The goal of my thesis is to research which factors have the best influence on American multinational companies when these companies make their headquarter location decision. We will execute our research utilizing a set of 35 global towns. Companies take numerous factors into consideration when coming up with headquarter location decisions and we will elaborate on these later on. These factors can be influenced by the insurance policy makers within an urban area. It's important to denote why cities should make an effort to catch the attention of multinational companies' headquarters. First, relating to Holloway and Wheeler (1991) and Meijer (1993), a high agglomeration of such office buildings both reflects and is a causal element in the economic electricity of an area. Second, Klier and Testa (2002) have discovered that headquarters are major consumers of high-skilled and well-paid labor. And third, technical spillovers may be brought on by the presence of a high amount of large organizations' headquarters in knowledge-intensive areas; these spillovers have an optimistic influence on the neighborhood.
We will start by defining the word global city, since all metropolitan areas we include in our research are of this type. Following we will clarify why companies become multinational companies, by detailing this we uncover what companies need to be able to locate their headquarters abroad. Then we will elaborate on the factors global towns need to possess in order to entice MNCs.
Definition of a worldwide city.
Emergence of global cities
According to Sassen et al. global metropolitan areas have become progressively more important in the last decades because of major changes in the macro-economic scenery. One of these major changes is the ascendance of information systems and the associated increase in the ability to move and liquidity of capital. Cross-border economic procedures such as moves of capital, labor, goods, raw materials and tourists, have previously existed for a long time. These processes, however, mainly used to occur in the inter-state system. The key actors in this system were national says and the whole international system was inlayed in this inter-state system. Due to privatization, deregulation, the checking of countrywide economies to overseas firms, and the growing participation of national financial celebrities in global markets the nationwide as a spatial product has partly been unbundled or at least been weakened. This weakening has resulted in the introduction of other spatial systems or scales. Among they are the sub-national, notably locations and areas; cross-border parts encompassing several sub-national entities; and supra-national entities, i. e. global digitalized markets and free trade blocs. Sassen state governments that the changes in the macro-economic environment, which can be discussed earlier, have resulted in the emergence of global cities.
Difference global vs world cities
Sassen points out that she knowingly has chosen the term global city, instead of the obvious alternative, world city. She's done this because the word world city refers to a kind of city which has been around for centuries. Sassen expresses that the majority of today's global places are also world cities, but there may be some global cities today that are not world cities in the full, rich sense of that term. We will elaborate on the planet city later, whenever we discuss John Friedman's work.
Sassen's Global City Model
The goal of my thesis is to learn what global-city characteristics induce MNCs to choose a certain global city as the location for their headquarters. In order to fully have the ability to answer this question it's important that I focus on explaining just what a global city exactly is. The explanation I provide is based on Saskia Sassen's global city model, her model consists of seven hypotheses and I will make clear these briefly.
First, globalization evokes the physical diffusion of monetary activities and along with the simultaneous integration of such geographically diffused activities, this is a primary factor which induces the progress and importance of central commercial functions. When a firm's operations are more dispersed across different countries, the firm's central functions become consequently more technical and strategic.
Second, since these central functions become this complicated, the head office of MNCs become more plus more reliant on outsourcing: they buy a share with their central functions from highly special service firms - accounting, legal, public relations, encoding, telecommunication and other such services. While, not long ago, the key site for the production of these central headquarter functions was the headquarter itself, nowadays another key site has arisen. Although this is particularly the case for firms involved with global market segments and non-routine businesses, all headquarters of large firms are buying more of such inputs alternatively than producing them in-house.
Third, the increasing demand for specialized services causes a new agglomeration dynamic. The metropolitan environment functions - because of the presence of a variety of firms, abilities, and know-how from a wide range of particular areas - as an information centre. Being in a city becomes synonymous with being within an extremely and dense information loop.
