A Critical Analysis Of Firm Location Economics Essay

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For the intent of this paper the factors lending to the attractive force and location of houses in urban countries, such as the Vaal-Triangle, will be analysed. “ The ability of that part to turn could be linked to the creative activity of an environment conducive to the location of houses ” ( University of Pretoria, 2009:97 ) . It is hence necessary to find the factors involved in the decision-making procedure that will promote houses to take a specific country.

It will besides be assumed that houses have a profit-maximizing motivation. A cardinal rule of location theory is that in order for any factor to act upon location determinations, it must change across locations ( University of Pretoria, 2009:97 ) . The most of import factors that a house will measure in finding location will now be analysed.

Background and Regional Economicss:

South Africa is rapidly developing its really ain unique individuality. Luus et Al ( 2005:1 ) indicates that South Africa ‘s metropoliss are undersized, dispersed, and over-concentrated. “ In South Africa, families in the state ‘s urban countries have mean incomes about thrice every bit high as the families in rural countries. ” Luus et Al ( 2005:1 ) besides states that more than 70 % of South Africa ‘s GDP is produced in merely 19 urban parts of which the Vaal -Triangle is included. In past surveies that have been carried out they have found that South Africa ‘s urban agglomerations are excessively little and the metropoliss chiefly offer urbanisation economic systems instead than localization of function economic systems.

A peculiar distinguishing factor of economic activity across South Africa is its spacial variability. Six metropoliss, viz. , Johannesburg, the East Rand, Durban, Cape Town, Pretoria and Port Elizabeth dominate the economic landscape. As different Fieldss of survey accelerate in their research of these metropoliss and their encompassing urban countries, particularly geographical economic sciences and the handiness of economic informations, economic experts are able to concentrate on metropoliss as drivers of economic growing and development more so than in earlier surveies. ( Luus et al, 2005:2 )

The benefits towards houses of being located in a metropolis are due to localization of function and urbanization economic systems. Localisation economies refer to the benefits a house receives from runing amongst other houses in the same industries. Urbanisation economies refer to the advantages of the overall graduated table and diverseness that originates in metropoliss due to the localization of function economic systems. ( Luus et al, 2005:2 )

It goes without stating that South Africa needs much higher economic growing rates to run into the demands of the more than 30 % of the population that is unemployed and has to be more widely spread, beyond the six major metropoliss. ( Luus et al, 2005:3 ) besides argues that the vicinities that do turn make so because of natural resources, engineering, lifestyles that attract enterprisers, and effectual local administration.

The localization of function and urbanization economic systems ( mentioned above ) tie in with the term spacial complementarities, hence “ the significance of geographics is non one of determinism ” ( Luus et al, 2005:3 ) . Nearby and intense economic interactions reap benefits for growing and chances which in bend establishes new Centres of activity.

When mentioning to metropoliss as drivers of growing and development it builds on the impression of spacial complementarities and external economic systems. External economic systems of graduated table occur at industry degree. In this instance, an addition in the end product of the industry as a whole leads to a lessening in mean costs. On the other manus internal economic systems of graduated table occur at house degree where increased production consequences in a cost advantage over smaller houses. ( Luus et al, 2005:13 )

When external economic systems apply, an addition in industry-wide end product causes a alteration in the relationship between inputs and end product for each single house. Harmonizing to ( Luus et al, 2005:13 ) there are two illustrations of this:

Knowledge Sharing, Learning and Innovation:

As industry end product rises, the stock of cognition rises and information spills over to houses. This is a positive external benefit that is non paid for, cut downing cost and doing an addition in the degree of end product at the steadfast degree. ( Luus et al, 2005:14 ) it is besides motivated that these benefits accrue due to knowledge sharing, larning and imitation in a peculiar country. Therefore, metropoliss play a really of import function in economic growing as they provide the versatile information that spills over and that besides contributes to innovation. “ The lumpiness of economic activity in South Africa may be good for economic development! ”

Public goods:

The supply of public goods and services provides benefits to consumers. These benefits are non-rivalrous and non-excludable in ingestion. Public goods or services therefore have external benefits that lower costs and heighten efficiency, giving rise to increasing returns in the sum. ( Luus et al, 2005:14 ) besides notes that economic outwardnesss non merely impact the production map, but besides a house ‘s end product determinations through monetary value effects that are conveyed via the market.

