DP5070 Why and Where do Headquarters Move?
Authors: Vanessa Strauss-Kahn (INSEAD) and Xavier Vives (INSEAD, ICREA-UPF and CEPR)
May 2005
The locations of headquarters tend to be concentrated (the top 20 centres accumulate 75% of the headquarters weighted by sales in the United States) and the rate of movement is statistically significant between 1996 and 2001. There is some evidence that metropolitan areas with a higher number and more diversified headquarters have higher income per capita. When headquarters do move, municipalities and regional governments worry about the possible negative externalities in terms of direct and indirect employment losses and decrease in market thickness. Indeed, this was the case in two notorious examples when the Bank of America moved its headquarters from San Francisco following a merger and when Boeing decided to move from Seattle. Boeing explicitly stated that it wanted to distance management from its traditional manufacturing base and look for a central location that could better accommodate a global and diversified aerospace company.
When Boeing moved its main headquarters from Seattle it induced competition among Chicago, Dallas, and Denver as potential business locations. Chicago offered the most generous package with incentives worth more than $50 million. According to their analysis, the negative aspects of Chicago are: highest wage levels; high taxes (Dallas and Seattle are very low while Denver taxes are slightly higher than Chicago); largest population and therefore congestion costs; less specialized in transport equipment than Denver or Dallas. The positive aspects of Chicago are: highest levels of total headquarters and transport equipment headquarters and higher specialization on finance and business services, except for Denver, which is more specialized in business services. In conclusion, Chicago may have subsidized relevant businesses and services in order to counterbalance the negative aspects of the city and the headquarters' cluster effects may have played a large part in Boeing's relocation decision. The authors believe that regional and local governments subsidize the location of headquarters because of external effects. Their theoretical model estimates that a 10% increase in the number of headquarters from the same industry increases headquarters' production by 2%.
| 
Up