Sassen's fourth hypothesis comes from the prior one. She claims that the greater headquarters outsource their most sophisticated, unstandardized functions, the freer they are simply to choose any location. This is actually the case since less work that is performed in the headquarters is at the mercy of agglomeration economies. This means that once more that the highly specialized and networked services sector is the key sector specifying the distinctive creation advantages of global towns. While expanding this hypothesis Sassen was giving an answer to an extremely common notion, the fact that the quantity of headquarters is what specifies a worldwide city. In lots of countries it may still be the case that the country's leading business middle also possesses the largest attentiveness of headquarters. In some countries however, there are multiple locational options for such headquarters, since we find well-developed infrastructure beyond the main business center.
Hypothesis five claims that the specific service firms, present in global places, need to create a transnational servicing network. This network involves affiliate marketers or other types of partnerships, consequently of this there has been a conditioning of cross boundary city-to-city transactions and networks. This might be seen as the beginning of the formation of transnational metropolitan systems. Due to this hypothesis is the fact that the space between the financial fortune of these connected global cities and the economical fortune of these hinterland and their countrywide economies becomes greater. Nowadays these transnational sites are of great importance for the major business centers of the world. In prospect to the, Sassen states that there is no such thing as a single global city.
Sassen's sixth hypothesis expresses that there has been a raise in the amount of socio-economic inequality in global places. This increase is brought on by the growing volume of high-level experts and high revenue making special service firms within global cities. Since special services have gained significantly in importance, the value of top level professionals and their number has risen. The grade of these services will depend on to a large level on the talent of the employees who perform these services, this makes proven talent an added value. This means that workers who have got of these capabilities experience rapid increases in their praise structure and personnel who do not possess of these traits will probably get trapped in the contrary cycle. This is the reason behind the growing level of inequality in global towns. Sassen's 6th hypothesis has however been criticized by Chris Hamnett (1994). First, he suggests that Sassen's concept of polarization is vague and undefined. She fails to make a distinction between utter and relative social polarization and she shifts between occupational and income polarization. Second, Sassen's newspaper fails to participate sufficiently with with existing work on communal change, and the evidence of large-scale professionalization in the occupational composition of Western population and many global cities. And finally, Sassen appears to have focused only on New-York and Los Angeles when writing her thesis. These are two cities that happen to be characterized by large-scale, carrying on immigration and hence a large range way to obtain low-wage personnel. Hamnett argues that her attempt to prolong the thesis to all global locations is difficult.
A 7th hypothesis, is the fact that one consequence of the dynamics detailed in hypothesis six, is the growing informalization of a variety of economical activities which find their effective demand in these towns, yet have income rates that do not allow them to remain competitive for various resources with the high-profit making companies at the top of the machine. A possible solution, to be able to make it through under these conditions, is informalizing part of or all creation and distribution activities.
The role of innovations in communication technology
Globalized economic sectors have a tendency to be rigorous users of the new telecommunications and computer solutions, on top of this, the end result these sectors produce is now progressively de-materialize. This raises a question as to if they should reap the benefits of agglomeration economies. Sassen points out the growing data that sites are a crucial variable that is usually to be distinguished from specialized networks. Even before the current systems were developed, these business sites were crucial. The business enterprise networks we've mentioned profit significantly from agglomeration economies and hence thrive in metropolitan areas right now when simultaneous global communication is possible.
Firms with many geographically dispersed factories and service shops encounter new needs for central coordination and servicing. This implies a dynamic of simultaneous geographic dispersal and concentration and this dynamic is one of the key elements in the organizational structures of the global economical system. Indeed, the primary financial centers inside countries concentrate a greater talk about of national financial activity than even ten years ago. That is an unexpected development for a globalized and digitized monetary sector. This advancement is induced by the actual fact that national and global market segments as well as globally integrated organizations require central places where the work of globalization gets done. To be able to implement and manage global financial systems, fund and advanced corporate and business services are would have to be produced. The most well-liked sites for the development of the services are metropolitan areas. Further, the firms who produce these services need a physical infrastructure comprising strategic nodes with hyper-concentration of facilities. Finally, Sassen declares that even the production procedure for the innovative information industries is at least partly place-bound since their development process takes a blend of resources even when their outputs are hypermobile.