In both these instances it is of import to observe the importance of propinquity. The concentration of consumers and manufacturers at a specific location makes it possible to capture the spillovers of cognition and indirectly so besides create substructure, which increase productiveness and lower costs. These are the spacial complementarities which metropoliss and parts offer, and which may drive growing and development. ( Luus et al, 2005:14 )

Finally, in the instance of external economic systems, a farther differentiation is possible between localization of function economic systems and urbanisation economic systems. Localization of function economic systems are industry-specific external economic systems. Urbanization economic systems are external economic systems that apply to houses across industries and capture the construct of positive spillovers for a house as a consequence of entire economic activity at a location. ( Luus et al, 2005:15 )

It is these localization of function and urbanization economic systems that have been the focal point of empirical work that seek to quantify the importance of spacial complementarities for growing and development. Typically, concentration ratios are used to mensurate the extent of agglomeration and the being of localization of function or urbanization economic systems. The decisions drawn from the empirical surveies are concerned with whether certain parts should specialize in a certain industry or whether it should diversify more to advance growing and development. ( Luus et al, 2005:15 )

Theoretical theoretical accounts of agglomeration investigate the duties of congestion, inactive factors and market size in spacial growing and development. Empirical attacks use soaking up indices to quantify the extent of agglomeration. For the intent of this paper a theoretical attack will be followed to find, foremost, what the drivers and properties for location determinations are to, secondly, set up whether policies assist and contribute to regional location. Third, an illustration will be given to actuate that there are more steps available to heighten such methods of growing and development. In the last subdivision the research in this paper will be reflected upon the state of affairs in the Vaal-Triangle as the research has been carefully reviewed from the position point that it is all relevant to the current clime that is ongoing in the Vaal-Triangle.

Instruments Affecting Location Decisions:

It is clear that there are many assorted factors that contribute to the decision-making regarding location. These factors besides chiefly reflect upon competitory advantage because without it location will non be motivated amongst houses. Below is a figure that concludes the assorted elements that contribute to the location of houses:

Firm Location 1.bmp

Figure 1: Conducive Elementss to Location Decisions Source: Cullinan, ( 2007:14 )

Adding to the above Visser et Al ( 2004:18 ) besides states that house determinations are influenced by basic conditions such as trade, labor and industrial policies. On the other manus, one time the limitations wherein houses have to run hold been defined, altering market procedures and the behavior of houses ( based on the degree of competition and demand-side demands ) besides start to determine the bing market construction.

Urban Econ ( 2008:9 ) used the Porter Diamond attack to explicate competitory advantage: the competitory advantage of a vicinity is founded on 4 pillars, as indicated below. Competitive advantage is at the root of concern keeping, enlargement and attractive force. When an country possesses such an advantage, it becomes extremely attractive as an industrial location.

Firm Location 3.bmp

Figure 1: Porter Diamond ‘s Competitive Advantage Source: Urban Econ, ( 2008:10 )

For the balance of this subdivision more properties will be discussed that houses take into consideration when doing determinations about the location of their concern:

Cost Variables:

Cost variables are those that straight affect house cost. Given the same amenities/facilities/services, a house will take a location which provides a lower pay rate. However, a higher pay may be accepted if the house chooses to hold an enhanced quality of labor accomplishment, substructure service and entree to markets. ( Kuncoro, 2000:4 )

Kuncoro ( 2000:4 ) besides states that little and average graduated table houses that are labor-intensive battle more when higher pay rates apply. Therefore, the grade of replaceability between capital and labour may be of low significance as the lower pay incentive already suggests that they could non afford the cost of capital investing. All these statements follow the premise that any single house, when taking location, attempts to maximise nominal net income.

Glen ( 2008:40 ) besides mentions that the cardinal cost factors to be considered include the cost of labor, the cost of the installation, depreciation charges of belongings, works and equipment, funding costs ( including involvement ) , transit costs, public-service corporation costs and revenue enhancements ( direct and indirect revenue enhancements ) . The cost of industrial land and building will be more of a factor for a house wishing to relocate. The cost of renting office infinite will besides impact on the overall investing determination. Therefore, guaranting that industrial land is available for development would surely be an advantage in concern location determinations.


