8. The Geography of Industry and Services

This chapter provides a view into economic geography, the spatial study of economic activity on Earth. Geographers are interested in why different economic activities occur in different places. While some things may appear random, it turns out that geographic factors make the location of businesses, industries, and jobs much more likely in some places than others.

Economic activity on Earth is divided into three sectors. The first, the primary sector, includes agriculture (covered Chapter 6), mining, and fishing. The secondary sector of the economy involves making things in factories, called industry or manufacturing. The tertiary sector of the economy is made up of all work done as services.

The first two sections of this chapter look at the factors that help determine where a factory is located. The last section examines why services are located in cities and how more specialized services are in larger cities.

1. Industrial location: transportation factors

Industry refers to the transformation of raw materials into more finished goods. This transformation, often called manufacturing, represents a "value-added": The industry makes money by adding value to the raw materials in a factory. The gross profit is the difference between the cost of the raw materials and what the product is sold for.

There may be many industrial steps to a value-added chain. For example, the raw material of logs is taken to a sawmill and turned into lumber. The sawmill exists because it can sell lumber for more than logs. Another industry, such as a furniture maker, might then use lumber as its raw material. This example just given is a two-step chain of manufacturing. Sometimes many factories are involved in different industrial processes before an end product is finally finished for the consumer.

Logs are processed in a sawmill to create lumber.
Left photo by Flickr user Aapo Haapanen under CC BY-SA 2.0 license (https://www.flickr.com/photos/decade_null/142235888). Center photo from Wikimedia Commons by Fir0002/Flagstaffotos under CC BY-NC 3.0 license (http://commons.wikimedia.org/wiki/File:Laser_guided_cutting_of_wood_inside_modern_woodmill.jpg). Right photo by Flickr user Incase under CC BY 2.0 license (https://www.flickr.com/photos/goincase/411530104) . 

Looking at the raw materials supplied to the industry and the finished (or improved) products produced by that industry gives some clues to where an industry might locate, a central concern of geographers. In the case of the sawmill, it should be fairly obvious that the value of the product has been concentrated. That is, not only is the product more valuable (it must be or the industry would not exist), it also takes up less space and weight when compared to the logs going into the factory.

We observe that industries like the sawmill tend to locate close to the raw materials to minimize the costs of transportation. Sawmills can't move the forest (the source of logs) or the customers who want their lumber, so a sawmill chooses to locate in a way that saves costs as much as possible.

It costs the same to ship a truckload of logs 1 mile as it does to ship a truckload of lumber. But 2 truckloads of logs might be used to make 1 truckload of lumber. So sawmills tend to be located close to the source of logs. This type of location decision is made by bulk-losing or weight-losing industries during the manufacturing process. These industries are also called material-oriented manufacturing. Some other examples of material-oriented manufacturing include: refining metals from ore, and milling sugar from sugar cane or sugar beets. In each case the factory will maximize profit if it locates closer to the raw materials on which it depends.

In contrast, other factories do work where the products are heavier or bulkier than the materials going into the factory. These industries are called bulk-gaining or market-oriented manufacturing. These industries face the opposite problem of the examples just given. When raw materials cost less to transport than the finished product, industries tend to locate closer to the recipient of their products (also known as the market).

A classic example of market-oriented manufacturing is beverage bottling. Soft drinks and energy drinks are mostly water combined with carbonation and some concentrated syrup for flavoring and sweetness. 1 truckload of syrup might become many truckloads of soda. Accordingly, soft-drink bottling plants are located near major areas of consumption, usually within a few tens of miles of large cities.

Coca-Cola is bottled in Tanzania near its major main market for consumption in Dar Es Salaam. 2008 photo by Flickr user Simon Berry, used under CC BY-SA 2.0 license (https://www.flickr.com/photos/colalife/8543957171/).

An earlier example mentioned along with the sawmill, furniture manufacturing, could be an example of a market-oriented industry. Finished furniture might weigh less than the boards that go into it, but furniture very often gains bulk in the manufacturing process--a finished chair or dresser constructed as one piece takes up much more space than the boards used to construct it. Furthermore, shipping finished furniture may be more costly because it must be transported to avoid damage. Some clever manufacturers have avoided these limitations by creating and selling their furniture in an un-assembled state, leaving the consumer to complete the final bulk-increasing step by screwing it together.

2. Industrial Location: Place Factors

What about industrial processes that are neither market-oriented nor material-oriented? Many value-added manufacturing processes start with raw materials that are neither bulky nor heavy, and their finished products are neither bulky nor heavy. In these cases, like with much of electronics manufacturing, the costs of transport do not differ significantly between before and after manufacturing.

