The Benefits of Being a 'Necessary City'

Cities aspiring to prominence on the global stage are overlooking a key economic development strategy.
by | May 2014
In the emerging world, Beijing is the top city for headquarters with 116 corporations, but it has only 14 subsidiary headquarters. Flickr/Edward Stojakovic

This story is part of Governing's annual International issue.

One aspect of globalization that has received tremendous attention is the concept of the so-called “global city” -- a place like New York or London that is in some sense an exceptionally successful and dominant player on the world stage. These have been variously defined, but often with a focus on specific business services like finance, and on overall economic size, diversity of culture and attractiveness as a tourist destination.

These are all important dimensions to be sure, but one area that’s gotten less attention is the seemingly old-fashioned idea of cities as centers for corporate headquarters. Even in this global age, it’s still an important idea. Some cities are simply “must do” locations for corporate heavyweights. This makes them in some sense “necessary cities” -- ones you can’t help but visit or deal with when doing business globally because of their popularity or their specific industry.

A recent report from the McKinsey Global Institute titled Urban World: The Shifting Global Business Landscape examined the location of major corporate headquarters on a national and metropolitan basis. They compiled a database of 8,000 global companies with annual revenues exceeding $1 billion, along with 2,300 foreign subsidiaries of those companies with stand-alone revenue of $1 billion or more. Their finding was that the presence of headquarters in cities is heavily driven by metropolitan area GDP. However, for foreign subsidiary headquarters, this isn’t true. Rather, certain cities appeared to be much more favored. So where overall corporate headquarters’ locations may be an accident of history related to where they were founded, foreign headquarters are more likely to be deliberately chosen.

In the emerging world, Beijing was the top city for headquarters with 116 corporations (including state-owned enterprises) but it has only 14 subsidiary headquarters. By contrast, Singapore is home to 118 large foreign subsidiaries, making it the top emerging world destination. Perhaps that’s why Singapore had more total foreign direct investment transactions than any city in the world in the last five years, according to the Financial Times’ FDI Intelligence Service.

In some cases this phenomenon can be tied to specific industries, creating even more market power. As part of a forthcoming report from Chapman University’s Center for Demographics and Policy, the project team and I analyzed headquarters and regional headquarters locations for leading firms in several industry groups. For example, where do major European firms in particular industries tend to establish a North American or Asia-Pacific headquarters? Where do American firms put their European HQ?

Our finding was that while some industries like pharmaceuticals were fairly dispersed geographically, others exhibited significant concentration. For example, Houston is overwhelmingly the preferred location for energy companies. Not only is the city home to a large number of U.S. energy company headquarters, it is also home to the North American or U.S. headquarters of a large number of major foreign firms. Even domestic energy firms based elsewhere in America often have a large Houston presence: Dallas-Ft. Worth-based Exxon is building a 3-million-square-foot campus there that will house 10,000 workers. If you’re in the energy business, there’s no escaping Houston.

Hong Kong is another popular Asia-Pacific headquarters location. It’s not as diverse as Singapore, but is more concentrated in the financial services sector, with many leading investment and commercial banks and hedge funds maintaining their Asian headquarters there. This creates a powerful pull. Paris is a powerhouse in the fashion and luxury sector. Dublin has seen many U.S. technology companies open up there thanks to its favorable tax laws. London, of course, is a juggernaut, with some important presence in nearly every industry, but with particular strengths in finance, media, fashion and technology.

One intriguing finding is that some places not conventionally viewed as global cities nevertheless are in a sense necessary global cities in select global industries. Take Detroit and the auto industry. The major global equipment manufacturers are widely dispersed, but when you look at leading global parts suppliers, they virtually all have their North American headquarters in Detroit -- including the German, Japanese and Korean ones. Among them are companies like Robert Bosch, Denso, Yazaki and Hyundai Mobis. If you’re in the auto industry in America, you have to deal with Detroit. Unsurprisingly, Detroit boasts several nonstop flights to key Asian destinations.

These concentrations show that attractiveness of cities as a location for global and especially regional headquarters is an overlooked area. Cities aspiring to prominence on the global stage should include this as a dimension of their overall economic development strategy. Because being a necessary city for global business lets a city reap a major economic harvest.

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