The distance to other concern installations is yet another indispensable consideration to cut down runing cost. Complementary concern services are most likely to be better developed in the already bing industrial Centres. Therefore, the distance to the nearest concern Centre will besides impact the location determination. Harmonizing to Kuncoro ( 2000:5 ) “ the distance variable besides captures the demand to cut transit costs, peculiarly if most clients are in urban countries. ” The same consideration applies if a dependable supply of direct inputs can merely be acquired at the closely located concern Centre in inquiry.

Infrastructure, Energy, and Communication:

The deficiency of substructure services may be a big determiner when doing location determinations. Recently South Africa has had many disagreements sing electricity supply and the dependability thereof, and the deficiency of electricity proviso may coerce houses to bring forth electricity by itself, which would be an extra cost ( Kuncoro, 2000:5 ) . Glen ( 2008:40 ) besides comply with this issue and provinces that the factor remains that South Africa ‘s cost of electricity is still competitory even after recent additions by municipalities and Eskom. It has to be noted that municipalities have an of import function to play in supplying an environment that is friendly to concern. The lifting demand for energy coupled with the steep rise in the cost of energy will add greater importance to energy handiness and stableness in choosing a location for investing.

Glen ( 2008:40 ) adds that the demand for fast, dependable, cost-efficient telecommunication is another cardinal factor drive determinations about where to put and make concern. The turning importance of broadband and the comparatively high cost thereof is an country that could be used for competitory advantage. Therefore, the cost of electricity and telecommunication are imperative factors in finding concern location determinations.

Traditional substructure ( particularly main roads ) remains the most of import factor when location is at interest. Glen ( 2008:40 ) researched that industries involved in extractive productions ( such as excavation and oil ) support this position as they receive ‘subsidised assistance ‘ to better their conveyance substructure. This is besides why disbursement on the many upgrading substructure undertakings in front of the 2010 FIFA World Cup bodes good to lend to the overall fight of the South African clime in general.


Local population could besides be regarded as one step of the size of the local market. Kuncoro, ( 2000:5 ) argues that a bigger population size is ever coupled with urban countries. New houses are likely to turn up in urban countries because local demand is high. Thus, some of the house ‘s merchandises could be sold in the local market without incurring conveyance cost.

Tax Considerations:

Municipal rates and revenue enhancements will be cardinal concern location determination factors. However, the synchronism of international revenue enhancements has ensured that revenue enhancement is mostly a impersonal factor in location decision-making. ( Glen, 2008:40 )

Industrial Environment:

For advanced houses confronting a market uncertainness, it is good to take location around other houses, preponderantly because of the benefits of information spillovers. Over clip the interaction among many houses in a peculiar location will take to the development of specific cognition which will be alone to that location. Another lending factor of the being of such a system will enable houses to avoid the high cost of making it. ( Kuncoro, 2000:6 )

A Skilled and Flexible Labour Force:

From a competitory point of position any emerging economic system requires a work force that is boundlessly more skilled than that required a few decennaries ago. Hence, the completion of secondary instruction has become the norm to enable a work force to work with advanced engineerings and continually better key procedures. “ The modern economic system besides requires flexibleness in the work force to guarantee sustainability in a extremely competitory environment ( Glen, 2008:40 ) . ”

The Department of Education ( 2003:5 ) found that “ values and morality give significance to our single and societal relationships. They are the common currencies that help do life more meaningful than might otherwise hold been. An instruction system does non be to merely function a market, of import as that may be for economic growing and material prosperity. Its primary intent must be to enrich the person and, by extension, the broader society ” .

