Location of Industries

Topics of Discussion

• Factors influencing location decisions• Theoretical perspective• Empirical evidence

INDUSTRIAL LANDSCAPE:

Some Basic Problems of Industrial Location

1. Distribution Pattern Not evenly distributed around the earth, with some

manufacturing industries typically concentrated in certain localities.

The reasons for the Contemporary Pattern of Location And the Cause for Dynamic Change of

Location1. Differences in scale or level of study: • Micro level or firm level – individual firm • Meso level – an industrial district • Macro level – an industrial area or a whole industry

2. Differences in the types of industry

• e.g. light industry such as textiles make strong demands for labour.

• Heavy industry such as oil refining and petroleum results little labour but much capital.

3. Differences in special needs:

• need to be close to other industries

• need to lower transportation costs by cheap sea transport

4. Differences in the motives of the individual

entrepreneur in choosing a location • Some are likely to be motivated by a desire to

maximise profits and will take risks in doing so.

• Other may want simply “satisfactory” profit and safe existence.

Despite these diversifying factors of location, there are

common requirements to all industrialists: 1. the purchase of raw material or semi-

processed materials

2. the processing or assembling of these raw materials or semi-processed materials whereby value is added to them.

3. the sale of the finished products.

4. the payment of transportation costs involved in the assembly of the raw materials or semi-processed materials and the distribution of the finished products.

5. labour supply

6. energy resources

7. capital

II. The Factors affect Industrial Location:

• Raw material• Labour• Market• Transportation• Capital• Power resources• The Role of Government / Government Influence• Technology• Climate and weather and water supply• Landscape• Personal Factors: Behavioral and Random factors for decision making

• The literature of regional economies suggest that industries tend to concentrate in order to realize tangible benefits from

• being close to other firms and to consumers,• market access,• thick labour markets, • available infrastructure, • transportation, • raw materials and resources, • agglomeration benefits, • knowledge and technology spill over, externalities,

etc.

• Why do rates of industrial growth differ among states? It is a natural question with seemingly obvious answers: infrastructure, human development and expanding markets are among the factors most often mentioned to explain differences in growth rates.

• Level and growth of agriculture is seen as another factor acting both on supply and demand side to affect the rate of industrial growth

THEORETICAL PERSPECTIVES OF INDUSTRIAL LOCATION

• The literature of regional development is rich with theoretical formulation and empirical studies on the concentration of economic activities in some particular regions.

• In the early location theories firms location decision is exogenously determined by given spatial distributions of natural resource endowments, technological differences and factors endowments

• However, these theories have been criticized with the development of research on externalities, increasing returns to scale and imperfect competition location decision becomes entirely endogenous.

• In these new models location choices are determined by a tension between “centripetal” or agglomeration forces, which promote the spatial concentration of economic activity, and

• “centrifugal” or dispersion forces, which favour an equal distribution of economic activity across space.

What are the factors that contribute to the location decision of new industry?

• the neoclassical theory suggests that in the long run “divergence is followed by convergence”

• The idea of inter-regional divergence followed by convergence is one of the cornerstones of the regional development literature.

• It is expected that interregional inequality (expressed typically in terms of per capita regional income or output) increases during the early years/decades of industrial development, being concentrated in metropolitan areas, and begins to decline at some later indeterminate point.

• This approach, perhaps the most dominant and widely used approach in the literature where “regional development models are equilibrium and convergence seeking”

• This is in contrast with the theory that raises the question about the regional development of the industrialization in India under the two policy regimes, namely the in-ward looking restrictive industrial policies (until the mid 1980s) and the liberalization policies since the early 1990s and that of the effect of economic liberalization on industrial location in India.

• Industry goes where industry is—as a result of developed infrastructure, agglomeration and linkages, but subsequently, when diminishing returns set in—in the more industrialised regions—it shifts to less developed regions.

• Contrasting the ‘convergence’ hypothesis there is an equally strong view that postulates increasing divergence due to “technology and agglomeration externalities” which make increasing returns possible over long periods.

• Different regions situated differently in terms of initial levels and capacities for development are thus subjected to “cumulative causation”.

• They not only grow differentially due to internal factors, but differences get reinforced through interaction among them through the mechanism of “back-wash effects”

• Main (overlapping) strands of this literature can be identified.

