Geography Reference
In-Depth Information
3.2
DETERMINING THE OPTIMUM LOCATION
BEHAVIOUR OF THE FIRM
All MNE investment decisions involve location choices. Firms must decide
where to situate their investments and, following on from the discussion
above, these location decisions must necessarily be taken at a spatial scale
which is more specific than simply that of an individual country. Firms
wish to make the best investment decisions and therefore it is necessary
for us to understand how the optimality of a firm's investment choices is
related to economic geography.
Production factor inputs are most simply defined in terms of capital and
labour. However, in economic geography models they are usually defined
in terms of three broad types, namely capital, labour and land, whereby
the factor earnings are profits, wages and rents, respectively. At this stage,
in order to keep things very simple, we ignore other potential factor inputs
such as technology and entrepreneurship. Later in the topic our discussion
will also investigate how the additional issues associated with innovation,
technology and entrepreneurship also affect and are affected by firm
location behaviour. In this chapter we concentrate solely on the determi-
nants of the location of a firm's capital investments, by assuming at this
point that both labour and land are immobile; in other words, we assume
that labour and land are location-specific while capital is geographically
mobile. We will relax these assumptions later on.
In order to understand the level of capital investment in an area it is
necessary to ask why a particular firm has chosen to locate there and why
the specific levels and types of investment in the area are as they are. These
issues can be addressed initially by using the approach set out by the sim-
plest Weber location-production model.
For our analysis to proceed we will also first assume that the firm is a
single establishment. This is clearly contradictory to the multiplant nature
of MNEs, but once the analysis has been fully developed, we can then also
relax this assumption and allow for the multiplant nature of firms, in par-
ticular MNEs. In addition, we assume that the firm's decision as to where
to locate is a 'one-shot' decision, in that there is no hierarchical nature to
the decision-making process, as implied by Figure 3.1. Once again, when
the analysis has been fully developed, we can also relax this assumption and
allow for the hierarchical nature of multinational location decision-making.
3.2.1
The Weber Location-Production Model: Fixed Input Factor Prices
The Weber location production model (Weber 1909) is conceptually the
simplest analytical framework for analysing location decisions, and is