The Regulatory Environment:

In finding the fight of a concern location, another of import factor is how crystalline concern regulations in that part are and whether they are enforced in a sensible mode. However, authorities at all degrees has to be cognizant that undue degrees of ruddy tape inhibit the fight of houses. The increasing importance of environmental ordinance is besides impacting on the sum of conformity that houses have to accomplish and adds to the overall cost of making concern. ( Glen, 2008:40 )

Measuring Quality of Life

Harmonizing to Glen ( 2008:40 ) the cardinal international determiners of the quality of life are “ offense rates, the quality of public schools, the handiness and cost of lodging and health care ” . Similarly, these same determiners are besides applicable to the decision-making procedure that houses have to do sing location. These determiners are lending factors to houses and their fight but besides a agency to better the quality of life for a population as a whole.

Research and invention:

Changeless invention is besides required to maintain markets and parts in a competitory visible radiation. This could be measured by the figure of scientific discipline and engineering alumnuss, every bit good as the pecuniary value spent on research and development. Research and development are by and large situated near to big universities and in engineering bunchs operated by concerns. Glen ( 2008:40 ) provinces that in many such parts the bunch these sorts of activities have proven successful. Visser et Al ( 2004:18 ) besides comply with this subject and add that lower informational costs, greater degrees of invention, cognition transportation, and enlargement of productive capacity is possible through inter-firm sharing.

Economic Policies Lending to Regional Location:

One of the cardinal rules that regional authoritiess have to encompass is that industrialisation and urbanization does non trust on market forces entirely. On the contrary, it materialises from a seeable set of good co-ordinated policies that aim to excite and back up acquisition and invention within the house and the economic system. Visser et Al ( 2004:21 ) besides notes that if institutional constructions and policies at an industrial degree do non complement the demands of houses at the micro degree it is unpointed to trust that they may favorably act upon firm-level behavior at a market degree.

“ In footings of basic conditions impacting market construction, the individual greatest obstruction to intra-regional trade is dealing costs faced by single houses ” ( Visser et al, 2004:10 ) . Market entree is mostly hindered as a consequence of inordinate dealing costs. There are still many characteristics that may represent barriers to intra-regional trade. Of these the lists of sensitive merchandises are likely the most obvious, but the uncertainness associated with the scope of unseeable non-tariff barriers is likely to be the most notable obstruction to integrating.

The five most of import non-tarrif barriers harmonizing to Visser et Al ( 2004:10 ) , that impede trade in the part, are communication jobs ; imposts processs and charges ; transport jobs ; deficiency of market information ; other boundary line processs ; services ( fiscal, electricity, proficient support ) ; and criterions and proficient limitations.

Inter-firm organizational restructuring may help with some of these predominating issues and it involves the transportation and assimilation of cognition and engineering wholly along the supply concatenation. Information prevalent at the micro degree tends to roll up at industry degree. However, this requires dynamic interaction at all degrees, from construct through to production and the market. Therefore, the function of networking and partnering relationships is instrumental in advancing cognition diffusion and invention. ( Visser et al, 2004:21 )

The nature of the underlying market construction in which industries operate has important deductions for firm-level behavior and public presentation. Invisible trade barriers significantly increase the cost and hazard of making concern, thereby impacting the fight of houses and, above all, forbiding entree of smaller houses to regional markets ( Visser et al, 2004:10 ) . Again, the deficiency of entree to information about trading spouses, investing chances and inducements all contribute to hesitance on the portion of houses to widen their projects within the part.

“ Development and competitory pricing is badly constrained by such information inefficiencies ; thereby further cut downing market chances ” ( Visser et al, 2004:12 ) . In South Africa, the ability of houses to construct efficient supply webs is mostly obstructed by hapless communicating systems cased by limited substructure, high cost, inefficiency and undependability due to regulated service proviso. The deduction is that possible societal capital development among enterprisers and directors are badly undersized and developing.

The assorted messages from contradictory policies ( within and between states in the part ) are a farther major limitation to cross-border investing. Therefore, it is clear that the turning point for high dealing costs to lend to integrating will merely happen if a extremist decrease in costs occurs. Barriers to entry, whether seeable or unseeable, automatically increase the hazard profile of making concern within parts and hence straight affect the behavior of houses. ( Visser et al, 2004:12 )

Therefore it is safe to state that counter assailing policies need to be brought to the tabular array. It is besides indispensable that the function of these instruments as explanatory variables for low intra-regional trade should be considered in the preparation of industry support policies aimed at supplying inducements for productiveness sweetening, industrial development, investing and trade enlargement. ( Visser et al, 2004:11 )