If transport costs were the only consideration, a factory producing one of these goods could be located anywhere between the source of raw materials and the market. But other factors do influence industrial location, sometimes to the point where transport costs are a relatively minor consideration. In fact, sometimes other factors are enough to influence location decisions in spite of transportation costs. The rest of this section will consider some of the most important of these place factors.

Labor

Industries consider two characteristics of labor: the cost of labor and its quality. All other things being equal, high-quality labor costs more than low-quality labor. But companies involved in manufacturing have long understood that the cost of labor is lower in some locations than others. Two trends, offshoring and outsourcing, have grown more common, especially since the end of World War II. Offshoring refers to locating part of a company, especially manufacturing, in a foreign country. Outsourcing refers to relying on another company for tasks that the main company once performed.

Workers in developing countries can perform the same work as workers in developed countries at a fraction of the cost. For labor-intensive industries, such as sewing together clothing, low-cost labor presents a strong incentive to locate garment factories in developing countries and import clothing to markets in developed countries.

Labor cost and quality also varies within countries like the United States. Corporations often select locations within the US based on the characteristics of labor, with lower-cost, higher-skilled labor preferred. Of course workers usually have an easier time of moving within a country to seek jobs so skilled labor tends to migrate to where the employment opportunities are strongest or the pay is highest.

Political Environment

Factors other than labor affect corporate decisions about where to invest in offshore factories or outsource production. First, political stability is desired, as conflict or changes in government might affect the cost or supply of labor, or result in disruptions to manufacturing.

The political environment also includes regulation. Fewer regulations can be attractive to multi-national corporations because of the lower costs they represent. Countries that either have few environmental regulations or don't enforce the ones they have may attract more factories. Countries with few laws protecting the rights of workers are more likely to have easily exploited workers who work for lower wages, longer hours, and are less likely to cause problems for the companies who employ them. These regulations, or lack thereof, occasionally reach the attention of the public in wealthy countries, like when poor regulation results in massive deaths from fires, building collapses, or industrial accidents. But so far even grave incidents like the one below have done little to change the way companies outsource their manufacturing.

In April 2013 an eight-story-tall building in Savar, Dhaka, Bangladesh, collapsed. The building was built twice as high as permitted and was evacuated the day before the collapse when cracks appeared in the walls. But workers were ordered to return to work the next day and the building collapsed, crushing to death or suffocating 1,129 and injuring thousands more.  May 13, 2013 Photo by rijans from Wikimedia Commons, used under CC BY-SA 2.0 license (http://commons.wikimedia.org/wiki/File:Dhaka_Savar_Building_Collapse.jpg)

Political restrictions on trade may also affect the location decision of some industries. For example, Ecuador has placed import restrictions on many goods from abroad. The policies are intended to promote manufacturing in-country instead of relying on foreign imports. These policies have worked to some extent, as shown in the photos below. Critics of Ecuador's trade policies argue that a small country like Ecuador cannot produce all goods its population wants as efficiently (cheaply) as the world marketplace could.

Ecuadorian women sew clothing in a garment factory in Quito, Ecuador. The factory would likely not exist here were it not for tariffs (trade taxes) placed on sewn goods imported to Ecuador, as factories supplying only Ecuador cannot produce with the same economies of scale that factories supplying a world market can. 2007 photo by Tim Scharks.

The political environment at the sub-national level may also influence location decisions. For example, some states in the US have been successful at attracting companies by having fewer regulations, lower taxes, or laws prohibiting the formation of "closed-shop"labor unions. In the last case these "right-to-work" states, predominantly in the American South, unions are effectively prevented by law from strong bargaining positions. Average wages are lower in right-to-work states, presenting an attractive reason for companies to locate factories in those states.

Other Place Factors

Other industries have specific requirements for utilities or technology. Some may require cheap or reliable power, water, or other resource. Similarly, considerations like communications or the availability of a specific expensive technology might influence location decisions.

Some places have greater access to capital-loans or investment-than others. Investors are more likely to consider a proposal for a shoe factory in China, where many shoe factories are already located, than one in Kazakhstan.

Finally, inertia may play a role in maintaining an industrial location in a particular place after location factors have changed. There is usually some reason or another for the original placement of an industry, but those reasons may no longer be relevant. Sometimes, then, an industry is located in a particular spot because that's where it started.

