A recent Chicago Fed conference looked at the shifting geography of company headquarters, with a public policy focus on headquarters as a much-desired target of economic development efforts.Corporations - Headquarters

Thomas Klier

William Testa

Yukako Ono

English

Research Papers in Economics

Chicago Fed Letter
SPECIAL ISSUE THE FEDERAL RESERVE BANK MARCH 2005
OF CHICAGO NUMBER 212a
The changing relationship between headquarters and cities
by William Testa, director of regional programs, Thomas Klier, senior economist, and Yukako Ono, economist
A recent Chicago Fed conference looked at the shifting geography of company
headquarters, with a public policy focus on headquarters as a much-desired target
of economic development efforts.
1. Fortune 500 headquarters 1975–2003
SOURCE: Fortune magazine, various issues.
HQ count
Top 5 cities by HQ count in 1975
New York Chicago Los Angeles Cleveland Philadelphia
0
20
40
60
80
100
120
140
160
1975
1980
1985
1990
1995
1999
2003
On October 29, 2004, the Federal Reserve
Bank of Chicago held a conference en-
titled “Headquarters and Cities.”1 The
headquarters operations (HQs) of large
multi-establishment firms are usually
located in cities because of superior
transportation and communication in-
frastructure and, more common of late,
because cities are often
preferred by high-skilled
workers and dual-career
households.
In his introductory re-
marks, Bill Testa, vice
president and director of
regional programs at the
Chicago Fed, noted that
headquarters are the
“prized pelts” of city eco-
nomic development of-
fices. Why is this? For one,
HQs enhance a city’s
economic strength and
image. A city that is the
location of big name
corporations will find it
easier to attract potential
investors. For another,
HQs often rely on high-
level business services—many of which
may be purchased locally, thereby creat-
ing jobs and income. In addition, the
jobs of HQ workers are typically of the
highly skilled and highly compensated
variety. Thus, from the local community
perspective, HQ employees may be cor-
porate leaders who are active in civic
and philanthropic affairs.
However, the philanthropic activities of
HQs may be changing along with the
evolving organizational structure of
firms. Most importantly, the size of cor-
porate HQs is said to be shrinking in
many firms and industries. As many firms
have outsourced services formerly per-
formed at the headquarters, no longer
does the headquarters translate into a
single “corporate campus,” housing ev-
erything from payroll to R&D to admin-
istration to public relations. Company
mergers and acquisitions have increased,
along with CEO turnover, often leading
to consolidation and relocation of head-
quarters. Finally, many companies have
become more global and knowledge-
intensive in scope, with corporate control
more broadly dispersed.
In view of these trends, policymakers,
planners, and development professionals
may need to adjust their development tar-
gets, possibly to focus more on achieving
a combination or “cluster” of both HQ
functions and related business service pro-
viders, such as accounting, advertising,
banking, insurance, legal, and manage-
ment consulting. Alternatively, rather
than focusing on facilities and compa-
nies at all, perhaps cities should be think-
ing about what public services attract
high-income personnel, i.e., professional
workers and entrepreneurs who develop
and staff headquarters and related fi-
nance and business service companies.
The first conference session was mod-
erated by Greg Hinz, weekly columnist2. Turnover among stand-alone HQs
Opening Closing
rate rate
1977–82 0.54 0.48
1982–87 0.61 0.52
1987–92 0.56 0.48
1992–97 0.58 0.58
NOTE: Opening and closing rates are calculated as ratio of
new or closed headquarters to number of existing headquar-
ters at beginning of period.
SOURCE: K. Aarland, J. Davis, J. V. Henderson, and Y. Ono,
2003, “Spatial organization of firms: Decision to split
production and administration,” Federal Reserve Bank of
Chicago, working paper, No. 2003-30.
for Crain’s Chicago Business. Hinz has
covered the progress of Chicago as the
domicile of HQs in recent years as it has
lost prominent HQs, such as Amoco and
Bank One, while gaining Boeing and re-
cently the North American HQ of HSBC.
Observers have been asking whether the
recent drop off in business service jobs
in the Chicago economy can be attrib-
uted to an outflow of large corporate
HQs (which may be their customers).
Thomas Klier, senior economist at the
Chicago Fed, explained that headquar-
ters of large companies continue to be
disproportionately concentrated in large
cities. Among these, however, mid-tier
cities have been gaining headquarters
at the expense of the very largest cities,
such as New York and Chicago, for some
time (see figure 1).2  Klier said that
Chicago gained headquarters during the