The existent message for policy shapers is that unseeable controls and barriers to merchandise are progressively what prohibit industrialization and general growing in parts. Extinguishing direct costs of making concern and cut downing the confusing signals given to houses will keep tremendous benefits for all parts in inquiry. Such accommodations could increase trade and investing and should therefore reconstitute economic activity towards greater fight. ( Visser et al, 2004:12 )

Visser et Al, ( 2004:18 ) provinces that labor policy, for illustration, non merely impacts on micro house behavior and local markets, but besides sets the market construction at a regional degree. “ Investment and location determinations will frequently hinge on differences between labour market flexibleness, returns on capital, and the predictability of the macroeconomic conditions. ” In this regard labor policy can play an of import function in the economic geographic form of industrialization.

Harmonizing to Cullinan ( 2007:1 ) , “ if the pre-conditions exist, good location can be created by reenforcing the elements such as better linkages, better circulation of income, income mix, greater thresholds and improved catchments through agglomeration of activity and points of handiness. ” Physical properties ( both man-made and natural ) besides create locations.

Cullinan ‘s ( 2007:23, 24 ) research provides a point of going for public disbursement:

Economic Growth is a requirement for the accomplishment of other policy aims.

Government disbursement on fixed investing should be focused on parts with high economic growing potency.

The focal point should be on the population, and non on past and current inequalities. Therefore, topographic points with high degrees of poorness and development potency should besides have fixed capital investing.

Social capital should be focused on countries with low degrees of development potency and high degrees of poorness. The focal point should be on supplying societal transportations, human resource development and labor market intelligence in order to help people to entree economic chances.

Future economic development chances should be channelled into activity accessed or linked to chief growing Centres. This will besides in bend play a function in get the better ofing spacial deformations of apartheid.

Kuncoro ( 2000:11 ) argues that the determination of authorities to possibly give provincial and regional municipalities more power in several facets of the administrative licensing system such as the pick of environmental feasibleness and belongings revenue enhancement could besides lend to development and competitory markets. That is nevertheless dependent on whether authorities abuse their power. If this could be the instance so the immediate impact of license decentralization on fabrication houses will bespeak more effectual location penchant within parts and payoffs will besides take down.

This subdivision efficaciously described how policies could help to pull more concern to a certain part such as the Vaal-Triangle. The undermentioned subdivision will be a conducive factor as to how to pull more concern to a part. The chosen subject involves and offers a much larger graduated table of diverseness that could be approached to help localization of function and urbanization economic systems.

How to Attract More Business to a Region:

“ The capable touristry involves the survey of why people travel and how to run into their demands and outlooks. It focuses on the touristry industry as an interconnected, wide and dynamic economic sector ( Department of Education 2003:9 ) . ” The capable trade with geographics, creates an consciousness of the function played by South Africa in the international touristry industry, and investigates and evaluates the value of touristry. The topic besides emphasises the duty to lend towards sustainable touristry patterns and socioeconomic growing. Therefore, the value and importance of appropriate and clear communicating, a regard for diverseness, and the proviso of quality service are emphasised.

Tourism will in existent fact empower people to develop an apprehension of the related services in the touristry industry, the mutuality of sectors and sub-sectors, and the benefit touristry brings to an economic system. The Department of Education ( 2003:9 ) besides mentions that the survey of touristry purposes to right historical instabilities, as the bulk of the population was antecedently excluded from touristry. This developing sector will enable people to ( Department of Education 2003:9 ) :

Acquire the accomplishments, cognition, values and attitudes necessary to pass on efficaciously with clients, place demands and supply the needed service to guarantee client satisfaction

Gain entree to further acquisition in the chosen sector by accessing information on calling chances in the touristry field.

Use scientific discipline and engineering efficaciously when pass oning and accessing information.

Work efficaciously with others through the communicating and interpersonal accomplishments applied in client attention and service bringing.

Organise and manage themselves and their activities responsibly and efficaciously by placing spreads in touristry development and doing recommendations for betterment and growing.

Collect, analyse, organise and critically measure touristry information.