• The Hirschman and Myrdal approach can be considered under the umbrella of ‘cumulative causation’, in which, ‘since nothing succeeds like success’, early industrial cities capture much of the new physical, human, and financial capital, often at the cost of peripheral and rural regions.

• This is the phase of polarisation (according to Hirschman) or backwash (according to Myrdal) and may be followed by trickle down or spread, primarily when there is effective political action.

• The Myrdal (1957) and Hirschman (1958) approach of “cumulative causation” is the first strand of this literature, which suggested that industrialization follows the classic virtuous cycle principles, and hence, regional imbalances in industrial development are likely to widen in the absence of state intervention.

• The most recent strand of this literature is the most analytical and identifies transport-cost as the crucial variable. The authors [Fujita, Krugman and Venables, 1999] build a series of ‘increasing returns’ models of cities, regions, and industries, where self-perpetuating forces of geographic concentration are for a time supported by, and later (in some circumstances) offset by declining transport costs.

Industrial Location policy in India

• India has been followed a path of rapid industrialization in a very conscious and planned manner over the years since gaining independence with the objective of balanced regional development

• preferential treatment to less developed states in distribution of public sector industries

• Pushing industries away from metro cities into Backward areas

Measures

• Industrial licensing• the location of public sector industries,• industrial estate program, • location policies for metropolitan cities, • small-scale industries location policies, • the distribution and pricing policies for intermediate

industrial inputs and other government location incentives,

All these measures were aimed at influencing inter-state distribution industries.

• Licensing and location restrictions resulted in fragmented and underutilized capacity. The objectives of balanced regional growth were also not achieved, as successful industries were concentrated in a few regions of the country.

• Mohan (2006) remarks “The obsolete system of capacity licensing of industries was discontinued, the existing legislative restrictions on the expansion of large companies were removed, phased manufacturing programs were terminated, and the reservation of many basic industries for investment only by the public sector was removed.

• At the same time restrictions that existed on the import of foreign technology were withdrawn, and a new regime welcoming foreign direct investment, hitherto discouraged with limits on foreign ownership, was introduced”

• few location restrictions • The private enterprises can establish industries

anywhere of the country they wish without facing restrictions, except a few environmental, pollution and other local land-use-related restrictions and also up to a certain distance from the metropolitan cities.

• The role of the central government as industrial owner and location regulator, thus, has curtailed and the role of private sector in industrialization has increased under the liberalization policy regime.

• Conflicting views– Private sector preferences– State governments autonomy

Reforms and spatial concentration

• New economic geography (NEG) models have argued for an inverted U-shaped relationship between trade reforms and spatial concentration of industries, where regional inequality first rises and then falls in the presence of increasing returns to scale and transport costs.

Divergence expected in post-reform period

• Krugman [1992] suggest that post-reform regional industrialisation is likely to lose its historical metropolitan bias and is likely to be more evenly balanced.

• They argue that the magnitude of internal trade is much larger than foreign trade in inward looking trade regimes; ‘this leads to concentration of production and trading activities in large metropolitan cities …

• an opening up of the economy is likely to break the monopoly power of these highly concentrated production and trading centres, weaken the traditional forward and backward linkages and lead to a more even distribution of economic activities across regions’ [Das and Barua, 1996: 365

• The centripetal forces such as proximity to local markets, inter-firm spill overs and so on, become weaker because producers can now depend on external demand,

• while the higher wages, land-rent, high transport cost due to congestion in the established markets act as centrifugal forces compelling them to relocate to less established regions.

• most of the evidence shows that although the share of the large cities has declined and that of the secondary cities and periphery areas increased, the already industrialized areas have continued the dominance in the industrial development even in the post reforms period.

• But these evidences are not enough to reach at a general conclusion about the pattern and regional dispersal of industrial location in the post liberalization period and to examine the influence of economic liberalization on industrial location in India

• Owing to the increasing dominance of the private sector in industrialization location concentration of industries has increased in the post reform period and this is one of the major causes of regional inequality in India (Chakravorty, 2003a; Lall & Chakravorty, 2005)

• in determining which districts get some new investment and in determining the quantity of new investment, the most significant factors are the existence and size of investment from the pre-reform period and the existence and size of new investment in the neighbouring districts.

• The first factor implies continuity – evidence of a historical process of investment location.

• The second factor implies clustering – evidence of the role of geography in guiding investment location.

• Both factors are stronger in determining success/failure .