1990s and remained second only to New
York as a location for headquarters of
publicly traded companies. He report-
ed a considerable amount of volatility in
headquarters locations, related to firm
births and deaths, as well as growth, de-
cline, and mergers of companies. In
Dallas, for example, a disproportionately
large share of the volatility is explained
by companies relocating to Dallas. In
Minneapolis, on the other hand, a larger
than average share of headquarters vol-
atility is related to the growth of  existing
companies. Finally, Klier discussed the
results of his statistical model of headquar-
ters location, which combines company-
and city-specific data. The model shows
that cities with a well-educated work
force, good access to international trans-
portation, and a reputation as a global
business center were more likely to re-
tain headquarters during the 1990s.
Next, Yukako Ono, economist at the
Chicago Fed, discussed the turnover and
geographical distribution patterns of
headquarters. Looking at management
offices in general (including corporate,
subsidiary, and regional headquarters),
Ono said that there is quite high turn-
over of headquarters (see figure 2).
Headquarters appear and disappear at
a locality due to firms’ separating man-
agement offices from their production
facilities, relocating existing headquar-
ters, or shutting down some subsidiary
or regional headquarters. However, the
high turnover does not imply that relo-
cating or opening headquarters is easy
for any firm. Ono showed that firms
have to reach a certain size to have stand-
alone management offices—as opposed
to management offices side by side with
production facilities. In addition, she
argued that, particularly in manufactur-
ing, even after a firm separates its man-
agement from its production facilities,
proximity to production activities may
still be important for the purposes of
monitoring, evaluating, and coordinating
these activities. This helps explain why,
unlike business services that are dispro-
portionately concentrated in more pop-
ulated areas, manufacturing headquarters
are located in small and mid-size cities.
The same is certainly not true of service
and finance industries. In a comparison
between Manhattan and Chicago’s Cook
County, Ono showed that one-quarter of
stand-alone headquarters in the finance,
insurance, and real estate (FIRE) sector
are located in Manhattan. Given that
some business services and FIRE as a
whole are concentrated in Manhattan,
the concentration of headquarters
might reflect a desire to locate produc-
tion and management in the same area.
On the other hand, a high concentra-
tion of a specific sector’s headquarters
might also reflect the benefits of infor-
mation exchange among firms within
the sector.
Offering the site location practitioners’
viewpoint, Jerry Szatan, an experienced
principal of a site location company,
observed that HQs typically move for
one of two reasons or, often, a combina-
tion of these two. First, as companies
experience significant growth in their
operations, a headquarters relocation
may make strategic sense for the admin-
istration of the new (and expanded) ge-
ography of the firm. Second, when a
company’s size and markets have shifted
and expanded, it may seek to change its
image to align with these new realities for
customers and investors. Szatan cited two
significant costs often associated with an
HQ move. First, there are the high costs
of moving HQ executives and other skilled
workers. Increasingly, key personnel are
lost to the firm because of the growing
prevalence of dual-career households,
where both wage-earners must consider
the new locale suitable. Second, there
are transitory but high costs of disrupt-
ing business operations during the move
and its aftermath.
Lyssa Jenkens, chief economist and
vice president with the Greater Dallas
Chamber of Commerce, discussed HQ
recruitment. To date, because Dallas is
a young and rapidly growing area, the
Chamber has focused on recruitment
rather than retention. For more mature
cities, however, retention may be the
more effective public policy. Recruitment
success can be modeled as a two-stage
process in the typical firm’s decision-
making. First, large scale fundamentals
must put you on the final list of candidate
cities. For Dallas, the growth of new mar-
kets and market opportunities in the
region, together with significant cost
savings and work force quality, have
brought it to the attention of many HQ
operations in recent decades. To suc-
ceed in the second stage of the process,
Jenkens said, the city needs a well-in-
formed and aggressive sales pitch and
the ability to create a high comfort lev-
el among senior HQ execs with the lo-
cal quality of life and business climate.
The second panel was introduced by
Richard Longworth, executive director
of the Global Chicago Center at The