However, the South African touristry industry is exposed to increasing competition. It is besides a complex service sector, necessitating high degrees of accomplishments and resources. As a consequence, widening the growing of the sector and its wagess to emerging markets nowadayss major developmental challenges. ( TEP, 2008:1 )

TEP ( 2008:2 ) conducted a survey on the current effectivity of this market and identified more than 5 000 endeavors and the statistical analysis were divided into:

Operational: Feasible endeavors ready to supply goods and services for 2010 and beyond.

Potential: Feasible endeavors which are non ready to supply merchandises for 2010, but, given appropriate aid, have the potency to make so.

Fringy: Enterprises on the borders of viability with no chance of going meaningful service suppliers for 2010.

Potential endeavors significantly outnumbered endeavors in both other classs, thereby showing development bureaus with a substantial development challenge. The decision of the survey was as follows ( TEP, 2008:2 ) :

Townships were besides emphasised in the choice procedure. However, it still shows that most emerging touristry markets operate in urban Centres and recognised touristry countries. “ Although townships attract niche tourers, endeavors runing in them are out of the mainstream, which constrains their development ( TEP, 2008:4 ) . ” This merely indicates one time once more that the effects of location are hard to get the better of, but some townships and parts are get downing to demo important touristry potency. Another conducive factor would be the deficiency of emergent travel or touristry bureaus, as they could make a great trade to bring forth more concern and better market entree for the emerging sector as a whole.

Case Study on the Vaal-Triangle:

As mentioned before, all the information gathered for the intent of this paper has been selected from a general position point on the Vaal-Triangle. In this subdivision some of the subjects will merely be lightly touched once more as to confirm the research even more.

Refering the subdivision on the instruments impacting location determinations it becomes clear that the Vaal-Triangle show many defects. Transport is expensive and by and large undependable, and deficient competition is possibly the most important obstructor to lower conveyance costs in the part.

Another factor that has non been mentioned is ‘time ‘ . Urban development procedures take clip and are by and large based on long term ends and short term intercessions. However, it is within human nature to mistreat the benefits of ‘time ‘ as long term ends are more than frequently expected to go on within the short term and hence de-motivation will be the norm to follow.

This prevailing job could be assisted with efficient planning, good stipulated and defined ends, and forbearance. At the ‘macro graduated table ‘ planning can help in supplying a model for believing about public investing in infinite that is non strictly reactive, but seeks to proactively act upon development results. ‘Macro graduated table ‘ planning is a much looser construct mentioning to a wide spacial graduated table and regional systems.

Research and invention could besides help this job country every bit good as with all the antecedently related issues ( mentioned earlier ) . The Vaal-Triangle besides shows a major advantage in this regard as there are assorted such installations in the propinquity. Therefore, information is easy accessible and the chance of bring forthing enterpriser has an increasing figure attached to it. The disadvantage that remains nevertheless is the high costs involved in these sectors.

Energy on the other manus is another staying disadvantage for this part. The increasing costs are impacting a much broader spectrum than merely houses and have an utmost negative impact for sustainable economic growing and development. If these industries in inquiry could come in a more competitory market and let the monopoly to fall off, so possibly an addition in production and other prevailing factors could happen to profit the big unemployment sector that remains an unreciprocated inquiry.

Sing regional policies and how they could help economic activity it is argued that instead than making extra policies, Southern African states should concentrate on bettering their investing clime from an operational position. To make so the economic foundations and financial direction should be strengthened, substructure should be improved, and one time once more, power and H2O supply besides needs to be upgraded. This, for illustration, will be a far greater inducement for foreign investors than foreign investing strategies that provide revenue enhancement cuts and the similar. Besides, advancing a system of investing paths can help in shuting down infinite, bettering entree to services and chances.

Paths with high degrees of entree and continuity should go a focal point for activity and economic development. Due to continuity and high degrees of entree along these paths, activities respond to changing degrees of entree by taking points which suit their demands. Public conveyance beat combines with the beat of handiness are cardinal elements.

In decision, the Vaal-Triangle should both specialise more in the fabrication sector and diversify its markets to let other sectors to congratulate growing and development on an economic degree. Is non a reactive construct but involves making new forms of entree and chance.