LESSON 2

Localization of a firm/ industry

Localization refers to the concentration of an industry in one particular area.

Or Localization is the tendency for both the main and subsidiary industries to concentrate in one area.

For example, soap industry in Kampala and textile industry in Jinja.

The causes of localization include:

  • Industrial inertia
  • Availability of required infrastructure in a particular area such as road network.
  • Existence of a pool of skilled labour used to a particular type of industry/industrial life.
  • Availability of security and other services like insurance.

Advantages of localization

  1. Promotes the development of basic infrastructure like road network, hospitals and schools; which also benefit the surrounding people. The government finds it economical to set up infrastructure to support the many firms.
  2. Creates more employment opportunities in the localized area. This is generated by the need for labour by many firms (main and subsidiary) and by the associated institutions such as service firms in the area.
  3. Promotes forward and backward linkages between firms and industries. For example, the sugar industry linked to sugarcane firms and also linked sweets and biscuits firms. This promotes the development of both the main and subsidiary industries and also reduces costs and wastes.
  4. Firms in the area enjoy economies of scale especially external economies of scale. These are the advantages enjoyed by the entire industry due to large-scale production such as transport economies, economies of information and thus reduced costs per unit output.
  5. Industries jointly undertake research from which they benefit. More so the industries share/ own some facilities jointly such as research centres, recreation grounds and health facilities. These would be difficult to establish by an individual firm.
  6. Localization encourages specialization and its advantages such as increased output. People concentrate at particular stages, which increases productivity.
  7. Creates a pool of skilled labour used/accustomed to industrial life. Workers specialized in that field are attracted to that area and this implies production of more quality output.
  8. Competition among firms promotes efficiency in production—production of high quality and quantity of output. Competition also translates into better prices for the buyers of the finished products.
  9. Leads to merging of firms which combine their resources. This in turn increases the level of output and hence economic growth.
  10. The localized area gains reputation for that line production. The area becomes known and the products find wide markets in other areas. (Area gains popularity and products they manufacture which bear the name of the place).( kakira sugar, hoima sugar, tororo cement)
  11. Promotes urbanization and related benefits such as increase in market opportunities. The increase in the number of people in the localized area leads to growth of towns.

Disadvantages of localization

  1. Creates/ breeds regional imbalance in development. This is because industries are concentrated in a particular area which becomes more developed in terms of infrastructure than other areas in the country.
  2. Worsens the problem of income inequality. This is because those employed in the localized area earn more than those who are not employed or those in the rural sector. This increases social evils such as theft and corruption.
  3. Accelerates rural –urban migration and its associated disadvantages. This is because many people are attracted to the localized areas in the urban areas in view of getting employment, and this comes along with like urban unemployment and growth of slums.
  4. Increases dependence of the country’s economy on the localized area; and this results into great loss in case of a catastrophe/disaster (like war, fire, and earthquakes) affecting many people and property. [The economy as a whole is greatly affected].
  5. Usually increases unnecessary/wasteful competition such as unnecessary advertisements. This leads to wastage of resources.
  6. There is a greater risk of unemployment for labour in the localized area. Employment opportunities are limited to a particular type of labour and as production in the localized industry declines or stops, the specialized labour may fail to get alternative employment elsewhere.
  7. Leads to persistent price increase (inflation) in the localized area due to excessive demand for goods and services. There are shortages of some goods and services relative to demand—hence demand –pull inflation
  8. Encourages external diseconomies of scale—disadvantages of large-scale production. For example, increased costs of factor inputs due to increased demand for them, increased air and water pollution of the environment, traffic congestion.
  9. Over straining of the infrastructure such as health facilities, housing, and road network. The infrastructure serves many economic activities and a large population in the localized area, hence quickly breaking down.
  10. At times the localized industries face a narrow market due to stiff competition and surplus/mass production. This leads to wastage of resources.

Delocalization of firms / industries

Delocalization refers to the deliberate act by the government of distributing industries evenly throughout the country to avoid concentration (of industrial establishments) in one particular area.

It involves locating of industries in various areas/ away from a localized area; and the major aim of delocalization is to promote balanced regional development.

Reasons for delocalization of firms/ industries

  1. To promote balanced regional development. This is by distributing industries evenly in the country, for example by promoting agro-based industries in the rural areas, hence facilitating economic development.
  2. To enhance rural transformation and commercialization of the economy. This is because it creates awareness among the people involved in subsistence sector who change their attitudes and produce for money.
  3. To improve on the social-economic infrastructure in all parts of the country. This includes road network, railway, banks, hospitals and power supply to support the various firms set up.
  4. To encourage exploitation of resources especially the idle resources. This is by establishing firms using these are raw materials and in turn increases national output/ national income.
  5. To create more employment opportunities especially in the rural areas. The setting up of industries in various areas helps to utilize the surplus cheap labour in such areas, and improving the standards of living.
  6. To reduce rural-urban migration and its disadvantages such as congestion and open-urban unemployment. This is by establishing industries/ firms in various areas including rural areas which makes many people stay in the rural areas.
  7. To control unnecessary duplication and wastage of resources. This is because various industries are set up in many areas to supply a wider market.
  8. To reduce government expenditure in the localized area due to population pressure. The population becomes wider spread and this makes the government to develop entire economy instead of concentration on one area.
  9. For strategic reasons. It is sometimes a planned move to utilize a special resource in a given area or to pull a particular area that is lagging behind.
  10. To fulfill political obligations. For example, to implement promises made during campaigns and the need to win political support from the masses.
  11. To facilitate fair income distribution. This is by extending employment to various people in various regions and this increases the purchasing power in the economy.
  12. To minimize the diseconomies of scale in the localized area resulting from over concentration of firms such as excessive pollution, and congestion. This is by distributing the firms widely in the country.

Disadvantages of delocalization

  1. Leads to high costs of production due to the scattered nature of industries. For example, increased transport costs and marketing costs.
  2. Limits the social interaction among people from different areas/regions. This is because they work in firms which are widely spread in the country.
  3. At times it is politically-influenced resulting into location of industries in a few areas. This makes the economy fail to achieve the benefits of delocalization fully.