• One implication of this is that though historical processes are being continued in the choice of investment location, the volume of new investments is following a different pattern from the past.

• Districts that were successful earlier continue to receive new investment, but degree of past success is not the best indicator of the degree of current success.

• The most successful pre-reform districts are not the most successful post-reform districts.

• There has been a shift in geographical focus whereby new investments seek locations within the existing leading regions (or clusters), but at new locations within these regions.

• To use a concrete example: Greater Bombay is still successful in attracting investment, but not to the extent it was earlier; its neighbours, Raigarh and Thane, are now the preferred investment destinations.

• Similarly, it appears that what is happening in India is quite distinct from ‘spread’ or ‘polarisation reversal’ in that there is increasing inter-regional polarisation of industry at the same time that there is intraregional dispersal in the leading regions.

• the situation is one of concentration with dispersal, or to make an ironic use of the term, ‘concentrated decentralisation’, where the new growth centres are in the advanced region rather than in the periphery.

• First, there is the decision on which general region to invest in, followed by the decision on the specific location within the selected region.

• The first decision leads to interregional divergence; the second decision may lead to intra-regional convergence (due to declining transport costs and/or rising agglomeration diseconomies).

• In India, the key is to device strategies that will influence the first decision.

Effects of FDI liberalization on spatial concentration

• Foreign firms want to take advantage of untapped domestic consumer market => rise in dispersion (Amiti and Javorcik, 2008)

• But foreign firms relying on domestic IO linkages will locate close to suppliers maybe already in clusters => rise in concentration (Amiti and Javorcik, 2008)

• Entry of foreign firms leads to more competition for domestic firms that may chose to locate away => rise in dispersion

• But if domestic firms become vertically linked to foreign firms and these locate in clusters => rise in concentration

Methods used to evaluate concentration

• coefficient of variation statistic in order to capture the regional concentration of industries across the states over the years.

• In order to make an assessment of what type of industries are located where we have followed the location quotient technique.

• Finally to examine how diverse are the states in terms of industrial mix we have employed the specialization coefficient technique.

Extent of Industrialisation

• Differences in the extent of industrialisation are one of the most glaring aspects of the variations in the levels and structure of state economies.

• The share of manufacturing in the Gross State Domestic Product (GSDP) varies very widely among the Indian states.

• In terms of this indicator, Gujarat with about 30 per cent share of manufacturing in GSDP was the most industrialised state among the major states of India in 2008–09

• Other major states which had a higher than the national figure of 17 per cent were Maharashtra (23.46 per cent), Tamil Nadu (23.32 per cent),Haryana (20.0 per cent), Karnataka (19.85 per cent) and Orissa (17.04 per cent).

• Kerala had the lowest 9.96 per cent of its SDP originating in manufacturing. Andhra Pradesh followed by Bihar and Uttar Pradesh were other states with low level of industrialisation with only 12 to 14 per cent of their SDP originating in manufacturing

• The share of industry in GDP ranged between 9.96 per cent in Kerala, the least industrialised state to 29.94 per cent in Gujarat, the most industrialised state, in 2008–09.

• The range of variation seems to have marginally declined from 1980–81, when the least industrialised state (Kerala) had 9.52 per cent of its SDP originating from manufacturing while in the most industrialised state (Tamil Nadu) manufacturing contributed 31.47 per cent.

• Gujarat has also seen the fastest pace of industrialisation, followed by Haryana, Punjab and Himachal Pradesh,

• while West Bengal, Andhra Pradesh and Tamil Nadu experienced a decline in the share of manufacturing in their respective GSDP.

• Disparities in the extent of industrialisation have somewhat decline during 1981–2009.

• Growth rates of manufacturing GSDP have been quite divergent throughout 1981–2009, but especially since 2001.

• Rates of growth have, however, not necessarily been higher in states with initially high level of industrialisation, except during the period 2001–09.

• The four states with largest share in national manufacturing GDP, namely Maharashtra, Tamil Nadu, West Bengal and Gujarat, have continued to account for over half of the national GVA in manufacturing—Maharashtra remaining at the top, Gujarat replacing Tamil Nadu in the second position and West Bengal receding from third to fourth position.

• Overall disparity in the shares of different states has slightly declined in 2007–08 from 1980–81.

