7.7 Changes as a Result of the World Economy

Weber's Least Cost Theory

Weber's least cost theory is an economic theory that proposes that firms will choose the production methods that minimize their costs, in order to maximize their profits. According to the theory, firms will consider a variety of factors, including the cost of labor, raw materials, and capital, as well as transportation and other logistics costs, when deciding how to produce a good or service.

The theory assumes that firms are rational and will choose the production methods that minimize their costs, given the available technology and other constraints. It also assumes that firms will choose the location for their production that minimizes their costs, taking into account transportation and other logistics costs.

Weber's least cost theory has been influential in shaping economic policies and decisions related to trade and investment. It has been used to argue for the benefits of free trade and the liberalization of international trade, as it suggests that firms will choose the location for their production that minimizes their costs and maximizes their profits.

Here are a few examples of how Weber's least cost theory might apply in practice:

• A car manufacturer might choose to locate its production facilities in a country where labor costs are lower, in order to minimize its production costs.
• A clothing retailer might choose to source its garments from a supplier in a country where raw materials are cheaper, in order to minimize its production costs.
• A software company might choose to outsource its customer support to a call center in a country where labor costs are lower, in order to minimize its costs.
• An electronics retailer might choose to locate its distribution centers near major transportation hubs, in order to minimize the cost of shipping its products to customers.

In each of these examples, the firm is making a decision based on the principle of minimizing its costs, in order to maximize its profits. The theory suggests that firms will consider a range of factors, including labor costs, raw materials costs, and logistics costs, when making these decisions.

Important Vocabulary

Agglomeration

Agglomeration refers to the clustering of economic activity in a particular area or region. This can occur for a variety of reasons, such as the availability of skilled labor, access to transportation and other infrastructure, and the presence of complementary industries. Agglomeration can lead to increased efficiency and productivity, as firms can take advantage of the benefits of being located near other firms and institutions.

Here is an example of agglomeration:

• Silicon Valley: Silicon Valley is a region in the San Francisco Bay Area in California that is home to a large number of technology firms and startups. The concentration of technology firms in Silicon Valley has led to the creation of a thriving ecosystem of complementary industries and institutions, such as venture capital firms, research universities, and legal and consulting firms. This clustering of economic activity has contributed to the success of the region, as firms are able to take advantage of the benefits of being located near other firms and institutions. Silicon Valley is an example of agglomeration, as it is a region where economic activity is concentrated in a particular area.

Growth Poles

Growth poles are centers of economic activity that are targeted for development in order to stimulate economic growth and development in a particular region. The idea behind growth poles is that by focusing development efforts on a particular area, it is possible to create a virtuous circle of economic growth that spreads to the surrounding region.

Here is an example of a growth pole:

• The Songdo International Business District in South Korea: The Songdo International Business District is a city located near Seoul, South Korea, that was developed as a growth pole to stimulate economic growth and development in the region. The city was built from scratch on land reclaimed from the sea, and it was designed to be a modern, sustainable city with a range of amenities and infrastructure. The Songdo International Business District has attracted a number of international firms and institutions, and it has become a hub for business, education, and research in the region. The city is an example of a growth pole, as it was targeted for development in order to stimulate economic growth and development in the surrounding region.

Just-In-Time Delivery

Just-in-time delivery is a production and logistics management system that aims to minimize inventory and reduce waste by delivering goods and materials to the production process just in time to be used. The goal of just-in-time delivery is to reduce costs and increase efficiency by eliminating the need to hold large inventories of raw materials and finished goods.

Here is an example of how JIT delivery might work in practice:

• A clothing retailer has a store located in a shopping mall. The retailer orders a variety of clothing items from multiple suppliers and stores them in a warehouse. When a customer makes a purchase at the store, the retailer retrieves the item from the warehouse and ships it to the customer. This process involves several steps and can take several days to complete.
• With JIT delivery, the retailer orders the clothing items from the suppliers only when they are needed in the store. The supplier ships the items directly to the store as soon as they are available, reducing the need for warehouse storage space and eliminating the need for the retailer to handle and ship the items themselves. This allows the retailer to be more responsive to customer demand and reduces the risk of stocking excess inventory that may not sell.

Post-Fordist Production

Post-Fordist production refers to a shift in the way goods are produced, characterized by a move away from mass production and towards more flexible, customized production methods. Post-Fordist production often relies on advanced technologies, such as automation and computerization, and it is often more responsive to changes in consumer demand.

