and large firms viii.Conclusion ix.Thoughts for discussion

Key Concepts Neo-Classical Economic Theory Homo Economicus Cost-Minimising Theory

Historically Weber: Transportation as the most general princible of location Waterways Railways Highways Example: – Ruhr area along the Rhine

Example: European waterways Source:

Transportation Transportation costs lower today – Offshoring to minimize production costs Important factors of location: – Production inputs: Labour Capital Raw matreials

Factor in determining optimal location: In increqasingly competitive global economy companies locate in low wage regions – Guangdong, China weight of localized raw materials Weight of final products MI:

Labour Access to low-wage labour Firms must make compromises between transportation costs and labour costs (Weber) ‘Weberian’ Triangle

Access to Markets Demand will decrease with distance from factory In a market with two sellers, both will locate in the middle (Hotelling)

Predicting the future Difficult to predict future conditions for manufacturing locations Assumptions for the investment might change – Changes in economic and political environment – Technological innovation and rival behaviour = Decision process of manufacturing location difficult

Differences between SPFsand MPFs Responces to change Short term: – SPFs have limited options, increase labour or overtime – MNCs can shift oders from one company to another Medium term: – SPFs limited options – MNCs possibly expansion Long term: – Geographical expansion and new site locations

Conclusion Main cost-minimising concerns: Transportation costs, input costs (labour) and access to markets Firms must always compromise to achieve the right balance between different costs Planning for the future is always difficult

Things to take away A firm can make a profit without necessarily being in the ultimate cost-minimising position No two firms will ever have the exact same cost-minimising position

Discussion Earlier, transportation costs played a key role in cost-minimizing, today transport is of less importance Global warming and transportation costs What might the consequences be if there will be a price on CO2 emissions in the future?