• In employment terms, Uttar Pradesh replaces Gujarat among the top four states, which account for 48 per cent in 2004–05, Uttar Pradesh alone accounts for 16 per cent of employment, the other three, namely Maharashtra, Tamil Nadu and West Bengal account for 11 per cent each.

How are different industries dispersed or concentrated among states?

• Leather products is most concentrated industry with the five largest contributing states accounting for 84 per cent of total employment in that industry with Tamil Nadu alone accounting for 41 per cent.

• That is followed by beverages and tobacco with 83 per cent of employment in five largest contributing states and Andhra Pradesh alone accounting for 56 per cent.

• Next comes textile products with 82 per cent share of the five top states and 39 per cent of the largest contributing state, namely Tamil Nadu.

• Most other industries seem reasonably dispersed in their location; though the top five states contribute more than half of total employment in all cases.

• Non-metallic mineral products, chemical products, wood products and metal products are among the most dispersed industries with the top five states contributing between 51 to 55 per cent each of their employment.

• Industrial base of a state has been identified in terms of the bunch of industries which claim a higher share in the state’s industrial structure than in the industrial structure of the country as a whole and is measured by location quotients of individual industries.

• Location quotient is one for an industry if its share in the state is the same as in India, is less than one if this share is lower and more than one if it is higher than in India. Industries having quotient value of one or higher are considered to constitute the industrial base of the state.

• The location quotient, which indicates the industries that are concentrated, or otherwise, in a region, would provide the basis for a qualitative judgment about the “structural base” of the region's industrial economy.

• Given the sets or blocks of interrelated industries it is possible by using location quotient analysis to identify one or more sets of interrelated industries in which a region specializes.

• The industries for which , may be taken as constituting an interrelated set or block of industries and one or more such sets or blocks of industries located in a region may be defined as the “industrial base” of the region (Alagh, Subrahmanian and Kashyap, 1971) and the industries with low location quotients are relatively non-concentrated

• It must be noted that the location quotients measure industrial base of a state only relative to the industrial structure of the country.

• Those industries which have a higher share in the state’s than in the country’s industrial structure constitute this base and these industries need not necessarily be the largest in the state.

• Location quotient, in fact, reflects the state’s relative specialization vis-à-vis the industrial structure of the country and is identified in terms of value of the quotients, and defines industrial base in a relative and not in absolute sense.

• It also implies that more industrialised states would have a wider industrial base in terms of having a larger number of industries with value of location quotients higher than one.

• Industrial base of Maharashtra is relatively wide consisting of 16 (out of 23) industries.

• Haryana, Delhi and Chandigarh come next with 14, 13 and 11 industry groups having a higher than one location quotient.

• Madhya Pradesh has 7 industries with a greater than one location quotient and Assam.

• Manipur has the narrowest industrial base with only two industries having a location quotient higher than one, followed by Arunachal Pradesh and Orissa each with four industries in that category.

Inter-Regional Inequality in Industrial Location

• However, on the whole the shares of these 16 states have declined from 99% in 1981-82 to 91.38% in 2002-03.

• In fact, the decline is more significant (more than 6% point) between the period 1995-96 and 2002-03. This implies that some redistribution has taken place in the manufacturing sector employment among the states during this period.

• However, a careful analysis shows that this redistribution has largely taken place only among six large states viz. West Bengal, Uttar Pradesh, Gujarat, Maharashtra, Andhra Pradesh and Tamil Nadu, whose combined share, which was 68.83% in 1981-82, still remained 60.87% in 2002-03.

• Considering the ranks of the states in terms of the employment share, we have found hardly any change in their relative ranks. The states continue to be remaining more or less at the same ranks over the years.

• Thus, the regional distribution of the industries still remains concentrated in few states in the post liberalization period as in the pre liberalization period.

Industrial Base of the Regions

• To explain the relative regional concentration of industries we have calculated the location quotient for each of the sixteen states and four regions using the employment data of the manufacturing industries

• Objective is to understand the structure of regional distribution of industries and also for inter-regional comparison of the industrial location pattern.

Regional Diversification of Industries

• Considering the four regions for analysis, it is found that the specialization coefficient for the Eastern and Northwest regions have increased, while that of the Central and the Southern regions have declined over the years, which implies that in the Eastern and Northwest regions concentration has increased and the Central and Southern regions have more diversified over the years.

