Information Technology and the Location of Corporate Headquarters

Mark Thoma writes:

Economist's View: Information Technology and the Location of Corporate Headquarters: This is an example of what Paul Krugman discussed in his column "The New York Paradox" where agglomeration economies, the benefits from the clustering of related firms, create an incentive for firms to locate in New York's financial center. However, up until recently, the high cost of locating an entire headquarters operation in New York... innovations in information technology... allowing many of the support personnel to work in lower cost areas in other parts of the world and communicate electronically with upper management.

This article on the movement of biotech headquarters to the U.S. to be located near sources of financing... shows that the phenomena is general - New York is not the only destination - there are agglomerations of biotech firms in places like Cambridge, Massachusetts and Carlsbad, California....

Europe's biotech 'immigrants' to America, by Andrew Pollack, Commentary The New York Times/IHT: When the Scottish government injected $9 million into the biotechnology company Cyclacel last October, the country's enterprise minister explained that "there could not be a more important company for Scotland's future." So how did Cyclacel show its gratitude just two months later? By moving its headquarters to Short Hills, New Jersey, and merging with a publicly traded American company.

Cyclacel executives say there was no slight intended to the government and the company's 65 research scientists, who continue to work in Dundee, Scotland, and Cambridge, England. "The issue was one of access to the capital markets of the United States," said Spiro Rombotis, Cyclacel's chief executive. Only American investors, he said, could provide the tens of millions of dollars needed to carry the company's cancer drugs through clinical trials.

Cyclacel is not alone among European biotechnology companies that consider their science second to none, while conceding the superiority of U.S. financial markets. A number of European players from countries including Denmark, France and Germany have come to the United States for greater access to the world's largest investment pool for life sciences....

The German company Micromet now has a Nasdaq listing and a U.S. headquarters, after reverse-merging with Cancervax, of Carlsbad, California. Most of its operations are still back in the home country....

Oxxon Therapeutics, a British company, moved its headquarters to Boston but then moved back to England. "It's extremely difficult to manage small operations on both sides of the Atlantic," said Craig Smith, Oxxon's chairman....

There has long been a school of thought that argued that manufacturing moved to resource and transport hubs, and then that design and engineering moved to manufacturing, and then finance and management moved to design and engineering--and thus that this century's finance and management hubs are the resource and transport hubs of two centuries ago.

It seems that now we are seeing a different process: design, engineering, and management moving to be within hand-holding distance of midtown Manhattan or of Sandhill Road.

Comments

[anne]

http://select.nytimes.com/2006/07/10/opinion/10krugman.html

July 10, 2006

The New York Paradox
By PAUL KRUGMAN

I live and work in New Jersey, but I've always loved the energy and variety of the city that's just an hour's train ride away. So I was happy to read in The New York Times about a New York success story: the surprising resurgence of Manhattan as a site for corporate headquarters.

What's interesting about the corporate return to Manhattan is that it flies in the face of today's conventional wisdom, which says that modern technology is making geography irrelevant. Since work can now be done anywhere, the story goes, jobs move wherever the wages and other costs of doing business are lowest. And this should mean trouble for a high-wage, high-cost location like New York.

But somebody forgot to tell New York about the new rules: in spite of high costs, the city's economy is thriving.

And the report on the headquarters boom suggests that New York may, paradoxically, be doing well precisely because technology has made it possible to move many jobs away from high-cost locations.

During the 1960's and 1970's, New York lost much of its historical role as a headquarters city, as companies moved out to suburban campuses around the country. "But in the last several years," the Times article declares, "New York has regained its magnetic force": there are more than twice as many headquarters and subsidiaries in the city as there were in 1990.

Why are corporations moving back to New York? Manhattan's appeal is obvious: the Big Apple is the best place for top executives to "network face to face with their peers in the hub of the financial, legal and communications industries," as the article puts it. But that's an advantage New York has offered ever since it became America's largest city.

In the past, however, this face-to-face communication came at a high price: in order to keep their top executives in Manhattan, companies also had to pay the rent on large office buildings and fill those buildings with thousands of lower-level employees, paying those employees wages high enough to compensate for New York's high cost of living. Many companies decided that the benefits of a New York headquarters weren't worth the cost.

Now, however, it's possible for many of the people who would formerly have worked at corporate headquarters to work somewhere else instead, communicating with management electronically. And that makes it worthwhile to move top executives back to the center of things....

[anne]

http://economistsview.typepad.com/economistsview/2006/07/the_good_and_ba.html

July 10, 2006

The Good and Bad News from New York
By Paul Krugman
Edited by Mark Thoma

Regional economists tend to think in terms of ... the "base-multiplier model." First, there's the metropolitan area's export base: the stuff it sells to other regions. In modern New York, that mainly means financial services. The income that people earn in that export sector gets partly spent on locally provided services, which supports a number of people working outside the export base. These people in turn spend money locally, which supports still more people, and so on. (That's the "multiplier" part of the story.) In a large metro area like New York, where a high fraction of income is spent within the region, the multiplier effect is large: a lot more people are employed outside the export base than in it. But the export industries are still the city's reason for being.

