By Greg Ip
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (September 21, 2017).
When Amazon.com Inc. announced this month it was searching for a
home for a second headquarters, it made it clear the winning city
should expect to dole out big incentives.
Mayors should think twice before writing a big check because the
playing field between cities and companies has changed.
As the U.S. economy has shifted from manufacturing to
knowledge-intensive products, that has also altered where companies
decide to locate.
Countless places could host a factory or the sort of
distribution center Amazon opens several times a year. In that case
it makes sense for cities to outbid each other with hefty incentive
packages.
But Amazon's head office operation will produce ideas, patents,
and software, the product of human rather than physical capital.
That significantly limits its options.
Whereas physical capital can be anywhere, including overseas,
human capital clusters in a handful of cities defined by deep pools
of innovative workers and companies and the quality of life that
keeps them there. Such cities don't need to offer cash to attract
the likes of Amazon.
Back in the 1990s, it was thought the internet would be the
"death of distance." Since employees could work from almost
anywhere, they would move to cheap, low-tax cities, fleeing the
costly, congested, overtaxed coastal enclaves of California's Bay
Area, New York and Boston.
In fact, as Enrico Moretti, an economist at the University of
California, Berkeley, notes in his 2012 book, "The New Geography of
Jobs," the opposite happened: The wealthiest cities have pulled
further ahead while the laggards have fallen further behind. The
divergence has grown since the last recession.
Mark Muro and Sifan Liu of the Brookings Institution noted in a
March article that between 2010 and 2015, 14 of the country's 100
largest metropolitan areas materially increased their share of the
nation's tech jobs. The three biggest share gainers -- the San
Francisco, San Jose and Austin areas -- are already home to
clusters of such jobs.
Mr. Moretti attributes this to the "network effects" of
knowledge work: "Being around smart people makes us smarter and
more innovative. ... Once a city attracts some innovative workers
and innovative companies, its economy changes in ways that make it
even more attractive to other innovators."
Many cities justify throwing massive incentive packages at new
employers on the theory that they will then attract new businesses,
creating spillover benefits. For the country it's zero sum but for
a city it can be positive sum. A study co-written by Mr. Moretti
shows that when a large plant locates in a county, productivity at
neighboring plants also rises, reflecting the spillover
benefits.
Such logic drove Wisconsin to offer an eye-watering $3 billion
to Taiwan's Foxconn Technology Group to build its first U.S.
factory, making liquid crystal displays, in the state's southeast.
Foxconn was scoping out a half dozen other states, all of which
could have offered the same basic amenities.
"You could place the Foxconn operation in many places in the
Midwest and the product of that establishment wouldn't change that
much," says Mr. Moretti. Where a factory locates "depends a lot on
the bids and less on the characteristics of the community."
Foxconn isn't about to turn Wisconsin into a hotbed of
innovation; public largess virtually never does.
Innovative people, top-notch universities and serendipity
can.
Silicon Valley owes its pre-eminence to the decision by William
Shockley, one of the transistor's inventors, to start a
semiconductor business there in 1956. Seattle was a run-down,
declining city when Paul Allen and Bill Gates moved Microsoft to
the area to be close to their families in 1979. Microsoft's
presence, in turn, encouraged Jeff Bezos to start Amazon there
since it guaranteed access to a lot of software engineers.
World-class universities are usually essential, as Boston and
Austin demonstrate. This is a relatively modern phenomenon. The
demise of Boston's factories turned the city into a "hollowed-out
hull" by the 1970s, Harvard University economist Edward Glaeser
wrote in his 2011 book, "Triumph of the City: How Our Greatest
Invention Makes Us Richer, Smarter, Greener, Healthier, and
Happier." Its universities made possible the city's resurgence on
"education-oriented industries" such as engineering, computers,
financial services, management consulting and biotechnology.
Those educational disparities are growing: Mr. Moretti has found
that since 1980 the best educated cities have expanded their
college-educated workforce share much faster than others, defying
expectations of convergence.
Mark Sweeney, whose firm McCallum Sweeney Consulting advises
companies on where to locate, says there's a good chance the winner
of the Amazon headquarters project will pay more than Wisconsin did
for Foxconn: "This really is a transformational project."
For any city not already brimming with knowledge workers,
landing Amazon's second headquarters, which it says will bring up
to 50,000 high-wage jobs and $5 billion in construction spending,
could indeed be transformational.
But what if your city already has them? The case for paying a
rich company to do what is in its own interest is much weaker. If
Amazon passes you by, odds are another company will come along. Or,
says Mr. Glaeser, "You'll create your own Amazon."
Write to Greg Ip at greg.ip@wsj.com
(END) Dow Jones Newswires
September 21, 2017 05:14 ET (09:14 GMT)
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