Note: This article originally appeared in the Knowledge@Wharton Management section on October 24, 2017
The Headquarters Checklist: How Do Companies Pick a Location?
If by announcing a search for a second headquarters Amazon intended to play one city against another and generate millions of dollars in free publicity, it has worked. Many observers believe Amazon has long known where it wants to be — or at least has never seriously considered more than two or three specific sites — since there are no more than a handful of cities that fit the requisite criteria.
Amazon may be huge, and the bounty for the winning city potentially life-changing. But when casting about for a second North American headquarters, what matters to Amazon are many of the same things that matter to many other companies.
“For most businesses, the issue of location choice now is driven by labor: Will we be able to attract the white collar skills we need?” says Wharton management professor Peter Cappelli, director of School’s Center for Human Resources. “For unskilled or semi-skilled jobs, will we be able to get it at a price we want to pay? No business goes to the Silicon Valley or New York City because it is cheap; they go because of the labor supply.”
“It boils down to access to clients, access to labor force, access to suppliers – these all play a role in these decisions,” says Christopher Thornberg, founding partner of Los Angeles economics research firm Beacon Economics. That said, Amazon wants a labor force that is young and educated – which generally means millennials. Forecasts see the population growth in the Northeast of 25- to 44-year-olds to be modest, with them preferring places like Colorado, Oregon, Washington State, California and Florida, he notes, “so where your potential work force is moving to and desires – that will play a role.”
But what do millennials want? “They want everything,” says Fernando V. Ferreira, Wharton professor of real estate and business economics and public policy. “They want a city with all the cultural amenities – theaters, museums, fairs, concerts, live music, all forms of entertainment. They don’t want to be in the middle of nowhere; they don’t like suburbs or exurbs. They want a lot of bars and restaurants so they can have fun in addition to work. And what they want, which is most important, is they want people like themselves. High-skilled workers want to live close to each other. Companies know that and pay a lot of attention to that, so cities that have those features have a huge advantage. The location with the highest education, with college degrees – that is the Northeast, by far. The whole Acela corridor has the highest concentration.”
For most businesses, the issue of location choice now is driven by labor: Will we be able to attract the white collar skills we need? For unskilled or semi-skilled jobs, will we be able to get it a price we want to pay? Peter Capelli
The ‘Coy’ Search
Not all headquarters searches happen for the best of reasons, says Cappelli, recalling that “Scott Paper’s move of its headquarters from Philadelphia to Boca Raton happened because that’s where the new CEO Al Dunlap was living.”
But Amazon’s reasons are compelling. They are out-growing their space in Seattle, and Ferreira points out that while Amazon might prefer to expand there, the development cycle on the West Coast, from San Diego to Seattle, is so advanced, and zoning restrictions and regulation so onerous, that prices have skyrocketed, “which means affordability becomes an issue. And that is why it is hugely unlikely they would pick a location on the West Coast.”
Some businesses might need a second location to be close to customers, but that is not the case here, says Wharton marketing professor David Reibstein. Given “the question of how much more key talent is still available in the Seattle area … then why not open it up to consideration of other cities? Many other companies, such as Google, have done this.”
The proposal says Amazon has a preference for metropolitan areas with more than one million people, a “stable and business-friendly environment,” urban or suburban locations with the potential to attract and retain strong technical talent, communities that think “big and creatively” when considering locations and real estate options.
But talented employees – and the talent pipeline – are clearly of paramount importance to Amazon. The proposal not only asks for a list of universities and community colleges with relevant degrees and the number of students graduating with those degrees over the last three years, but also “information on your local/regional K-12 education programs related to computer science.”
Cappelli says that although it is likely Amazon had only a couple of cities in mind as possible locations before they began their search process, part of the benefit of this kind of sweepstakes format is that the company will learn things in the process about issues they could pursue at locations already on their short list.
“Is there much that local and state governments can do to influence those decisions? Tax cuts obviously count, but I suspect more important is giving businesses the sense that the government will actually try to help rather than get in their way,” Cappelli says. “Some of that now has to do with training workers, helping the new business navigate infrastructure issues like transportation, and so forth. It is certainly true that business sees local governments at the final stage as a kind of vendor, and they are not above playing coy, pretending that they have more options than they actually see, and playing them off against each other to squeeze whatever deals they can at the location they want to go to anyway.”
High-skilled workers want to live close to each other. Companies know that and pay a lot of attention to that, so cities that have [attractive] features have a huge advantage.” –Fernando V. Ferreira
As for a subjective, data-driven approach, Moody’s Analytics ranked Austin, Atlanta, Philadelphia and Pittsburgh close together as top contenders in an analysis aimed at pegging where Amazon’s second headquarter should go. Criteria considered were business environment, human capital, cost of living, quality of life, transportation and geography. Austin came out on top – unless geography was included, which put Philadelphia in first place. “Among the top 10 it would be difficult for the data alone to be decisive, as some metro areas are scored very closely, and changing the weighting of the variables brings others to the top,” the analysis noted. “Determining which is better will require looking at specific site availability and what the metro areas are willing to offer.”
