Transcript Lecture 6 - Read More

GEOG 3404
Economic Geography
LECTURE 6:
Location Quotients: Centres and
Regions
Dr. Zachary Klaas
Department of Geography and Environmental
Studies
Carleton University
Reading in the Dicken text
Beginning this week, we will be making greater use of
the Peter Dicken text Global Shift. I chose not to use this
text to assign readings in the first part of the term due to
the project involving reading the other course text by
David Landes, The Wealth and Poverty of Nations. Now
that we are finished with that part of things, however, it is
more appropriate to make greater use of this text.
 This lecture has to do with “location quotients”, which is
a kind of geographic measure of concentration within a
larger reference region. We will largely use this
technique in this class to measure concentrations by
economic sector.

Peter Dicken's book has a number of chapters which
essentially are extemporaneous developments of
descriptions of the spatial concentrations connected with
particular sectors of the economy (specifically, the
clothing industry, the auto industry, the semiconductor
industry, the agro-food industry, the financial services
industry and the logistics and distribution industries).
 It is for this reason that I would like you to read Chapter
9, which is about the clothing industry, for our next class.
 As you read, ask yourself where jobs in this industry are
found in the various stages of the “production circuits”
that Dicken describes. Also, where are the places that
have lost jobs recently as the nature of these “production
circuits” have changed.

Centres and regions
In economic geography, we want to be able to identify
the centres for economic activities. Products are made
from inputs that may come from many different
geographic sources. If a particular location supplies a
disproportionate amount of the productive activity that
goes into making a final product, that location is
important economically, and its interaction in space with
other such location is important to economic
geographers.
 In this lecture, we hope to shed light on what defines an
economic centre. Principally, that is its
disproportionately greater productivity with respect to
other locations in some larger region.

Cities as “functional units” - centres in
economic networks.
Economic geographers often consider cities to be
“functional units” in regional economies. By this, they
are suggesting that cities play a specific role in economic
exchange, based upon their production for export to
other locations in a region.
 In this conception, producers in particular cities market
particular kinds of goods or services to serve the needs
of consumers living outside of those cities. Thus, cities
are here considered exportation centres with respect
to the outside region they serve.
 To put this another way – a city becomes a centre
because it produces more of something than other
cities in a region, presumably in order to better serve
those cities than they at present serve themselves.

Defining and locating centres: the
location quotient approach
The principal means by which an economic centre is
defined is by means of a comparison to locations within a
broader region, in which the centre location is itself
situated. This region is usually referred to as a
reference region.
 The statistical means by which this comparison is made
is the location quotient (LQ). A location quotient is a
ratio of the level of productivity in a local area divided by
the level of productivity in the reference region as a
whole.

The usual form of the location quotient:
employment data as a “proxy
measure” for productivity
How does one measure “productivity”? One may
answer this sort of question in a direct fashion by
enquiring into the net profits made by each firm, but
sometimes this data is not available for smaller firms, and
in any case assembling all the data for an entire city
could be somewhat intensive.
 For this reason, economic geographers have generally
preferred to use employment data for all firms in a
particular industrial sector as a proxy measure for the
productivity of those firms. This means that the
measure is not a direct measure, but sufficiently enough
approximates the direct measure to be used. The
underlying logic is that people will tend to be employed
only in productive firms.

Note that this logic is not without its potential flaws –
perhaps some firms have overhired and these jobs are
actually thus evidence of poor management rather than
productivity.
 Nevertheless, employment data does seem to generally
accord with our idea of what an economic “centre”
provides. A “centre” for the automotive industry, for
example, probably should be somewhere where either a
substantial portion of the population, or perhaps even a
majority, work in jobs related to making automobiles.
 The concept the location quotient puts under our
consideration is whether or not it is the case that a given
city has such a greater than normal number of jobs in a
particular industry that it must be an economic centre
for that industry.

