Geography Reference
In-Depth Information
Indeed, large firms often do exactly this with the help of GIS analysts
when they are searching for new locations.
In Figure 3.8, if all local factor prices are interregional equilibrium
prices, the firm will be indifferent between all locations. Under these
circumstances, the firm will be equally likely to build its new production
facility at any location. More generally, the fact that the firm is indifferent
between each location means that the probability of a firm investing in a
particular location will be exactly equal to the probability of investing in
all the other locations. Therefore, over large numbers of firms with similar
input requirements and similar output markets to our particular firm, the
level of such investment in any single location should be approximately the
same as the investment levels in all other locations.
With this type of analysis it becomes immediately obvious that geog-
raphy and space confer different profitability advantages on different
locations, which can only be compensated for by variations in local factor
prices. The concept that locations can be perfect substitutes for each other
from the point of view of a firm's profitability is therefore important in
terms of our understanding of the spatial patterns of firm investment
behaviour, as it defines the critical variation in local factor prices which
ensures an even distribution of investment. From the isodapane analysis,
we know that without any variations in factor prices across space, the
Weber optimum will always automatically be the most profitable location
for the firm's investment. Therefore, in order to make other alternative
locations attractive for firm investment, local factor prices have to fall
relative to the Weber optimum
K
*.
If wages are not in equilibrium over space, in terms of profitability
certain areas will automatically appear more attractive as locations for
investment, and there are two possible general cases here. The first one is
where the observed interregional wage gradient is less steep than would
be required in order to generate the equilibrium wage gradient. In this
case, all investment will tend to concentrate around the Weber optimum
location. In contrast, if the observed wage gradient is steeper than the
equilibrium wage gradient, then investment will tend to move away from
the Weber optimum. More broadly, the attractiveness of any particular
location as a new investment location for the firm will be positively related
to the extent to which the local factor price falls can more than compen-
sate for the increased transport costs associated with any sub-optimal
geographical location.
So far, these generalizations have been made on the basis of a single
firm with particular input and output coordinates, a particular produc-
tion function, and facing particular transport costs and input and output
prices. Yet, the fact that different firms exhibit both different production