The changes in communication technology never have only influenced the degree of amount of financial activity, they have also improved the role of centrality and hence of metropolitan areas as economical entities. Formerly, the guts was synonymous with the downtown or Central Business District. Because of new communication solutions, this is no more the situation. Nowadays what's seen as the center can presume several geographic forms, which range from the CBD to a fresh global grid of cities. Sassen says that today one can view centrality in three different varieties. First, even though the CBD has been altered by economical and scientific change, it remains a form of centrality with great importance. Second, the center can lengthen into a metropolitan area in the form of a grid of nodes of extreme business activity. The nodes in this grid are both connected by cyber-routes plus more conventional forms of marketing communications infrastructure, such as rail and highways connecting to international airports. These conventional infrastructures will probably maximize the monetary advantages which follow from the new communication systems. Finally, through telematics and extreme economic trades, transterritorial "centers" are being constituted, and therefore the major international financial and business centers are connected at the inter-urban level.
Why do firms become multinational companies?
This may appear like the logic consequence of a company who grows and grows and is also willing to get other market segments then its market in order to sell more of its products and get higher earnings. It really is however not as easy as it appears. Conducting business in another market then your market incurs a substantial cost in accordance with the price tag on doing business in your home market. Therefore, companies have to have large offsetting advantages to be able to extend to foreign market segments.
John Dunning has made a restricted but nevertheless very helpful framework which really helps to inquire these offsetting advantages. Relating to this construction a there are three conditions required for a company to continue with foreign direct assets. The first condition is 'Ownership Advantage', this problem requires that the firm really needs something or a production process which gives the firm market power advantages in foreign markets. The second condition in Dunning's framework is 'Location Benefit', this includes that the firm must have a reason to want to find production abroad somewhat than concentrate it in the home country especially if there are scale economies at the plant level. The third and final condition of Dunning's construction is 'Internationalisation Advantage'. This condition tells that organizations must have a reason to want to exploit its possession advantage internally, somewhat than license or sell its product/process to a international firm.
In order to hook up these theoretical ideas with practical organization and country characteristics, Adam R. Markusen centered on several other writers in his newspaper 'Multinational Businesses, Location and Trade.
Markusen message or calls it the 'knowledge-capital' model, but he records at the same time that is not really a widely disperse term.
Markusen starts off with the possession advantages to be able to hook up theory and practice. He notes that multinationals are related to R&D, marketing, scientific and technical employees, product newness and complexity and product differentiation. This denotes that multinational companies are companies who use an extensive amount of knowledge capital. Knowledge capital is a term which includes many different things such as the individuals capital of the employees; patents, plans, types of procedures and other proprietary knowledge. Finally the word also includes marketing assets such as trademarks, reputations and brand names. The key reason why knowledge capital is associated with multinationals, in unlike physical capital, is the actual fact that knowledge capital can simply be carried to foreign development facilities, at least relative to the services of physical capital. The next property of knowledge-capital which brings about the association of this kind of capital with multinational companies is the fact that knowledge-capital often has a joint-input or 'public-good' property within the firm. Knowledge-capital often has an extremely high creation cost, but once it is produced it can be transferred to overseas production facilities at an inexpensive which without reducing the worthiness or productivity of those possessions in existing facilities.
The second property of knowledge capital which affiliates knowledge capital with multinational businesses is the actual fact that knowledge capital often has a 'public-good' property within the firm. Knowledge capital generally has a huge cost to be produced, but once it is produced it could be provided at relatively low cost to foreign development facilities without reducing the value or productivity of these assets in existing facilities. In regards to this, multinationals become exporters of the services of knowledge-based assets: managerial and anatomist services, financial services, reputations and trademarks.
Sources of location advantages are different between horizontal and vertical multinationals. For horizontal multinationals, which produce the same goods and services in several locations, location advantages arise from trade costs. Indeed, when trade costs were zero the multinational would produce everything in a single plant, to be able to maximize plant-level size economies. The next source of location advantages of multinationals, again following form the occurrence of plant-level size economies, is a sizable market in the host country. When the marketplace in a possible number country is quite small, the forex market could be supplied by export.