• Now, classifying the regions into three broad groups according to their levels of diversification, it is found that Delhi, Karnataka, Madhya Pradesh, Maharashtra, Punjab, and Tamil Nadu are the diversified states, whereas Bihar, West Bengal, Orissa, Haryana, Uttar Pradesh, Gujarat, and Rajasthan could be grouped in the middle level of diversification; and Assam, Andhra Pradesh and Kerala are the less diversified states.

Relation between specialization and diversification

• all the less diversified states namely Assam, Kerala and Andhra Pradesh are specialized only in a set demand oriented consumer goods industries.

• On the other hand, all the middle level diversified states specialized in resource based intermediate goods industries, except Haryana and Uttar Pradesh who specialized in capital goods industries.

• Similarly, almost all the diversified states specialized in a set of capital goods industries, except Madhya Pradesh and to some extent Tamil Nadu who specialize in a set of intermediate goods.

Conclusions• the post liberalization period has witnessed more

concentration of manufacturing industries, which suggests widening the inter-regional divergence in India in terms of industrial development in the post liberalization period.

• The Southern region has gained employment shares over the years at the cost of the Eastern region and to some extent Central region.

• At the states level, the share of West Bengal and Maharashtra has declined significantly, while that of Andhra Pradesh and Tamil Nadu has increased.

Degree of diversification• It is found that Central and Southern regions have become more

diversified, while Eastern and Northwest regions become less diversified over the years.

• Nature of specialization varies with the degree of diversification. The less diversified states, in general, specialized in a set of consumer goods industries, while the middle level diversified and diversified states are specialized in intermediate goods and capital goods industries.

• Less diversified states remain in the same relative ranks over the years, while changes have taken place in the relative ranks of the middle level diversified and diversified states.

• India is diverging, not converging in terms of inter-regional distribution of manufacturing industries in the post liberalization period.

• After the economic reforms in 1991 found that the process of cumulative causation was in operation insofar the existing level of industrial investment and activity attracted the new investment.

• Continuity and clustering were thus found to lead to increasing divergence

• Infrastructure may continue to be important but its influence is intermixed with that of agglomeration economies.

• In other words, new industries go where industries exist which are also the states that have better developed infrastructure.

• Between states with developed infrastructure but very little industry and those with both developed infrastructure and a good industrial base, the latter attracts more industry than the former.

• Thus, Kerala with good infrastructure does not attract industry while Gujarat also with high level of industrialisation does.

• Punjab with highly developed infrastructure has a relatively lower level of industrialisation, but Maharashtra with relatively lower level of infrastructure development has a high level of industrialisation.

Limitations

• Considers only organized sector• Employment data to represent industrial activities• Liberalization is just a cut-off period, may or may not have

impact• Factors influencing location may be different • reasons of industrial concentration in the post reforms

period could be the traditional factors that we have mentioned above or some region specific factors such as cost structure, characteristics of labour forces, geographical characteristics, investment climate, political condition, etc.

• Various factors that could have influenced the differential performance of states in industrial growth during the post-reform period can broadly be divided into the following four broad heads:

• capital investment, • human resources, (HDI)• Regulatory framework and • infrastructure (banking, power)

• Another important point, as Bhargava (1995) pointed out, is the regulatory regime prevalent in the states. Although industrial licensing system has been abandoned, several labour, company, and tax laws and environmental licenses and permits need to be taken for access to land, water and power etc.

• Under such a situation, states having fewer complexities in these regulations along with other advantages will attract more industrial investment, and thus, results in more concentration of industries.

Role of states in attracting investment

Under the liberalization policy regime the states have more freedom and flexibility, and thus, they could take the advantage of initial development, physical capabilities and economic and geographical environment to attract and develop industries

• “incentive war” such as relief from sales tax, electricity and water rebates, capital subsidy, and preferential treatment in government purchases, etc. to attract new investment in to the state.

• Although these direct government incentives are necessary for attracting industrial investment, they are unlikely to be sufficient

• Factors that are likely to be more important are availability of transport and communications, water and power, and services and social amenities.

• Therefore, the backward states should emphasize more on providing appropriate physical infrastructure (power, water, transport and telecom), legal and financial infrastructure (corporate law, accountancy norms, and banks, capital markets), and social infrastructure to attract new industrial investment.

It appears that the pattern of location of new industrial activity is becoming increasingly complex and requires fresh approaches that go beyond the traditional theory of industrial location, to explain it.