The Covid-19 pandemic has seen tens of millions of Americans engage in a gigantic experiment in working from home — one that looks to be more permanent than anyone might have imagined. Corporation after corporation has announced that they won’t be reopening their offices until mid-2021, at least. Some commentators are even predicting the death of the officeand the end of cities.
But let’s not get too far ahead of ourselves. Now, more than ever, the issue of where we work — of place and location — remains a fundamental question.
Pandemics and other crises can disrupt or change the status quo, but history shows they can also accelerate trends already underway. The question of where to locate corporate facilities has been increasing in strategic importance for a long time. Corporations were facing a rising backlash to their perceived effects on housing prices and gentrification in superstar cities and tech hubs, and from attempts to hoard taxpayer-financed incentives — a backlash that is only likely grow in the wake of the growing movement for racial and economic justice that has swept American cities since the brutal police killing of George Floyd in Minneapolis in May.
In today’s increasingly fraught economic, political, and social environment, decisions about where to locate are becoming more, not less, important. Figuring out who will work from home and who will require actual office space, which offices to prune and which to keep, how they will be configured and shared, and precisely where they should be sited — in talent-laden superstar cities, in more cost-effective second- or third-tier metros, in downtown urban centers, suburbs or rural regions — requires more strategic thought, analysis, and planning than ever.
Location today is a central component of corporate strategy. It is not just a cost that can be cut, but a key factor in attracting and retaining talent. What I call “locational strategy” is essential to the ability of corporations to gain competitive advantage. My insights on locational strategy are drawn from both my academic research in economic geography and business location, my personal involvement with numerous high-profile location decisions, and work with high-tech companies and cities over the past several decades.
The New Imperatives of Corporate Location
For the past several years, I have been undertaking research on changing locations and determinants of corporate headquarters. This research, conducted with my colleague Patrick Adler, charts the locations of the headquarters’ units of Fortune 500 companies from the heyday of the old industrial economy in the 1950s to the rise of the knowledge economy today. It identifies a huge shift in the locations of those headquarters and zeros in on the factors that underlie such changing locational imperatives.
Back in 1955, when Fortune magazine compiled its first 500 list, America was still a largely industrial economy, dominated by industrial corporations like General Motors, Mobil Oil, General Electric, and U.S. Steel. Today’s more knowledge- and technology-driven economy is dominated by technology-intensive companies like Amazon, Apple, and Alphabet. Indeed, just 60 of the companies on that original list remain today.
In the old industrial economy, location decisions were oriented to minimizing the costs of three key factors: gaining access to raw materials and transporting them to factories, transporting finished goods to their markets, and labor. Though early industries were based in and around cities like Detroit and Pittsburgh, over time this model came to be biased against these higher-cost locations. As industrial corporations grew into highly diversified, industry-straddling enterprises, they were able to shift their factories — or what came to be tellingly called “branch plants” — from more expensive cities to lower-cost greenfield locations, first in suburbs, then in the Sunbelt, and eventually overseas. To capture those factories, mayors and other local leaders and boosters of aspiring cities used tax credits and other financial incentives. The new profession of economic development emerged to position communities to better compete for and attract corporate investments and of corporate site selection to manage the process and extract maximum incentives for businesses. Over time, incentives packages grew and grew into modern day multimillion-dollar mega-deals.
But the location decisions of high-tech, knowledge-based firms turn on a different set of factors. The driving factor is access to highly educated and skilled people. This new location model is shaped by the simple fact that such talent is heavily clustered and concentrated in certain places. This is particularly true of young talent which is central to knowledge-based industries like finance, media, entertainment and high-technology and which is drawn to places which offer a combination of abundant job opportunities, deep professional networks, and lots of other young people to make friends with (and date). As such, it is skewed toward superstar cities like New York and Los Angeles, and leading tech hubs like San Francisco, Seattle, Boston, Washington D.C., and Austin, which serve as talent magnets. Under this model, the ability to attract and retain talent has become the central factor in corporate location.
Our statistical models, which track hundreds of Fortune 500 headquarters’ locations over six decades, confirm the role of talent as the key factor in the geography of corporate headquarters today. Seventy percent of Fortune 500 headquarters are located in metros that rank in the top quartile (25 percent) for talent, measured as the share of the population which holds a bachelor’s degree or more. Another key factor is the size of metro areas. This reflects the fact that larger metros have larger talent pools and more the amenities that attract top talent. Ninety percent of Fortune 500 headquarters are located in metro regions with populations of 1.3 million people or more. The third factor is the presence of international airports. Almost 90 percent of corporate headquarters are located in metros with international airports. Such airports offer global connectivity between talent hubs across the world.
Our research also charts the shift in the cities and metros where corporate headquarters are located. Not surprisingly, the biggest loser since 1955 has been the industrial Midwest, while the biggest gainer by far is the San Francisco Bay Area, the veritable center of America’s high-tech knowledge economy. New York, of course, remained the center for corporate headquarters over the entire period, home to 16% of corporate headquarters from the mid-’50s to today. Back in 1955, Chicago was the nation’s second-leading headquarters city, and Cleveland, Detroit, Pittsburgh, Minneapolis, and Milwaukee all ranked high up the list.