Smith's Theory of Industrial Location

Industrial geography is more inclined towards observation of the real world than abstract theories. One of the significant geographers, D.M. Smith aimed at bringing spatial dimensions into conventional locational theories.

Historical Background

The British geographer David M. Smith practiced locational analysis and came up with a theoretical framework for the location of industries. In 1971, he proposed an industrial model by publishing his book, "Industrial Location," based on his observations made at a steel mill situated in Brazil. Since his theory explains the concept of "spatial margin locations" and their profitability for an industry, it is also known as "Spatial Margins Theory".

Area-Cost Curve Theory

By utilizing the ideas and references of the least-cost approach with perfect competition from Alfred Weber and the market area approach with monopolistic competition from August Losch, D.M. Smith came up with his Area-Cost curve theory.

Smith made a few assumptions to explain his theoretical concept of industrial location, which are listed as follows.

• Profit is the key determinant of the location of an industry.

• There is a variation in processing cost according to space, as observed in the case of revenues

• The most profitable location is realized in the region where revenue is higher than the cost of production by the greatest amount.

• All the producers are fully aware of spatial variations in profits and costs of production, and all the producers are involved in business to obtain profit.

• All the supplies that are fed are considered unlimited.

• The sources of factors of production, such as land, labor, and capital, are fixed in nature.

• There is a constant demand for space.

• Entrepreneurs are equally skilled individuals.

• There exists a level playing field where no company takes advantage of scale economies.

• The location of one firm has no bearing on the location of the other.

• No subsidy was provided to any firm.

Smith opined that a company would generate profit if the revenue generated exceeded the costs of production and would suffer a loss if the revenue generated was less than the costs of production. He took into consideration the inputs of cost of production, average revenue, and distance and visualized them in a graph. This graphical representation resulted in Area-Cost curve, and he analyzed three cases with three different combinations.

Case (I): Constant Revenue, Varying Cost

In this case, he considered the revenue to be constant and the cost to be variable. From the graph, it is clear that the area between the points 'a' and 'b' is the area of profit. In particular, the point "O" is considered the optimal location for an industry to be located since it is the place where the cost of production would be the least.

Case (II): Constant Cost, Varying Revenue

In this case, he considered the cost of production to be constant and the revenue to be variable. From the figure, it is concluded that the region between the points 'a' and 'b' is the area of profit. In particular, the point "O" is considered to be the optimal location for an industry since this is where the revenue is generated in the greatest amount.

Case (III): Both the cost and revenue are variables

In this case, he made both the cost of production and revenue variables. From the diagram, it is clear that the region between 'A' and 'D' is the area of profit. The optimal location would be at point A' where the cost of production is the lowest and the revenue generated is significant but not necessarily high.

Smith also used the isocost lines to elucidate his theory and derived an isocost map plotting the points to get the optimum location. Isocost lines are the imaginary lines that have an equal cost of production.

Henceforth, D.N. Smith concluded that the parameters such as total revenue and total cost vary with space considerations, and they are the key determinants in finding the optimal location of a firm/industry where the profit is maximum. A company can be located anywhere within this margin of area of profit.

Criticism

• Smith's model is considered more static and confined to a certain point in time, whereas the real world possesses a dynamic pattern.

• Manufacturers do not always attempt to find the most profitable location since there are other key constraints that serve as key determinants.

• The demand factors of the market are not necessarily uniform with respect to distance.

Conclusion

D.N. Smith has profoundly considered the dynamic interaction between the costs of production and the generated revenue in the spatial economy. With the help of necessary changes in places and advanced studies and observations, this model can assist entrepreneurs in establishing an industry in a location where it can generate the most profit.