For vertical MNCs, in contrary to horizontal MNCs, the resources of location advantages occur from low trade costs. Vertical MNCs, for example, exports the services of its knowledge capital as well as perhaps other intermediate inputs to a foreign production service for final set up and shipment back to the MNC's home country. These transactions will tend to be prompted by low alternatively than high trade costs. Another source of location advantages for vertical MNCs occurs when the stages of production have different factor intensities and the countries have different comparative factor endowments. Which means that vertical MNCs will produce skilled-labor-intensive products and services in countries that have an abundant amount of skilled-labor present and less-skilled last assembly will be achieved in countries where low-wage unskilled labor causes can be found. Fragmentation thus comes up to be able to exploit factor-price dissimilarities across countries.
The third and final kind of advantages Dunning state governments in his construction will be the internalization advantages. These advantages occur, like the possession advantages, from the public-goods property of knowledge capital. The house of knowledge capital that means it is easily transferable to overseas locations makes it easily dissipated. When a MNC deals a licensee, this licensee can absorb the MNC's knowledge capital and then disrupt the contract with the MNC, still having the data capital of the MNC. In regards to this risk, MNCs will opt to internalize the transfer of knowledge capital.
Markusen state governments characteristics, which companies need to have got in order to become MNCs. This isn't very interesting for my thesis since I am speaking about firms who are already found to be MNCs.
Afterwards Markusen reveals his conclusions on what characteristics countries should have got to become home and web host to foreign direct investment. These results are interesting since the goal of my thesis is to discover what characteristics of global places can ensure MNCs to find their head office in this particular city. These country characteristics aren't a similar as the global city characteristics, but they can definitely help us to form an image of what characteristics draw in MNCs. We will list Markusen's 10 country characteristics below.
1) The high-income developed countries aren't only the major way to obtain direct investment, also, they are the major recipients. Most immediate investment seems to be horizontal.
2) There has been a major growth of immediate investment into the growing countries in the 1990s, but almost all of it has gone to the more complex LDCs and to China. Little would go to minimal developed countries.
3) Immediate investment stocks have become significantly faster than trade moves during the last 2 decades, even though trade barriers have fallen substantially.
4) High volumes of direct assets are associated with similarities among countries in conditions of relative factor endowments and per capita incomes, not variances.
5) Point 4 notwithstanding, that part of affiliate productivity which is exported back to the parent country seems to depend on differences in factor endowments between the home and host country.
6) A high volume of outward direct investment is positively related to a country's endowment of skilled labor and insignificantly or negatively related to its physical capital endowment.
7) You can find weak evidence that direct investment is mainly motivated by tariff avoidance or measurable transfer costs.
8) You can find mixed information that tax avoidance and/or risk diversification are important motives for direct investment. Some data does claim that politics risk discourages inward investment.
9) Infrastructure, skill levels, and a minimum threshold degree of per capita income seem to be very important determinants of immediate investment.
10) There is research that agglomeration effects are important in direct investment. But it is admittedly difficult to tell apart agglomeration results from companies being attracted to the same (unobserved) site-specific resources.
Some of these conclusions have can be applied to the problem I pose in my own thesis, specifically the headquarter location selection of multinational companies. Although my research investigates the location choice in global places, some of Markusen's findings are still relevant. This applies in particular on his last five findings. Markusen's 6th finding claims a high volume of outward immediate investment is positively related to a country's endowment of skilled labor and insignificantly or negatively related to its physical capital endowment. This feature is also appropriate on global locations since MNCs can differentiate global cities predicated on this characteristic. Finding seven can even be applied on global towns since MNCs can bottom the location choice of their headquarters on measurable travel costs, since these costs differ between different global cities. To find eight, Markusen claims that tax avoidance and/or risk diversification are essential motives for immediate investment funds. These characteristics should be seen as nearly equal for all cities that are positioned in the same country. It really is thus not possible, predicated on this quality, to identify between different cities which can be found in the same country but it is possible to differentiate between locations which can be found in several countries. Regarding to Markusen's 9th finding infrastructure, skill levels and the very least threshold level of per capita income appear to be very important determinants of direct investments. They are characteristics which can alter between different global metropolitan areas, meaning that MNCs will probably choose global places which have of good infrastructure, a highly skilled labor force and in which a lowest threshold of per capita income is available. Markusen's last finding states that it's difficult to investigate whether the agglomeration results or the site-specific resources are the primary reason why MNCs are drawn to a certain location. This implies that it will be difficult to check on, whenever a MNC has chosen a certain global city, whether this choice was based on the agglomeration effects of this global city or on the site-specific resources which can be found in this global city.