3. Services and Cities

We defined industry at the start of this chapter as adding value through manufacturing. While industry makes up an important part of the world economy, it is less important (and becoming less so) in the developed world. Instead, we see the service sector of the economy as the most important sector in developed countries, both in terms of total employment and contribution to the Gross Domestic Product. For example, 79.4% of the United States' 2013 GDP of $16.72 trillion was from the service sector, compared with only 1.1% from agriculture and 19.5% from industry.

Services differ from manufacturing in that the value-added by a service generally does not transform raw materials into finished products (exceptions include food preparation in restaurants, where the transformation of raw foods into cooked dishes is considered a service), but rather the value is based on helping others through assistance or knowledge. 

Service jobs are extremely varied, from taking an order at a fast-food restaurant to working as a neurosurgeon. We'll use these two examples in the following discussion to help illustrate some concepts. An interesting facet of employment in services is that we see services are fundamentally associated with cities. Geographers use the term urban to describe things related to cities so we'll use that term here too. 

Urban geographers have made several important observations about services and cities: 

• The larger the city, the more diverse are the services offered there.
• Many of the same types of services tend to cluster together in a city.
• The larger the city, the more specialized the services that can be found there.

These observations are explained by Walter Christaller's (1933) Central Place Theory.  Christaller identified two characteristics of services that have particular geographic meaning and help explain why services cluster together in cities: threshold and range.

A service's threshold is the minimum number of people required to support that particular service. We can think of this as the number of potential customers or the number of likely customers. The threshold represents the combination of the percentage of people who want the service and the frequency with which they want it. For example, fast food has a relatively low threshold: of any given number of people, a fairly high percentage will probably want fast food on any particular day. Thus, we see one fast food restaurant from a major chain can be found in towns as small as around 10,000 population. Multiple fast food restaurants appear in larger towns, or where highways take many potential customers past each day. 

A service's range is the distance someone is willing to travel for a particular service. In our example of fast food restaurants, people are not willing to travel very far for cheap, low-quality food. A main feature of the service is its convenience compared to preparing your own food or visiting a more traditional restaurant. Accordingly, we observe that fast food restaurants are located in places where people can easily pop in and out--usually on major roads, especially near intersections. This location decision maximizes threshold by making the service available to everyone who drives by while minimizing range, the distance they must deviate in their trip to visit the service. Range can also be thought of in terms of time spent traveling or waiting for the service, which is why fast food restaurants often have drive-through windows. 

So a fast-food restaurant is a good example of a service with a relatively low threshold and a short range. Let's turn to an example of a service at the opposite end of the spectrum: neurosurgery. 

Neurosurgery is highly specialized: in contrast to the fast food example, a very low percentage of any population will need brain surgery any given year, much less any particular day. So the population threshold required to support a neurosurgery practice is much higher than for a fast food restaurant--probably somewhere upwards of 100,000. 

But also unlike fast food, if you need brain surgery, it's probably pretty important. People are willing to travel much farther for this service than a convenience like fast food. So specialized services like neurosurgery have much longer ranges: people would probably be willing to travel a day, or take a  flight, for this service. They would also be willing to wait for the service.

Thus, a specialized medical practice like neurosurgery represents a service with a high threshold and long range. Of course, other services fall in between these two relative extremes: for example, think of a general practice doctor (shorter range and lower threshold than neurosurgery). There are even more specialized services or even lower threshold services, too. For example, a coffee shop has a lower threshold and shorter range than fast food.  

We might expect highly specialized services with long ranges to be located randomly, then, since people are willing to travel great distances for that service. But we know that consumers don't like to travel farther than they have to for an equivalent service. This fact results in the clustering of services in cities. 

Services tend to locate near the middle of cities (or, as already mentioned, along major roads, especially at intersections) because these locations minimize the distance necessary to travel for the most potential customers. When looking at a market area, a service provider considers whether most people will be close to their service or to a competitor's. Faced with the same decisions, most service providers choose to locate to maximize customer access. This is the reason we observe fast food restaurants cluster together at particular points in a city. Medical services tend not to locate in the very center of places, instead usually clustering near hospitals. In this case the hospital location is determined by other factors and the medical services follow that location decision--but hospitals and the associated specialists are usually only a few miles outside of a city center, or located between two or more major population centers.

Here is an excellent video explanation of the last paragraph. The video makes a few references to "Hotelling's Model of Spatial Competition," which is not featured in this chapter, but the general rule of Central Place Theory--that services tend to locate in the most central places, near one another: https://www.youtube.com/watch?v=jILgxeNBK_8

 Last updated July 30, 2018