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4
Forces of Attraction
AT FIRST GLANCE, the geographical location of America’s innovation hubs
appears arbitrary and puzzling. In many traditional industries, location is tied
to natural resources. The U.S. oil industry clusters in Texas, Alaska, and
Louisiana because that’s where large oil reserves are. The wine industry is
mostly concentrated in California because of good weather and favorable
soil. The lobster industry is in Maine because lobsters don’t live in Kansas. In
these cases, clustering is neither surprising nor particularly revealing. The
geographical concentration of innovative industries, however, appears much
harder to explain. There are no obvious natural advantages to explain why
innovative industries are located where they are. After all, there is no silicon
in Silicon Valley. In the past, firm established themselves near their
customers because transportation costs were high. For example, during the
industrial revolution, London companies could deliver their products at a cost
advantage because most of their customers were in London. But today
transportation costs are low, especially in high-tech industries. In the case of
IT, they are essentially zero, since you can ship software code instantly and
cheaply through any modem. If Google moved to Visalia—or to Tibet, for that
matter—no user would ever notice.
Thinking a little more deeply about the location question makes it even
more ba8ing. Companies appear to locate in absolutely the worst places:
they pick very expensive areas—the Bostons, San Franciscos, and New Yorks
of the world. With sky-high wages and o<ce rents, these are among the
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costliest places in America to operate a business. We would expect these
cities to be unattractive for firm, especially those that compete globally.
Why do innovative firm cluster near each other in these expensive
locations when they could be anywhere? What is so special about cities like
San Jose? If you actually visit San Jose, you will not 3nd it very diFerent from
other cities. In fact, there is not much there. Visual clues as to why salaries
should be so high are hard to 3nd. Most of the iconic Silicon Valley
companies are located in anonymous o<ce buildings or o<ce parks. Like
many other metropolitan areas in the United States, the San Jose metro area
is made up mostly of parking lots, corporate campuses, and a few
sterile-looking glass towers surrounded by an ocean of single-family homes.
There is nothing distinctive about its urban form; freeways crisscross its vast
expanse, and people drive everywhere. The city has been trying to redevelop
its downtown and turn it into a more pedestrian-friendly destination, but it is
an uphill battle. Among the tallest buildings, the Adobe tower stands out
because it is visible from the 101 freeway. Situated just 3 miles southwest is
eBay’s sprawling campus. Just a short drive away, you 3nd Intel, Cisco,
Yahoo, and countless less prominent high-tech corporations with arcane
names that sound like prescription drugs—Progent, Xilinx, and Sanmina. To
hire a skilled worker with a college education, eBay and Adobe must pay that
worker $87,033 a year in San Jose, but a similar company based in Merced
would need to pay only $62,411. In fact, if eBay and Adobe moved to
Merced, they would end up paying less to hire a college graduate than what
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they are paying now to hire a high school graduate, which is $68,009. This
seems truly puzzling.
1
If San Francisco Does Not Like Walmart, Why Does Walmart Like
San Francisco?
The story of Walmart sheds some light on the matter. The company name is
synonymous with low prices, so it is perhaps not surprising that ever since
Sam Walton founded the company 3fty years ago, Walmart has been based
in Bentonville, Arkansas. Bentonville is a small town where running a
business is remarkably aFordable, embodying the company’s frugal
corporate culture. O<ce space in Bentonville is among the cheapest in the
nation, and the cost of living and average wages are also low. This is where
Walmart’s CEO, all its top managers, and all the headquarters staF live.
Bentonville is clearly the perfect 3t for Walmart’s cost-cutting ethos.
1 Many industries display some degree of geographical agglomeration.
Entertainment is concentrated in Los Angeles, and the main producers of
carpets have long been in Dalton, Georgia. But the degree of concentration
of the innovation industry is particularly high. The ten counties with the
greatest number of jobs in computer manufacturing account for 70 percent
of the total number of jobs. For scientific R&D, software, and Internet
companies, the corresponding figure are 45, 32, and 25 percent,
respectively. The majority of all nanotech research done in the world occurs
in eight metropolitan areas. Countries such as Japan, France, and Korea
exhibit even more geographical concentration, as Tokyo, Paris, and Seoul
absorb the lion’s share of their nation’s most innovative activities and talent.
The same is true in China, with Shanghai and Beijing.
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But when Walmart set out to enter e-commerce twelve years ago, it did
not choose to locate its Internet division, Walmart.com, in Bentonville. Nor
did it choose Bangalore, where costs are even lower. Instead it chose
Brisbane, California, just 7 miles from downtown San Francisco, one of the
most expensive labor markets in the world. (It also happens to be an area
that is politically hostile to Walmart, which makes it hard for the company to
open many local stores.) What sense does this make, given how aggressive
Walmart is in keeping the costs of every division under control? Has Walmart
betrayed its own business model?
2
No. As it turns out, in the world of innovation, productivity and creativity
can outweigh labor and real estate costs. Walmart saw three important
competitive advantages to a San Francisco location, which economists refer
to collectively as the forces of agglomeration: thick labor markets (that is,
places where there is a good choice of skilled workers trained in a specific
3eld), the presence of specialized service providers, and, most important,
knowledge spillovers. Although not much discussed, these forces ultimately
determine the location of innovative workers and companies and therefore
shape the future of entire communities. Understanding these forces is
critical, because they are the ones responsible for the Great Divergence of
the past thirty years. Understanding them is also important because they
2 Actually, according to a current employee, Walmart did try to locate
Walmart.com in Arkansas at first. The results were so poor—presumably
because of the lack of specialized Web designers in Bentonville—that the
company had to move the division almost immediately. The employee (who
prefers to remain anonymous) told me that the graphics of the pilot Web
page were so bad that insiders still joke about it.
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hold the key to making struggling cities more economically successful. As
we’ll see, they explain why eBay and Adobe 3nd it profitable to remain in San
Jose, and the seemingly illogical location decisions of many other companies,
from P3zer to IBM. These forces are growing stronger, and they will aFect
each and every American worker in the years to come.
Advantage 1: Size Does Matter
In 2007, Mikkel Svane cofounded the high-tech firm Zendesk in Copenhagen,
but he soon realized that Copenhagen was too isolated. Two years later he
moved the company to the United States “in search of [funding and] talented
staF.”
1
First he tried Boston, but eventually he settled on San Francisco. “It is
very exciting. Coming to San Francisco and working with the local people
here and our advisers has made us think bigger and more aggressively and
really pushed the envelope,” Svane told the local press when he moved.
The twenty-four-year-old programmer Kiel Oleson moved from Lincoln,
Nebraska, to San Francisco in 2010, looking for a high-tech job. His story is
pretty typical. “I knew I wanted to do iPhone development, and a lot of
start-ups here are looking for iPhone developers.”
2
If you ask San Francisco CEOs why they moved their companies to the
Bay Area—even when there are much cheaper places to do business—most
will tell you that San Francisco is where the talent is. If you ask software
engineers why they moved to San Francisco, they will tell you that that’s
where the jobs are. Simple, right? Not really. True, a software engineer will
3nd many more job openings in San Francisco than in Lincoln. But he will also
face more competition for these jobs. The same is true for employers.
Although there are more software engineers looking for jobs in San Francisco
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than in Copenhagen, there are also more employers seeking to hire them. It
is odd that workers claim that San Francisco has an excess demand for
software engineers while employers claim that San Francisco has an excess
supply of engineers. They cannot both be right.
