Classical Location Theory

3. THEORETICAL BACKGROUND
3.1. Classical Location Theory

Kimelberg and Nicoll (2016: p. 2) state that there is extensive literature dedicated to the understanding the role of production factors in the location decisions of manufacturing establishments. They further argue that classical location theory focused on access to markets, labour, transportation, and raw materials as the key determinants of site selection while more recent theories emphasise the importance of other factors such as taxes, unionization rates, business climate, and infrastructure as shown in Table 1 below.

Table 1: Location theories and factors influencing firm relocation Source: (Brouwer, et al., 2004, p. 338)

Location advantages such as extensive possibilities

It is argued that firm location behaviour is a consequence of its investment strategies after considering its social and economic environment. It is therefore a response to a firm’s negotiation with suppliers, government, labour unions and other institutions about prices, wages, taxes, subsidies, infrastructure and other key factors in the production process of the firm. Simultaneously other ‘external’ or ‘institutional’ factors (e.g., spatial adjustments such as expansion, merger, acquisition and take-over, but also trust, reciprocity, co-operation and convention) play a key role at all levels in the economy, from the structure and functions of the firm, through the operation of markets, to the form of state intervention as shown in Table 1 above (Brouwer, et al., 2004, p.

transportation cost, labour cost and market size) are considered as the main forces driving firm relocation (Brouwer, et al., 2004, p. 337). This theory seeks to explain the spatial dependency of firms in terms of agglomeration ad/or clustering for localised learning and innovation. In this theory cities are perceived as the nucleus of knowledge-based agglomerations, with high intensities of face-to-face contact and strong internal flows of knowledge with a different global urban hierarchy determined by agglomeration benefits (Jakobsen & Onsager, 2005, pp. 1519-1520).

4. LOCATION FACTORS Brouwer, Mariotti and van Ommeren (2004: p. 335) argue that the geographical movements of firms, together with firm formation and expansion, decline and closure, influence the geographical distribution of economic activity at any point of time and are determined by the following factors:
 Internal factors (e.g., size)
 External factors (e.g., market size)
 Location factors (e.g., region)

(Wardner, 2012, p. 2) Many authors including Wardner (2012, p. 2) identified the following factors that have an impact in a firm’s