When Boeing decided to move its main headquarters from Seattle, Chicago, Denver and Dallas competed fiercely for the company's bid. In the end, Chicago won by offsetting its high wages, high taxes and large population with incentives that totaled more than $50 million.
The relocation pattern of headquarters - the administrative and marketing center of a company - reflects the evolution of a company's internal organization. The decision also has important economic consequences. In the paper "Why and Where Do Headquarters Move?" Xavier Vives of IESE and ICREA-UPF and Vanessa Strauss-Kahn of INSEAD analyze decisions regarding the location of headquarters in the U.S. Using a unique firm-level database that tracked 30,000 U.S. headquarters between 1996 and 2001, the paper examines where and why headquarters relocated during that period.
The decision of where to locate a firm's headquarters is linked to the evolution of the modern corporation. Firms may now afford to separate management from production activities, and can concentrate each one where they are more efficient.
In the U.S., say the authors, headquarters are increasingly concentrated in medium-sized, service-oriented metropolitan areas. The rate of relocation is significant, at 5 percent a year. Larger (in terms of sales) and younger headquarters tend to relocate more often. Also, firms that have several headquarters, such as General Motors Corporation, which is based in Detroit but has several affiliate headquarters around the U.S., are more likely to relocate. So are foreign firms and firms that are the outcome of a merger.
There is also evidence that metropolitan areas with a higher number of and more diversified headquarters have higher per capita income. When a city attracts company headquarters, it also attracts business services, a highly qualified pool of labor and other headquarters. So, when headquarters move, municipalities and regional governments worry about the possible negative consequences for the city in terms of direct and indirect employment losses and decrease in market thickness. This was the case when the Bank of America moved its headquarters from San Francisco because of a merger and when Boeing decided to move from Seattle. To prevent this from happening, local governments try to influence headquarters' location by offering appropriate infrastructure, subsidies and tax incentives. The stakes are high: The location and relocation of headquarters shapes the structure of metropolitan areas.
Several variables go into a company's decision about where to locate its headquarters. They include: industry specialization, corporate taxes, congestion, cost of transmitting headquarters´ services, and firm-specific factors, such as merger activity, size and age of the headquarters.
The research shows that headquarters tend to relocate to metropolitan areas with good airport facilities. Companies look for low corporate taxes, low average wages, high levels of business services, same industry specialization, and the agglomeration of headquarters in the same sector of activity.
Also, headquarters cluster in a small number of metropolitan areas. New York stands out as the dominant center, hosting 15 percent of the total number of headquarters, which represents 21 percent of headquarters' sales. These numbers reflect the presence of very large New York based corporations such as General Electric, Phillip Morris, AT&T, Texaco and PepsiCo. However, New York is showing signs of slipping as the dominant center.
Strauss and Vives also point out that 65 percent of headquarters are located in the top 20 U.S. cities ... General Motors in Detroit, Exxon in Dallas, Mobile in Washington, Hewlett-Packard in San Francisco, Sears Roebuck in Chicago, and Cargill in Minneapolis.
As for specific sectors, traditional manufacturing centers show a higher position in Detroit, Cleveland and Pittsburgh than, for example, in Washington, D.C. Foreign corporations tend to locate their headquarters in metropolitan areas close to international borders, such as Honolulu, Buffalo, San Diego and Anchorage. Finally, leading centers show a better positioning for Kansas City and San Diego, and a worse positioning of traditional industrial centers such as Cleveland, St. Louis and Milwaukee. Indeed, the data reveals that mid-sized, service-oriented "sun belt" agglomerations are gaining at the expense of "rust belt" industrial centers.
The authors also emphasize that corporate history matters; older headquarters are less likely to move. Headquarters in a location with good airport facilities, low corporate taxes, and with agglomeration of headquarters in the same sector of activity are also more likely to stay put.
Strauss and Vives' results imply that a metropolitan area that wants to keep and attract headquarters must improve its airport facilities, lower taxes and promote the location of business services and other headquarters. "The dramatic impact of a better airport cannot be underscored," they write. In order to attract business services and headquarters, direct subsidies and incentives should also be carefully considered.