Why and where do headquarters move?
In my thesis, I wish to check out the headquarter location selection of American multinational companies in global towns. In order to do my research I want to find out which factors generate MNCs to choose a certain global city as the location for their headquarters. Headquarters are according to Strauss-Kahn et al. defined as a management (administration and marketing) middle of a company. This means that neither the end result of head office nor the price tag on this output is observable. However, headquarters will be located in the places with the cheapest costs for their sort of activities (Bel and Fageda, 2008). This affirmation is confirmed by PolЁse and Sheamur (2004), they say that firms will indeed find their head office where they can maximize their contribution to income.
Strauss-Kahn in addition has found that headquarters cluster in a tiny number of metropolitan areas and they will be more agglomerated than financial activity, this means that that MNCs will probably locate their headquarters in a global city. Bel and Fageda (2008) discuss various other standard features which effect headquarters location choice. First, total costs of transmitting information are dependant on the proximity of other company units and the quality of transport services. This induces organizations to find their headquarters close to their other establishments and final demand. Second, since location choice means communication costs, firms will try to avoid other possible costs, such as congestion costs and duty payments. Third, firms try to lessen total labor costs of employees and exterior suppliers; they'll thus prefer to locate their head office in places with an extremely varied pool of skilled business services providers and skilled labor. And finally, firms will benefit from the presence of headquarters of other businesses, since their occurrence can reduce the costs of information exchanges about market conditions. Bel and Fageda (2008) talk about another feature which affects the headquarter location choice which will not concern costs, specifically the actual fact that some multinational companies choose to find their headquarters in the major business centers and/or the political capital of the home country, somewhat than in regular major places in other countries.
Strauss-Kahn has researched the determinants of the headquarter location choice of American organizations. First, we will show which determinants Strauss-Kahn has found to be the key determinants for these location decisions, later on we will discuss these determinants more specifically. Strauss-Kahn found that head office relocate to metropolitan areas wits good international airport service - with a dramatic impact, low commercial fees, low average wages, high degrees of business services, same industry specialization, and agglomeration of head office in the same sector of activity. She also found that younger and much larger (in conditions of sales) head office tend to relocate more. This also can be applied for businesses that are greater (in terms of variety of headquarters), are foreign, or are the outcome of the merger.
Bel and Fageda (2008) talk about that information exchange between metropolitan areas can be critical for the headquarters of large firms that operate on a global scale. This is actually the case because the role of head office in a organization is to organize and order activities within the firm. Because of globalization, many organizations have observed a spatial parting of headquarters from product crops. Within this context, Bel and Fageda (2008) have discovered that passenger transportation quality is a key input for handling and transmitting information successfully. This is the case since passenger transportation networks influence the costs and opportunities for face-to-face contacts between cities. Companies thus face a trade-off when separating headquarters from production vegetation, this trade-off is researched by Henderson and Ono (2005). Organizations can, on the main one hand, reduce communication costs by locating their headquarters close to the creation facilities. Alternatively, when they track down their head office in a metropolitan area, they can reap the benefits of better externalization of some services plus they can obtain information from other headquarters. Furthermore, Strauss-Kahn and Vives (2005) have used airport availability to be able to capture the costs of transmitting services to other firm units. Within their paper they conclude that whenever a city has available an air port that may be considered a tiny or large hub, this increases the possibility of head office to be found in this specific city. Their research shows that the likelihood of locating in a metropolitan area boosts significantly with the availability of international airports. Strauss-Kahn and Vives have found that, relying on possibilities ratio, the likelihood of finding in a metropolitan area increases by 40% whenever a city offers a tiny hub and increases by 90% when a city offers a huge hub. This implies that the option of airport connections has a dramatic impact on the headquarter location choice of firms and that headquarters rely intensively on airport connections to be able to maintain their relationship with plants and clients.