A Quixotic Mission
To some, the hoops through which cities are jumping highlight the kinds of distortions that can occur when the stakes are so high. “I am appalled by this entire thing,” says Thornberg. “Every politician out there wants to be the guy who lands Amazon, and for them this is low cost, because they just tell someone to do the work. But the economic development folks themselves are sent out on the quixotic mission to pull together this application, and they know the chances of landing it are zero. For me it’s an unnecessary sort of distraction from the daily work they do.”
Hundreds are trying. Amazon received 238 proposals by the October 19 deadline from big cities like Boston, Chicago and Atlanta; smaller hip cities like Austin and Portland; gritty, nouveau-hip sites like Detroit and pre-hip Camden, N.J. (where the slogan is “Experience the Rebirth!”): regional bids like ones from Central Indiana or a three-city package in Missouri; and Northeast hopefuls betting on proximity to the corridors of power, like Philadelphia, Baltimore and Washington, D.C. (where Amazon founder and CEO Jeff Bezos owns a home, not to mention The Washington Post). A decision is expected sometime in 2018.
Moreover, says Thornberg, governments should not be allowed to pick and choose – ‘I’ll give subsidies to this company and not everyone else.’ That doesn’t seem kosher. It’s a corrupting influence,” he says. Thornberg would like to see a federal law that prohibits cities, counties and states from awarding individual entities special perks.
Even schools have gotten in on the act. Wharton students developed mock proposals to Amazon to make the case for Philadelphia, presenting their ideas earlier this month as part of a competition judged by Wharton faculty. Among their proposals: having Amazon partner with Comcast, based in Philadelphia, to marry Amazon’s analytics capabilities with LoRa (long-range wide-area network) “smart city” wireless technology Comcast already has in place that monitors and responds to situations as diverse as traffic flow, utility metering, determining when a pothole needs to be filled or a child has gone missing.
Other teams touted the huge influx of talent that comes into Philadelphia through its concentration of top colleges and universities, while another pegged the value of economic incentives already in place at eventually as much as $15 billion. “$15 billion is big,” Philadelphia councilman Kenyatta Johnson told The Philadelphia Inquirer. “But in the long run, it would pay off.”
Another Wharton group proposed the creation, essentially, of a concierge just for Amazon: a “chief happiness officer” in city government to make sure they had full access for all their needs.
The competition was just an exercise, but it reached some well-placed ears as Philadelphia was putting the finishing touches on its own real-life bid. Present when proposals were unveiled were city economic development officials as well as Philadelphia Mayor Jim Kenney. “While city officials heard some things that confirmed their own analyses, they also heard some new ideas to consider as they were putting the final draft together,” said Wharton management professor Lori Rosenkopf, vice dean and director of the school’s undergraduate division who, along with Wharton MBA vice dean Howard Kaufold, sponsored both the case competition as well as an essay competition.
The economic development folks…are sent out on the quixotic mission to pull together this application, and they know the chances of landing it are zero. [It’s] an unnecessary sort of distraction from the daily work they do.” – Christopher Thornberg
The prize is perceived as great. Toronto Mayor John Tory has called the Amazon HQ2 search “the Olympics of bidding” – “It’s gigantic,” he told The Toronto Star. Amazon says for its second corporate headquarters it will hire as many as 50,000 new full-time employees with an average annual compensation exceeding $100,000 over the 10 to 15 years following commencement of operations. The project – which may eventually reach eight million square feet – is expected to have over $5 billion in capital expenditures. Amazon’s investments in Seattle from 2010 through 2016 have meant an additional $38 billion to the city’s economy, the company estimates.
“That city will be better off,” says Ferreira. The presence of a new Amazon headquarters anywhere “will attract more companies, and the business environment will exist on a larger scale. Their whole economic growth will benefit from that.”
But wherever Amazon’s HQ2 ends up, and no matter what a city forks over to get them there, it doesn’t seem likely that this particular scenario will play out again any time soon.
“That type of process has been happening for a long time. It’s nothing new – companies decide to open a new plant, and cities and counties compete,” says Ferreira. “But it’s not usually so heavily advertized. You contact the chamber of commerce, advertise to different cities, and then the cities go after a certain plant, yes. But this one is massive, and Amazon is such a big company.”
There are not too many companies that have the growth and name to create this kind of a ruckus,” says Thornberg. “Who else is there? Maybe Microsoft, Google or Apple. If Boeing did this, people would say it’s big. But I don’t think people would get this excited about it.