Sunday, August 9th, 2009

Replay: Chicago Corporate Headquarters and the Global City

[ In honor of United Airlines moving its headquarters and 2,800 employees back to the Loop from the suburbs, I am re-running this article from last fall on the migration of corporate HQ’s back to global cities. I highlight the concept of an executive headquarter vs. and operational headquarters. The United announcement is actually a full on operational HQ. Will this be a one-off or is it a signal of the next phase of the evolution of this trend? Stay tuned. This post originally ran on October 8, 2008 ]

Chicago is the Midwest’s only “global city” (or world city if you prefer). There are many paradigms of the global city, but the most widely cited is Saskia Sassen’s. The Cliff Notes version goes something like this. As businesses became more globalized and more virtualized, this created demand for new types of financial products and producer services – notably in the law, accounting, consultancy, and marketing areas – to help businesses service and control these far flung networks. These financial and producer services are subject to clustering economics, and end up concentrated in a relatively small number of cities around the world. These global cities serve as control nodes for various global networks and key production sites for these services.

Although the typical 1-3 million aspirational metros I often feature in this blog have law firms, accounting firms, marketing agencies, and banks, they mostly do not function as global cities. That is because those services are oriented towards domestic consumption and servicing the local market only. In a global city like Chicago, these services are qualitatively different, in that they are designed to serve the needs of global networks, and they are produced to a great extent for export. Columbus’ law firms serve mostly Columbus and Ohio. Chicago’s law firms serve the world. This also explains why the boom in Chicago’s core includes employment growth, while smaller metros, despite their entertainment and residential improvements, are showing urban core employment declines.

This also explains an interesting conundrum. The number of large company headquarters in places like New York and Chicago have been declining while the urban core has been booming. Sassen’s theory explains this in terms of growth built around financial innovation (currently hitting a rough patch to say the least) and producer services, not corporate headquarters.

But I’m starting to notice something. I don’t have the resources to do an empirical analysis, but I’m seeing anecdotal evidence that the global city may actually be starting to attract company headquarters again, albeit a reconstituted notion of the headquarters. Just as Chicago was not able to reinvigorate itself until it figured out how to reposition its experience as an agro-industrial capital into a global age, similarly, the corporate HQ needed to reinvent itself, and is reinventing itself to take advantage of the new global cities.

I was struck by the recent example of Mead Johnson Nutritionals, a spinoff of Bristol-Myers Squibb. This company is currently headquartered in Evansville, where it has also located its key manufacturing operation. But Mead Johnson is planning to move its headquarters to Chicago. According to the article:

“Mead Johnson Nutritionals is looking at Chicago and other cities as a possible location for its corporate offices. Working in a large city will make it easier to conduct business throughout the world. Mead Johnson makes Enfamil and similar products and about half of its sales come from overseas. Having offices near Chicago, for instance, will place executives in close proximity to global-business consultants, leaders in the field of nutrition and an international airport.

Between 40 and 60 people will work in the corporate offices, most of them in new positions. Evansville will retain the company’s operations in research and development, U.S. sales and marketing and information management, as well as a bulk of the finance and human-resources departments, Paradossi said. Mead Johnson’s liquid products will continue to be made in Evansville, he said.”

This excerpt makes two key points:

  1. In addition to just access to global flights, the company specifically wants executive access to the producer services found in a global city, in this case global-business consultants.
  2. The headquarters being moved is not a traditional headquarters, but rather a thin layer of only 40-60 top level people who require close interaction with providers of producer services. Traditional headquarters functions such as R&D, Sales, and IT will remain in Evansville, as will production.

In short, proximity to producer services (and international flights) is a source of advantage to the company, else it would not be making this move, which will cost money in its own right and create a coordination burden with the bulk of the staff left behind in Evansville. We’re also seeing a new concept of what a headquarters is. The “headquarters” is actually splitting into two: an executive headquarters and an operational headquarters.

Is this an isolated example? No. Two other ones in Chicago come immediately to mind. Boeing relocated a small headquarters from Seattle to Chicago. This company wanted a location independent of its operational businesses. A more recent and probably better example is Miller, which is again moving a small headquarters function from Milwaukee to Chicago, this time explicitly to gain access to the marketing services available in Chicago. Many traditional headquarters functions, as well as a key production facilities, will remain in Milwaukee.

I’m not sure if these are isolated cases or a trend. And it isn’t entirely new. Some companies have maintained these type of executive headquarters for a while, though historically the examples I can cite have been motivated primarily by the residential preferences of the CEO. For example, Men’s Wearhouse has a small HQ in Fremont, California (the Bay Area) where the CEO lives while most of the work gets done in Houston. Lincoln National moved a small headquarters to Philadelphia from Ft. Wayne when it hired a new CEO from the Philly area. But I do find it interesting that companies are now moving to places like Chicago where they don’t have a historical connection, and are explicitly citing access to producers services as a rationale. This will be an interesting trend to watch.

I think it also goes to show the uphill battle smaller Midwestern cities will have to fight. While some of these are doing well on the whole and are home to clusters of new economy businesses, they are not production sites for international producer services. This will mean that until they develop some type of export oriented production of and participation as a node in a global network for some specific service, they won’t probably see the same types of urban core development as the major global cities.

3 Comments

Cities: Chicago

3 Responses to “Replay: Chicago Corporate Headquarters and the Global City”

  1. John says:

    So how will this affect Elk Grove Village (United's old HQ)? I would assume that revenue from United makes up a big part of their budget. Add in a loss of other businesses and houses due to O'Hare expansion and Elk Grove could be facing trouble. What happens to a small suburb when it's revenue dries up? Yet another reason to have a diversified, sustainable economy I suppose.

  2. The Urbanophile says:

    Yeah, I haven't read anything about that, but we shall see. Because there are no local option income taxes involved, the fallout might be limited, however.

  3. the urban politician says:

    Thanks for reposting this, Aaron.

    I think it's too early to say whether this is truly a trend or just an isolated event. Lets not forget the large subsidy the city is offering to relocate United downtown.

    Plus, this is very different from the example of Mead Johnson you discussed in your article. Mead Johnson is an example of a major corporation moving from a medium sized town to the suburb of a major city. United is an example of a major corporation moving perhaps a dozen miles & setting up shop downtown, but in the same metropolitan area. Big difference

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