Thirty years ago there was reason to worry that New York's export base was collapsing. The geographic advantages ..., notably the Erie Canal, had become irrelevant, and the "agglomeration economies" — the advantages New York derives from its sheer scale - seemed to be eroding. The old manufacturing sector ... was in terminal decline. Corporate headquarters were moving out. Media were moving to Los Angeles. It seemed possible that the city would fall below critical mass and enter a period of irreversible decline.

The good news is that this didn't happen. Instead, the financial industry prospered, and in the end even the corporate headquarters have started to come back. And because of the multiplier effect, this meant lots of jobs overall. ...

The bad news is that, on average, the jobs created by the multiplier aren't well-paying. That's only a generalization... But by and large we're talking about relatively low-wage jobs, supplying services to the affluent... So it's a highly unequal economy, and one in which even people with incomes that would be middle class somewhere else find it hard to make ends meet.

So it's not an entirely positive picture. But I remember the deep pessimism we all felt about New York in the 1970's, and I'm glad that the city survived that crisis.

[dilbert dogbert]

You mentioned Sandhill Rd, which I just left after a vist to the horses in Woodside. I wonder if that is the reason that housing prices around here are holding up well? I will have to ask my venture cap friends about the movement of biotech to this area. Biotech has been here for a long time so it is not as if some new type businesses are showing up.
I remember people lamenting that bio had not lived up to its brag and no one was making money on it. Has all the invested capital finaly started paying off?

[anne]

Housing prices are holding just as well about Cambridge and Manhattan, as far as I can tell, and broad real estate is strong.

[anne]

Actually, I am thoroughly impressed by how well the broad real estate has held and take that largely as a sign of demand in critical urban market centers. The Vanguard REIT index, somewhat in reflection, was up 16.1% as of last evening and the relative stability of the index has been impressive.

[anne]

For several years, I have argued that the real estate investment trust index appears to be indicating a strong and stable general market beyond housing that can bolster the economy even through moderate swings in housing demand. Performance of the Vanguard REIT index continues to indicate just this. Suppose there is no real estate bubble, but only variously expensive housing markets....

[Outsourced]

As all the work is done in lower cost areas, eventually those workers would think, "Gee, we do all the work, why do those guys in New York get all the money?" Then, "Could we manage ourselves and start our own company? Hmm..."

[wkwillis]

Where does the boss want to live? Where is housing cheap enough for the workers to live? Put the headquarters between them. That used to be a good predictor.
The boss wants to live in New York because New York is a wonderfull place to spend money. Now he can, and can put the workers someplace else cheap, and he has.

[Randolph Fritz]

The Al Capone principle of economics: "That's where the money is." (I haven't had dinner; I'm cranky.)

[Randolph Fritz]

...and Google is setting up in Oregon, apparently because of cheap electricity.

[s9]

Sand Hill Road. Not Sandhill Road.

[Bruce Ferguoson]

This may seem strange in light of what is going on in China but I tend to think that the cities are losing population and gaining wealth. Part of an idea that I got from J.R. McNeill (something new under the sun).
Think of it this way. City life is attractive to people who want to earn more but not attractive to the poor. Used to be you could be poor and still tend a few crops. You can't do that in a city. You don't get any land. At best you might get welfare.
Right now you can homestead in parts of Kansas. Land is essentially free in places.
Those are kind of the parameters. People are leaving the cities mostly because they are too expensive. At the same time the $$Class is taking up residence in the cities because well you just can't get haut cuisine in Abiline KS. Believe me I was there the other day.
Think of the Bronx burning down in the 70s.

[anne]

http://economistsview.typepad.com/economistsview/2006/07/paul_krugman_le.html#comments

July 14, 2006

Paul Krugman: Left Behind Economics
Edited by Mark Thoma

Paul Krugman reviews the implications of data from 2004 on the distribution of income that have just become available. As he notes, and as noted here in a post discussing the Piketty and Saez study referenced below, the data show that recent trends towards more concentrated income continued between 2003 and 2004 and there is reason to believe the trend towards more concentration will persist into the future unless there are changes in policy

Left Behind Economics, by Paul Krugman, U.S. Economy Commentary, NY Times: I’d like to say that there’s a real dialogue taking place about the state of the U.S. economy, but the discussion leaves a lot to be desired. In general, the conversation sounds like this:

Bush supporter: “Why doesn’t President Bush get credit for a great economy? I blame liberal media bias.”

Informed economist: “But it’s not a great economy for most Americans. Many families are actually losing ground, and only a very few affluent people are doing really well.”

Bush supporter: “Why doesn’t President Bush get credit for a great economy? I blame liberal media bias.” ...

Many observers, even if they acknowledge the growing concentration of income..., find it hard to believe that this concentration could be proceeding so rapidly as to deny most Americans any gains from economic growth. Yet newly available data show that that’s exactly what happened in 2004 ...

