Author: Dr. Jean-Paul Rodrigue

The location of economic activities is related to their nature and function, with each activity having a dependence on transportation.

1. The Importance of Transport in Location

The location of activities encompasses the concepts of the site and its situation. The site relates to the characteristics of a specific location, while the situation concerns the relationships of a location in relation to other locations. Both concepts are interdependent as the characteristics of a site can be expanded by a better situation (connectivity), and a situation can improve if a site is better endowed. Historically, specific sites suitable for defense or commerce have been essential factors in the location of cities. This perspective can further be expanded by three interdependent factors in the global location of cities:

• Connectivity. The city is located at a load breakpoint where cargoes are moved from one mode to another, connecting two or more circulation systems. This is particularly the case for port cities, which explains, for a large part, the coastal location of most of the world’s largest cities.
• Proximity. The city is located in proximity to major (or several) resources and serves as a convenient point of collection, distribution, and transformation. The resource can exist at a specific location (e.g. a mine) or encompass an area (e.g. agriculture).
• Accessibility. The city serves a hinterland in providing goods and services, with its size a function of the density.

In addition to being a factor of spatial organization, transportation is linked with the location of economic activities, including retail, manufacturing, and services. In a market economy, location is the outcome of a constrained choice where many issues are being considered, transportation being one of them. The goal is to find a suitable location that would maximize the economic returns for this activity, such as the amount being produced, production cost, or market accessibility. There is a long tradition within economic geography of developing location theories to explain and predict the locational logic of economic activities by incorporating market, institutional, and behavioral considerations.

Location theories tend to have an explicit or implicit role attributed to transport since accessibility is an important factor in the location preferences of firms and individuals. As there are no absolute rules dictating locational choices, the importance of transport can only be evaluated with varying degrees of accuracy and based on the context it takes place. Transportation has four main locational influences, including costs, agglomeration, density, and co-location. At best, the following observations concerning transportation modes and terminals and their importance as locations can be made:

• Ports and airports. Main port and airport facilities, particularly the networks they support, have been important factors in reducing transportation costs, particularly over long distances. The location and the level of activity of ports and airports are reflective of global trade patterns. These facilities are also important drivers of co-location of related activities, particularly for ports, since inland distribution costs tend to be higher.
• Roads and railroads. Road and rail infrastructures provide a structuring and convergence effect that varies according to accessibility and density. In addition to reducing transport costs, efficient roads and railways support higher-density economic activities. For rail transport, terminals also have an important co-location effect with the setting of inland ports.
• Telecommunications. They provide no specific local influence, but the quality of regional and national telecommunication systems tends to ease transactions. Telecommunication systems benefit from higher densities since it becomes more practical to service a customer base. With the ongoing digitalization of transportation, information technologies impact mobility in numerous ways, mainly by allowing the providers and consumers of transportation services to interact better. Further, telecommunications can support remote work, which provides locational flexibility.

Globalization has been associated with significant changes in business operations and markets. The whole scale of locational considerations has been expanded. Managing operations in such an environment has become increasingly complex, especially with the globalization of production and consumption. Manufacturing strategies tend to use different locations for each component of a product in order to optimize respective comparative advantages and reduce input costs. Transport requirements have proportionally increased to support and organize the related flows.

The provision of faster long-distance transport services has propelled the importance of air transport, especially for freight. Air terminals have thus become a significant location factor for globally oriented activities, which tend to agglomerate in the vicinity. Additionally, the surge in long-distance trade has put logistical activities, namely transport terminals and distribution centers, at the forefront of locational considerations. Technological changes have also been linked with relocating industrial and service activities. Global telecommunication can favor the outsourcing of several services to lower-cost locations.

Still, the relationships between transportation and location are dynamic, meaning that circumstances can change due to economic and even political factors.

2. Location Spectrum and Factors

The location of economic activities is dependent on the nature of the activity, particularly what its inputs are and who consumes its outputs. While in the past, locations were mainly considered at the scale of whole industries, such as petrochemicals, the focus is now more on the specific activities involved. This allows for a broader range of locations to be considered since it can focus on specific components or services. The location spectrum represents a range of requirements for a specific activity, such as its material (resources) and non-material inputs (labor) and its outputs (market). Covariance is important since the economic success of a location is more than often not just the outcome of a single factor but of a combination. Therefore, assessing location factors such as the attributes of the site, its level of accessibility, and its socioeconomic environment is an important exercise to understand better and articulate the principle of location.

Although each type of economic activity has its own set of location factors, some general factors can be identified by major economic sectors:

• Primary economic activities. Their dominant location factor is related to environmental endowments, such as natural resources. For instance, mining occurs where economically recoverable mineral deposits are found, and agriculture is subject to environmental constraints such as soil fertility, precipitation, and temperature (climate). The most basic location factors thus characterize primary activities and strongly rely on transportation since their locations are rarely close to markets. When ponderous goods are concerned, substantial investments in extraction and distribution infrastructures must thus be made before they can be brought to markets. The capacity to transport raw materials plays a significant role in the possible development of extractive activities at a location.
• Secondary economic activities. Imply a complex web of location factors which, depending upon the industrial sector, relate to labor (cost and/or skill level), energy costs, capital, land, markets, and proximity of suppliers. Location is thus an important cost factor, and the general purpose is usually to minimize it. Considering the wide variety of industrial and manufacturing activities, understanding the rationale of each sector is a difficult task that has been subject to many investigations in economic geography. Globalization, recent developments in supply chain management, and global production networks underline the locational complexity with the presence of many intermediaries and significant locational changes. The contemporary industrialization of Japan, South Korea, and China has been supported by several strategies trying to multiply locational advantages, such as setting export-oriented special economic zones and large investments in transport infrastructure.
• Tertiary economic activities. Involve activities that are most bound to market proximity. The capacity to distribute a product or to make a service available is an important location requirement. As many of these activities are retail-oriented, consumer proximity, as well as their income level, are essential and directly related to sale levels. The main focus is to maximize sales revenues, with location an important revenue factor. The retail industry has seen the emergence of large retail stores that maximize sales through economies of scale and local road accessibility. E-commerce also provides a new dynamic where niche retailing markets can be developed with high product diversity.
• Quaternary economic activities. Imply activities not linked to environmental endowments or access to a market, but to high-level services such as banking, insurance, education, research, and development. This often relates to the high-technology sector, where innovation is a key commercial factor. With improvements in telecommunications, many of these activities can be located almost anywhere, as demonstrated by the trend to locate call centers offshore. There are still some strong locational requirements for high technology activities that include proximity to large universities and research centers and a pool of highly qualified workers (as well as cheap labor for supporting services), availability of venture capital, high quality of life (cultural and commercial amenities) and access to excellent transportation and telecommunication facilities. The sector has shown a propensity for clustering as close inter-firm relations are an innovation factor.

Each of these sectors thus has its own set of economies related to its relations with production, distribution, and consumption. However, basic location strategies appear to be dominantly cost-minimization or revenue-maximization endeavors. Understanding location factors enables a better overview of the dynamics of the global economy and the associated territorial changes at the global, regional, and local levels.

3. Accessibility and Location Economies

Since accessibility is dominantly the outcome of transportation activities, namely the capacity of infrastructures to support mobility, it presents the most significant influence of transportation on location. Hence, location (accessibility) and economic activities are interrelated. Accessibility plays an important role by offering more customers through an expanded market area, making distribution more efficient (in terms of capacity, costs, and time), or enabling more people to reach workplaces (labor cost and qualification). While some transport systems have favored the dispersion of socioeconomic activities (e.g. automobiles and suburbanization), others have favored their concentration (e.g. airports and container terminals). All transport systems are bearers of spatial specialization and configuration. Among the five main economies (economies of transportation, economies of scale, economies of scope, agglomeration economies, and economies of density), four are particularly influential for transportation:

• Transportation costs. Refer to the benefits of a location that minimizes transport costs for passengers or freight. These considerations are at the core of classic industrial location theories, where transport-dependent activities seek to minimize total transport costs. With the expansion of transport infrastructures, shifts in manufacturing, new economic activities such as high technology, logistical management, and an overall decline in transport costs, cost minimization is no longer a substantial consideration in the locational choice. However, transport costs cannot be easily dismissed and must be considered in a broader context where the quality and reliability of transport are of growing importance. It has been demonstrated that travel time, instead of distance, is the determining factor behind commuting ranges. For freight distribution, while cost factors are significant, there is a growing importance of the concept of reliability.
• Agglomeration economies. Refer to the benefits of having activities located (cluster) next to one another, such as using common infrastructures and services. Clustering continues to be a powerful force in location as the reduction in transport costs favored the agglomeration of retail, manufacturing, and distribution activities at specific locations. For instance, shopping malls are based on agglomeration economies, offering customers a wide variety of goods and services in a single location. Distribution activities, even unrelated, also tend to cluster in logistics zones where they benefit from common infrastructures and access to markets. The development of special economic zones, many export-oriented, also benefits from the clustering effect.
• Co-location. An agglomeration economy is specific to transport terminals and concerns the benefits of activities directly adjacent to a terminal facility. Globalization has underlined the growing importance of transport terminals and the principle of co-location, a particular form of an agglomeration economy. The main benefit concerns complete and privileged access to the transport capacity and connectivity of the terminal. Any level of separation between the activity and the terminal significantly reduces or even negates the advantages of co-location. It could involve an individual activity or a cluster of activities where agglomeration economies can be added to the benefits of co-location. Hotels adjacent to airports or rail stations are set on the co-location principle since they derive their business almost exclusively from the terminal’s passenger activities. The distribution centers of parcel companies are commonly located directly adjacent to runways so that their air freight services can be tightly synchronized with the consolidation and deconsolidation of air parcels. For intermodal rail terminals, inland port facilities are built over the principle of co-location.
• Economies of density. Somewhat related to economies of agglomeration but focuses on spatial coverage and proximity. A core issue concerns the benefits derived from market density so that the same customer base can be reached (or serviced) with shorter distances and thus with fewer facilities. For instance, if the customer density is sufficient, a retailer can achieve several types of cost savings by locating its stores in proximity to one another. Such a structure reduces logistics and delivery costs by sharing a distribution center. Other advantages may include the possibility of relocating part of the workforce between nearby facilities and having shared advertising. In such a circumstance, the locational strategies are based on proximity to existing facilities, even if this implies the selection of sub-optimal locations.

Because of the provided level of accessibility, new transport infrastructures influence the setting of economic activities. It becomes a particularly strong effect when new infrastructures are added to an undeveloped (or underdeveloped) site. In this context, locational decisions tend to be simpler and unhindered by the existing spatial structure. Therefore, there are more substantial locational impacts of transportation improvements in a less developed context than in the case of high density. The locational effects on activities are not always automatic or evident. However, they are important when infrastructure is accompanied by social, economic, and urban transformations. New infrastructures, therefore, play a catalytic role because they can transform space through land use and mobility changes, to which further improvements change in a more marginal fashion.

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Related Topics

• 1.2 – Transportation and Space
• 2.4 – Information Technologies and Mobility
• 6.2 – Transport Terminals and Hinterlands
• A.4 – Transportation and Accessibility
• A.16 – The Specialization Index and the Location Coefficient

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