Calculating the location quotient
The conventional form of the location quotient, then,
using employment data as a proxy variable for
productivity, looks like the following:

# of persons employed in
# of persons employed in
industry I in local area
/ industry I in larger region
# of total persons
# of total persons
employed in local area
employed in larger region
The value of the LQ will be over 1 where there are
comparatively more people working in this specific
industry I locally (on a percentage basis) than there are
overall in one's chosen “reference region”, and under 1
where there are comparatively fewer people.

The choice of the “reference region” in
the location quotient calculation
The choice of the “larger region” to which one compares
the employment data of one's “local area” is important, as
it will help to establish whether that local area truly counts
as a centre.
 For example, in the highly industrialised NordrheinWestfalen (NRW) province of Germany, a city which has
a large number of jobs in the manufacturing sector, may
still not “count” as a centre for manufacturing
comparatively because elsewhere in the province one
finds the massive Rhein-Ruhr manufacturing centre cities
(such as Essen or Dortmund or Cologne).

However, compared to Germany as a whole, however,
as a larger “reference region”, it may “count” as a centre,
because NRW as a province is so much more
industrialised, in terms of heavy industry, than the rest of
the country. Thus using all of Germany for comparison
will bring this centre “up” in the averages.
 The point here is that what counts as a centre changes
on the basis of what other places one uses for
comparison. If one compares one's local place of
interest to other places that are obviously centres, it may
make it seem less centre-like.
 In other words, one's choice of a “reference region” is
itself part of the overall consideration of the location
quotient as a measurement.

Using the information provided by the
location quotient method
The LQ can be an important source of information for
policy planners, particularly at the municipal/metropolitan
level. City leaders can use the kind of information the LQ
provides to market their city (“our city is a centre for the
following industries...”)
 The LQ, however, is generally considered useful as a
statistic related to a city's capacity to attract external
money from consumers in the greater region. If a city
has more jobs in a certain industry than is normal for the
region generally, then that implies that these jobs do not
exist to merely satisfy the “normal” need for that industry
locally, but also the needs of external consumers. If that
is the case, then those external consumers presumably
must be paying money to those in the city to support
those jobs.

The “economic base” of a city
Employment over what is “normal” in a region for some
specific industry indicates specialisation in that industry.
Specialisation, furthermore, implies that this employment
is oriented not merely at servicing the needs of those
living in the city, but also those living outside it in the
larger region.
 If those in the larger region are paying money to
purchase specialised goods and services made in a
particular city, this brings money into the city. Thus,
employment over what is “normal” for the region is
indicative of this power to bring money into the local area.
It implies that the industry is part of the economic base
of the local area.

“Basic” and “nonbasic” industries
This approach thus leads to the LQ being used to
identify basic industries (industries where employment
is higher locally than regionally, indicating a local
economic base and service to the larger region) and to
distinguish these kinds of industries from nonbasic
industries (industries where employment is not higher
locally than regionally, indicating no local economic base,
and service at best to the population of the local area
itself).
 An LQ higher than 1 for any industry indicates that
it is a basic industry. Any industry which has an LQ
over 1 is one, by this logic, which brings money into the
local area.

An LQ under 1 or equal to 1 for any industry
indicates that it is a nonbasic industry. This means
that the industry serves the needs of the local area, but
does not bring in money from the greater region. Where
the LQ is exactly 1, it is understood that employment
exactly meets the needs of the local area, without any
requirement for economic interaction with the greater
region.
 In general, LQs above 1 are seen as desirable, from the
perspective of bringing external money into a city.
However, as one can see from the previous observation
here, though, a case can also be made for bringing LQs
to approach values of 1, from the perspective of
promoting local economic self-reliance.

“Production for export” and export-led
development
Underlying the entire location quotient approach is the
notion that “production for export” is generally the
most reasonable strategy for a local area's economic
development.
 Indeed, this presumption is based in a general theory
favouring export-led development, or the development
of an area through the creation of economic ties with
outside locations.
 This presumption is also taken to be one of the basic
principles of the globalisation paradigm itself – economic
contact with the outside world is itself not only a
good thing, but something to which “there is no
alternative”.