Here’s what happened... The U.S. economy grew 4.2 percent, a very good number. Yet ... real median family income — the purchasing power of the typical family — actually fell. Meanwhile, poverty increased, as did the number of Americans without health insurance. So where did the growth go?

The answer comes from the economists Thomas Piketty and Emmanuel Saez, whose long-term estimates of income equality have become the gold standard for research on this topic... They show that even if you exclude capital gains from a rising stock market, in 2004 the real income of the richest 1 percent of Americans surged by almost 12.5 percent. Meanwhile, the average real income of the bottom 99 percent of the population rose only 1.5 percent. In other words, a relative handful of people received most of the benefits of growth.

There are a couple of additional revelations in the 2004 data. One is that growth didn’t just bypass the poor and the lower middle class, it bypassed the upper middle class too. Even people at the 95th percentile of the income distribution — that is, people richer than 19 out of 20 Americans — gained only modestly. ...

The other revelation is that being highly educated was no guarantee of sharing in the benefits of economic growth. There’s a persistent myth, perpetuated by economists who should know better ... that rising inequality ... is mainly a matter of a rising gap between those with a lot of education and those without. But census data show that the real earnings of the typical college graduate actually fell in 2004.

In short, it’s a great economy if you’re a high-level corporate executive or someone who owns a lot of stock. For most other Americans, economic growth is a spectator sport.

Can anything be done to spread the benefits of a growing economy more widely? Of course. A good start would be to increase the minimum wage, which in real terms is at its lowest level in half a century.

But don’t expect this administration or this Congress to do anything to limit the growing concentration of income. Sometimes I even feel sorry for these people and their apologists, who are prevented from acknowledging that inequality is a problem by both their political philosophy and their dependence on financial support from the wealthy. That leaves them no choice but to keep insisting that ordinary Americans — who have, in fact, been bypassed by economic growth — just don’t understand how well they’re doing.

[anne]

Well, short of lowering the minimum wage as a conservative alternative for worker well-being, the mere disdain conservatives have for requiring paying a decent wage to workers tells me the minimum wage needs to be raised.

[Cranky Observer]

When the engineering/production company that I worked for in the 1980s moved its headquarters from Downtown Big City to Exurban Big City, the exurban dwellers among the employees gushed about how much more "productive" the secluded campus envirnoment was. The objective fact was that a meeting with a supplier, say, had gone from a 5 minute stroll down the street (with plenty of good lunch choices within another 5 minute walk) to a minimum 4 hour oddessy (plus 2 more hours if lunch was involved). Same with interaction with those company depts/divisions that had chosen not to campus-ize: our two buildings 3 blocks apart had morphed into 1 downtown building plus 7 different exurban campuses. No more quick train ride to the airport, either.

But that move to this day is considered an example of how to beat the "difficulty and expense" of being located downtown!

Cranky

[anne]

http://www.calvorn.com/gallery/photo.php?photo=4972&exhibition=15&u=244|22|...

Female Red-tailed Hawk with Twig Near Nest at 927 Fifth Ave.
New York City.

Nature, nature, everywhere and a walk to work even if that means mouse hunting :)

[anne]

http://www.calvorn.com/gallery/photo.php?photo=4971&u=244|21|...

Male Red-tailed Hawk With Twig Hovering Near Nest at 927 Fifth Ave.
New York City.

Yes; living costs can be ever so much less than you might suppose if you are clever enough.

[david]

Housing prices are not holding up in Cambridge, I'm afraid -- the market's very slow, inventory high, etc.

Why are there so few tech vc markets in the states? Doesn't seem like something that needs so much concentration, particularly given the quality of the US university system generally.

[Ari]

David, as far as I can tell houses in Cambridge are selling a little more slowly but prices have not come down. Same for Brookline. I have no sense of sellers lowering prices because houses are on the market too long.

[Ari]

Nothing is better than being able to walk or ride a bicycle to work, and there are enough stable jobs through the Cambridge-Brookline area to make this a competitive place to live even if Boston becomes less so over an economic cycle.

[david]

Anecdotal, but I know people in Cambridge and Brookline that have brought prices down. Out on the North Shore too. They'll fall further.

Yeah, I walk a lot, so I agree it's a good place to live for that and other reasons, and no reason to think of real disaster, but it's a bubble.

[Ari]

David, I agree there has been a housing price bubble here but I think we will be in for a long period of level or slightly lower prices rather than a serious decline. I will pay close attention, but this is an area of job stability and that may be most important.

[Wally Smith]

Home builders in Las Vegas are looking forward to a 8th consecutive year where new homes in Las Vegas closings have exceeded 26,000. Just think about it - - - Las Vegas has built over 155,000 new homes in Las Vegas the last five years! Through the first six months of 2005 we have seen 13,106 new homes in Las Vegas closings, putting us on pace for over 26,000 for this year.