The concept explains the optimal location of a manufacturing establishment based on minimizing three basic categories of cost: transportation, labor, and agglomeration. The theory postulates that industries will locate where they can minimize these combined costs, thereby maximizing profits. For example, a business that requires substantial raw materials that are costly to transport will attempt to locate near the raw materials source, while an industry reliant on cheap labor might choose a location where such labor is readily available.
This theoretical framework provides a basis for understanding industrial location patterns and their evolution. It is important in economic geography for its contribution to identifying factors that drive spatial distribution of economic activity. Understanding this helps businesses make more informed decisions about where to locate and provides policymakers with insights on how to attract industry and promote economic growth. Historically, it offered one of the first comprehensive attempts to create a spatial model for industrial location.