“Comparative advantage” as an implicit
philosophical grounding of the method
David Ricardo's political economic theory of
comparative advantage is also often invoked in defense
of the location quotient method. Comparative advantage
is that situation which obtains when two locations benefit
mutually from a trading relationship.
 If some Location A produces things it is uniquely suited
to produce, and sells them to Location B, which would
have been less efficient at producing those things, and
Location B then does likewise, producing those things it
is uniquely suited to produce, and selling them to
Location A, which would have been less efficient at
producing those things, then each location ends up in a
position of greater advantage than they would if they tried
to be self-reliant.

Underlying the location quotient method is an
assumption that something like comparative advantage
generally also obtains in the relationships between
cities/centres and the larger regions in which they are
situated. Cities produce what they are uniquely suited to
produce, and then provide this in a trading relationship
with other cities. These other cities provide what they are
uniquely suited to provide as well, and all are better off
than they would if they concentrated on being self-reliant.
 All of this, however, implies that cities are “uniquely
suited” for certain industrial roles, which may not be true.
Often, cities will have similar abilities to service particular
kinds of needs. Furthermore, it is not clear that
competition between cities to serve the needs of outside
consumers will always play out in the favour of one's own
city. By this perspective, LQs over 1 may reflect
potential vulnerabilities, rather than strengths.

Special economic zones
Implicit in the kind of approach the location quotient
methodology takes is that cities are to be considered as
“special economic zones”, or locations where specialised
industry is located, with the specific developmental
purpose of attracting outside money into the location.
 The strategy of development used by the Asian Tiger
countries in the 1970s and 1980s was exactly this one,
and there are numerous specific cities in today's People's
Republic of China that are specifically designated as
such “special economic zones”, with the specific goal in
mind of doing just this – bringing foreign money into
these local areas.

“Crowding out”
The recent success of the “Asian tiger” countries at
pursuing export-led development strategies has, not
surprisingly, popularised export-led development
strategies generally. Many local areas now seek to
replicate their success by means of creation of
specialised economic zones.
 One danger of this growing popularity, however, is what
is called the “crowding out” effect. It may be possible, in
a world with millions of cities, that competition in virtually
any area of projected specialisation may be too extreme
for a would-be developing location to attempt to make it
their area of specialisation.
 In other words, new entrants into the world of economic
development may be “crowded out” of every market.

Production for export as seed money for
later “import replacement”
It is possible that the production for export approach to
economic development, which underlies the location
quotient methodology, may be useful as part of a more
long term developmental approach.
 Jane Jacobs, in her The Nature Of Economies,
suggests that the initial infusion of cash that export-led
development strategies provide may provide a basis for
investment in the local area.
 To put this in the terms related to the location quotient
method – basic industries are indeed good because they
bring cash into a local area, but this cash should then be
invested in nonbasic industries to ensure that they better
serve the local population, and to provide a basis for selfreliance.

Jacobs uses in her work the example of Uruguay in the
1920s. Uruguay was actually a fairly rich country in the
1920s owing to its position in the market for wool, its
primary export. However, a sharp upturn in competition
from the rest of the world (particularly New Zealand)
increasingly “crowded out” Uruguay from the wool
market, and since its economic development policies
were so dependent upon the decisions of outside
consumers, Uruguay went fairly quickly from being a rich
society to a poor one.
 For Jacobs, Uruguay's mistake was not in participating
in the world market, but rather in not investing the profits
from having done so into local industries that could have
consolidated economic strength and protected the nation
from external market shocks.

In contrast to the Raúl Prebisch “import substitution”
concept of the 1960s, Jacobs refers to this idea as
“import replacement”, suggesting that she does not mean
to stigmatise participation in the world market, but rather
to use that participation to fulfill the basic goals of the
import substitution idea. One uses one's interactions with
an external market in order to reduce one's ultimate
dependency on that external market.