Here is an example of a company that employs post-Fordist production:

• A clothing manufacturer operates a small factory with a flexible production line that can quickly switch between different types of clothing items. The factory is equipped with advanced ICTs that allow the manufacturer to receive orders from customers online, track the status of orders in real-time, and adjust production accordingly. The manufacturer sources materials from a variety of suppliers and uses just-in-time delivery to minimize inventory costs. The finished products are shipped directly to the customers, bypassing traditional distribution channels.
• This type of production allows the manufacturer to be more responsive to customer demand and to offer a wide range of customized products without incurring the high costs associated with mass production. It also allows the company to be more agile and adaptable to changes in the market.

Economies of Scale

Economies of scale refer to the cost advantages that a firm can achieve by increasing its scale of production. As a firm increases its production, it may be able to reduce its average costs by taking advantage of various efficiencies, such as purchasing raw materials in larger quantities or using specialized production equipment. Economies of scale can allow firms to produce goods at a lower cost than their competitors, which can give them a competitive advantage.

Here is an example of a company that has achieved economies of scale:

A grocery store chain operates a large central warehouse that supplies all of its stores with a wide range of products. The warehouse is equipped with advanced storage and distribution systems that allow the chain to efficiently handle and ship large volumes of goods. By centralizing its distribution operations, the chain is able to negotiate favorable pricing with suppliers and reduce its transportation costs. As a result, the chain is able to offer its customers low prices and still maintain a profit margin.

Outsourcing and Offshoring

Outsourcing and offshoring have led to a decline in jobs in core regions and an increase in jobs in newly industrialized countries (NICs). Places like India and China host call centers for Trans-National Companies that move jobs from the USA (the core) into India/China (the NICs). The NICs are Brazil, Russia, India, China, South Africa, and Mexico (BRIC SAM). New Asian Tigers is a term used to describe a new industrial region of Asia that grew because of manufacturing to become highly developed economies and these countries are: Hong Kong, South Korea, Taiwan, and Singapore.

Special Economic Zones

Special economic zones (SEZs) are designated areas within a country that have special economic regulations that are more favorable than the regulations that apply in the rest of the country. SEZs are often established to encourage economic development and attract foreign investment.

SEZs may offer a range of incentives to firms, such as tax breaks, relaxed regulatory requirements, and access to infrastructure. These incentives are designed to make it more attractive for firms to locate in the SEZ and to take advantage of the favorable economic conditions.

SEZs are typically located in developing countries, and they are often established in areas that are underdeveloped or disadvantaged. The goal of SEZs is to stimulate economic development and create jobs in these areas, and to help the country catch up with more developed countries.

Examples

Examples of SEZs include the Shenzhen Special Economic Zone in China, the Dubai International Financial Centre in the United Arab Emirates, and the Export Processing Zones in Kenya.

The Shenzhen Special Economic Zone: The Shenzhen Special Economic Zone is a city in southern China that was established as an SEZ in 1979. It is located in the province of Guangdong, which is one of the most developed regions in China. The Shenzhen SEZ was created to encourage economic development and foreign investment in the region, and it offers a range of incentives to firms that locate in the zone, such as tax breaks, relaxed regulatory requirements, and access to infrastructure. The Shenzhen SEZ has been successful in attracting a large number of foreign firms, and it has played a key role in China's economic development. Today, it is a major hub for manufacturing, technology, and innovation in China.

The Dubai International Financial Centre (DIFC): The DIFC is a financial hub located in the United Arab Emirates that was established as an SEZ in 2004. It offers a range of incentives to financial firms that locate in the zone, including a tax-free environment, access to a highly educated and skilled labor force, and a state-of-the-art infrastructure. The DIFC has attracted a large number of financial firms, and it has become an important center for finance and investment in the region.

The Export Processing Zones (EPZs) in Kenya: Kenya has established a number of EPZs, which are SEZs that are specifically designed to promote export-oriented manufacturing. The EPZs offer a range of incentives to firms that locate in the zones, including tax breaks, relaxed regulatory requirements, and access to infrastructure. The EPZs have been successful in attracting a number of foreign firms, and they have helped to create jobs and stimulate economic development in Kenya.

Image Courtesy of Forbes