Bel and Fageda (2008) also denote that the grade of airport services made available from an metropolitan area is meticulously related to the geographical scope of the spots with direct airline flight, and not only to the amount of total traffic that those international airports move. We thus conclude that qualitative air port facility is a key factor in the headquarter location decision of multinational companies.
Corporate taxes are anticipated to truly have a negative influence on a location's attractiveness. Organizations will be less induced to locate their head office in locations where corporate taxes are high. This is the logical result of firms minimizing the expenses associated with certain locations. Strauss-Kahn and Vives (2009) et al. have provided us with the empirical data for this affirmation. Strauss-Kahn and Vives argue that corporate taxes rate levels have a substantial impact on the choice of location of headquarters. However, since corporate and business tax rates differ more across parts than across urban centers within regions, the importance of the feature decreases when we compare urban centers which are located in the same region. Corporate and business taxes thus effect headquarter location choice significantly when you compare global cities which can be situated in different countries or regions but corporate fees lose their impact on headquarter location choice when you compare global cities which can be located in the same country or region.
Intuitively we'd suppose that higher average salary in a certain urban area would reduce the possibility of companies locating their headquarters in this location. This makes sense when you take into account the fact that companies try to minimize costs when choosing a headquarter location. Strauss-Kahn and Vives (2009) et al. declare that, when by using a population-nested model, a 10% upsurge in the average wage decreases the probability of choosing the metropolitan area by 25%.
High average wages may however also point out a higher option of services and qualified labor, and this location feature has a confident effect on the attractiveness of any urban area. Indeed, as explained by Markusen (1998), headquarters of multinational organizations face high needs of high-skilled labor makes. This "hidden" feature of higher salary in addition has been detected by Strauss-Kahn and Vives (2009). They have got found wages to have a positive affect on the appeal of cities in some of the specifications plus they have attributed this finding to the presence of experienced labor. Notwithstanding this finding, Strauss-Kahn and Vives still suppose high average salary to truly have a negative impact on the elegance of an urban area.
Levels of financial business services
According to Strauss-Kahn and Vives, both levels of relative availability of financial and business services have significant results on headquarter location choice. Their research implies that a 10% increase in the way of measuring business services escalates the possibility of choosing a location by around 5%, this strategy however does not have a significant influence when locating creation headquarters. The way of measuring business services on the other hands remains it significant impact when regarding production headquarters. Strauss-Kahn and Vives have found that a 10% increase in the measure of business services expertise increases the probability of choosing a spot by 7-13. 5%.
Presence of other headquarters
Strauss-Kahn and Vives reveal that the number of head office and the matter of head office of the same SIC industry are always significant and always have a positive influence on the attractiveness of an city. They have found that an increase of 10% in the number of head office from the same SIC industry escalates the possibility of choosing a city by 6. 7%. When the number of headquarters of your SIC different than their own increases by 10%, the likelihood of choosing that city only heightens by 2. 6%. This indicates that the occurrence of other head office in a city influences the attractiveness of the city positively, but it's important to denote that effect is much bigger for the presence of the same SIC industry.
Strauss-Kahn and Vives (2009) have found that the distance between a firm's original headquarter location and the possible new location is only a significant varying in their population-nested model. The price implied by this variable is the price tag on transmitting headquarters' services. The reason why this variable is only significant in their population-nested model is that this cost varies a lot more between cities who are located in different locations than between towns found in the same region. Because of this this variable loses its significance in the region-nested model.
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