Chicago Council on Foreign Relations.
Longworth suggested that as companies
have become both more global and
knowledge-intensive, the attractions of
large “global cities” for major headquar-
ters may be changing. Transportation
and communication needs may be moreMichael H. Moskow, President; Charles L. Evans,
Senior Vice President and Director of Research;  Douglas
Evanoff, Vice President, financial studies; David
Marshall, Vice President, macroeconomic policy research;
Richard Porter, Senior Policy Advisor, payment
studies; Daniel Sullivan, Vice President, microeconomic
policy research;  William Testa, Vice President, regional
programs and Economics Editor; Helen O’D. Koshy,
Editor; Kathryn Moran, Associate Editor.
Chicago Fed Letter is published monthly by the
Research Department of the Federal Reserve
Bank of Chicago. The views expressed are the
authors’ and are not necessarily those of the
Federal Reserve Bank of Chicago or the Federal
Reserve System.
© 2005 Federal Reserve Bank of Chicago
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ISSN 0895-0164
pressing for such companies, but the
related infrastucture may also be becom-
ing more common among cities. Instead,
what may tip the balance toward global
cities (such as Chicago) is that an organi-
zation’s leader can interact there with
other corporate leaders during the
course of the day. Cities are “learning
places,” where both new ideas and im-
portant business information can be
“snatched from the air,” so to speak, and
this may be critical to globally dispersed,
knowledge-intensive firms.
Next, Stuart Rosenthal presented empir-
ical evidence showing that headquarters
tend to cluster together in order to take
advantage of information-exchange
benefits. In particular, he looked at ex-
porters. Exporting requires specialized
knowledge of foreign markets. Informa-
tion exchange is especially important for
firms that export to countries with “diffi-
cult” trading environments. Rosenthal’s
research measures, for each country,
the degree of difficulty in the trading
environment based on the degree to
which a country is integrated into the
world economy, the level of political
freedom, GATT membership, whether
the country is subject to U.S. trade sanc-
tions, and the country’s credit rating.
He reported that the U.S. headquarters
of firms that do business in more “dif-
ficult” trading environments are more
geographically concentrated, indicating
that they rely more heavily on local in-
formation exchange.
Then, Saskia Sassen, professor of soci-
ology at the University of Chicago and
visiting professor at the London School
of Economics, discussed the role of
digitization in finance. She suggested
that finance companies are intense
consumers of new technologies and
that they use technology to meet the
seemingly conflicting goals of decen-
tralization of the product to meet con-
sumer needs while maintaining system
integration and control. She argued
that centralization/agglomeration is
still necessary at the point of product
generation, and this tends to affect the
location of HQ operations and their
functions. Administrative HQs can be
located anywhere, since they perform
routine functions that don’t benefit
from the service network found in glo-
bal cities. In contrast, strategic HQs’
operations often require a global city.
As an example, Sassen cited the loca-
tion and relocation of various finan-
cial service functions in the New York
area after September 11. Partly arising
from the initial impetus of enhanced
security concerns, administrative func-
tions (and the build-up of system re-
dundancy) moved out of Manhattan.
However, specialized functions, such
as the trading floor at Goldman Sachs,
remained behind. She suggested that
a shared culture existed in the trading
world and that informal interaction was
essential to success—both work-site and
cross-firm communication. Even though
complex software could be designed to
guide traders, Sassen argued that non-
digital tools are still needed. These may
include unique cultural attributes to
create trust, an ever-evolving dialect
for interpretation of information, and
the services and interaction between
traders and several connected profes-
sions. More generally, she concluded,
each city’s headquarters may reflect its
own deep economic history.
Matt Krentz, Chicago-based partner of
the Boston Consulting Group (BCG),
commented on the locational strategy
of his management consulting firm
and some of its clients. With 60 offices
around the world, BCG functions more
as a neural network than as a hierarchy.
Its current CEO, for example, is located
in Frankfurt, Germany, while the former
CEO was in Chicago. The primary func-
tion of all of its offices is to provide exper-
tise and strategic advice to its customers.
To some extent, the size and location of
offices are determined by access to cus-
