GEOG 3404Economic Geography

Dr. Zachary KlaasDepartment of Geography and Environmental

StudiesCarleton University

LECTURE 6:

Location Quotients: Centres and Regions

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 Nordrhein-

Westfalen (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 self-

reliance.

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.