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Importance of Geographic Space and Location
FIRM LOCATION
Many new studies have clearly confirmed that the firm’s economic success and growth are
significantly influenced not only by traditional ‘purely economic factors’, but also by its location
(Audretsch and Dohse, 2007).
In the past, the theory of industry location has found a lot more attention within the fields of
economic geography and regional science, rather than business and traditional economics. The
location theory has greatly benefited from the following concepts:
(i) least cost approach based on locational factors, such as transportation, labor costs
and agglomeration economies (Weberian model);
(ii) market-area analysis based on the spatial distribution of demand (e.g. Hoover);
(iii) international trade theory and comparative advantage (e.g. Heckscher-Ohlin
factor endowments);
(iv) land use models (van Thunen), and urban development patterns, such as the
central place theory (Losch & Christaller).
Under the first approach, according to Weber and his followers, firms would choose those
locations that minimize their transportation costs. Labor costs were the so called first distortion
to the original model. Heavy industries would usually locate close to the sources of their inputs,
while labor intensive industries would have chosen locations closer to huge pools of labor.
Agglomeration economies by offering additional benefits would encourage industrial
concentration of different firms. It has been recognized that as the costs of transportation have
diminished over the years, many firms have become more flexible in terms of their locational
decisions. The market area analysis questioned Weber’s one market approach and a lack of
attention to spatial variations in demand (Hoover, 1975). According to this approach, as
consumers are found in different geographic areas, the firm’s optimal decision depends on
locating as close as possible to the largest concentrations of buyers. The international trade
theory has added comparative advantage and differences in factor endowments among regions
and nations, which helped explain international specialization and industry location. The trade
theory usually assumed zero factor mobility in its basic models and had to rely on transportation
costs of moving goods. In the fourth approach, van Thunen findings were based on a land use
model which was developed in contrast to the traditional trade theory. Van Thunen’s model
assumed labor mobility within a region and there were no costs to labor migrations. His
innovative concepts and the central place theory have made a major contribution to the
understanding of land use patterns, business location and regional development.
In recent years, much attention has been given to investigating in more detail the role of
agglomerations, and particularly agglomeration economies in firm and industry location. There
are generally two trends that explain the emergence and expansion of agglomerations. The
agglomeration of businesses and people can be caused by favorable natural features, including
natural resources, while man-made ‘agglomeration economies’ show benefits of being in the
same location (Roos, 2005). The theoretical work further distinguishes between general
agglomeration or urbanization economies, which influence most sectors, and localization
economies, which are specific to individual industries, such as inter- and intra-industry linkages
(Giarratani, 2007; Funderburg, 2006; Fujita & Thiesse, 2002; Conkling & Yeates, 1976).
The transaction costs, which are usually discussed in the main stream economic texts also have an
important spatial dimension according to Wood. He argues that “institutional, commercial,
cultural and language characteristics are differentiated across the geographic space separating
market agents” and therefore require additional attention (Wood & Parr, 2005, p. 1). Some
contemporary research focuses on incorporating spatial dimensions in econometric models of
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