tomers. Loss of headquarters and other
key customers in a region can be seen to
diminish the presence of a management
consulting company there. So too, the
depth and breadth of air travel connec-
tions to serve customers are key. However,
another determinant of BCG office size
is the ability to attract and retain the very
highest level of skilled consultants. This
requires cities that are large and diverse
enough to provide career opportunities
for dual-career households, have a
world-class quality of life, and provide
rich educational opportunities. From his
observations of other industries, Krentz
pointed out that the nature of headquar-
ters has been changing, with many back-
office operations now being outsourced
to other locations or other companies.
Today’s headquarters are noticeably
smaller than they used to be. They still
matter, but in a different way. While the
actual headquarters staff may be small
in numbers, it interacts with companies
that provide support services. Often that
contact needs to be face to face. That’s
why many of the high-end business
services are located in metropolitan
areas that are home to headquarters.
Next, Rae Rosen, vice president and
economist at the Federal Reserve Bank
of New York, described New York’s ex-
perience as a truly “global headquarters”
city. Even as New York has lost headquar-
ters in recent decades, its economy has
moved upward in the skill composition
and wages of its employees. The share
of those workers employed in business
services, finance, engineering and man-
agement, and computer-related indus-
tries continued to expand during the
1990s. Total employment has remained
largely flat over the past 40 years, but
personal income has approximatelydoubled. As evidenced by the behavior
of the securities industry, the city has
continued to shed back office and less-
skilled occupations. The New Jersey side
of the metropolitan area now hosts
40,000 jobs in the lucrative securities
industry. However, the higher paying
jobs have tended to remain and expand
in Manhattan. How has NYC continued
to reinvent itself as a highly specialized
financial center? The process has oc-
curred more through serendipity than
planning, said Rosen. Much like other
cities, New York is trying to understand
how to help build and renew the net-
works and agglomerations of firms
and functions that will create wealth
and income in the coming years.
Paul O’Connor, executive director of
World Business Chicago, delivered a
keynote address on bringing headquar-
ters to Chicago. His organization, a
public–private partnership between the
Chicago area business community and
the City of Chicago, was successful in
winning Boeing’s global headquarters
from Seattle in 2000. In this effort,
O’Connor cited such success factors as
O’Hare airport’s modernization and
broad scope in offering nonstop flights,
a culturally diverse and high-quality-of-
life city where Boeing can be comfort-
able recruiting the world’s best talent
(and their families), and the presence
of other business leaders with whom to
confer on global business strategy and
information. O’Connor announced that
a major petrochemical operation will
make Chicago its global headquarters
in the near future.
Reflecting on the importance of head-
quarters to cities, O’Connor said that
large headquarters matter greatly for
city morale and for philanthropic/civic
leadership. However, he noted that the
public and press often hold a distorted
or incomplete view of the actual job im-
pact of a nameplate HQ arrival or depar-
ture. For example, he cited PepsiCo’s
acquisition of Chicago-based Quaker
Oats in 2000, whereby the city lost a
major headquarters but subsequently
gained many high level jobs in PepsiCo’s
strategic reorganization.
Conclusion
Many cities have experienced a similar
wave of mergers and acquisitions and
with it have lost familiar headquarters’
names and prestige. Yet, underneath the
upheaval, successful cities continue to
grow their own companies in several ways,
so that the occasional loss of a headquar-
ters through a merger or acquisition is
often not that significant. Consequent-
ly, in their public policy and business
strategy, cities should emphasize such
fundamentals as transportation and
communication infrastructure and pro-
viding those high-quality public services
that serve to create and retain global
businesses and their employees.
1 View the agenda and presentations at
www.chicagofed.org/news_and_ confer-
ences/conferences_and_events/2004_
headquarters_and_cities_agenda.cfm.
2 The headquarters of large banking compa-
nies, however, strongly favored larger cities
during the 1990s. See Robert DeYoung
and Thomas Klier, 2004, “Why Bank One
left Chicago: One piece in a bigger puzzle,”
Chicago Fed Letter, Federal Reserve Bank
of Chicago, No. 201, April.

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