Forbes - July 4, 2005

Issues & Ideas 

Eclipse of the City 

Around the globe, wealth used to be associated with centralization. No more.

he history of modern capitalism has been the story of great cities. By the very need to harbor goods and process information, business has tended to concentrate primarily in urban centers, from Venice and Florence in the Renaissance to early modern Antwerp, Amsterdam and London and, in this century, New York and Tokyo.

Today this long dominance by global cities may be ending. Instead of clustering increasingly in "world cities," economic power is now declustering away from the primary urban centers to a host of smaller cities as well as to the sprawling suburban periphery.

Such a notion violates the thesis held by many academic analysts like Saskia Sassen who see core cities like New York, London and Tokyo as occupying "new geographies of centrality" that provide "the strategic sites for management of the global economy." Behind these giants she identifies a secondary list of global centers, including Los Angeles, Chicago, Frankfurt, Toronto, Sydney, Paris, Miami and Hong Kong.

Yet in terms of high-end service jobs as well as headquarters, this hierarchy seems increasingly unsteady. Great cities will remain important as centers of commerce and culture, but increasingly corporations can locate their headquarters in the suburban periphery or even small towns.

The global securities industry, for example, once overwhelmingly concentrated in the financial districts of London and New York, gradually has shifted an ever larger share of operations to their respective suburban rings, to smaller cities and overseas. Even when the headquarters remains in or near the traditional central core, much of the work has been moved elsewhere. This can be confirmed in various sectors by looking at office vacancy and rental-rate data.

In the future increased telecommuting from home threatens to reduce even further the roles once played exclusively by primary urban regions and to boost even greater deconcentration. The evolution of a home-centered economy, in its infancy today, promises elite knowledge workers—and companies—an unprecedented latitude in choosing where they live and work.

Although increasingly a worldwide phenomenon, this declustering of corporate functions seems most evident in the U.S. and its predominant global city, New York.

Built around one of the world's great natural harbors and ideally situated for dense, high-rise office buildings, New York has enjoyed an economic and cultural preeminence arguably unprecedented in world history. In the 1940s the journalist A.H. Raskin remarked that "in a single afternoon in a single Manhattan skyscraper," decisions would be made that would determine what movies would be played in South Africa, whether children in a New Mexico mining town would have a school or how much Brazilian coffee growers would receive for their crop.

This confluence of finance, manufacturing, trade and high-end business services made New York the natural point of concentration for large multinational corporations. By 1967 the city was home to 137 of the 500 largest firms in the U.S. Chicago, with the second-largest concentration, had 38.

Yet even at that time this clustering of corporate power in New York, Chicago and other cities was beginning to be undermined by three forces: the shift in the global industrial structure, a growing emphasis on cost competitiveness and, perhaps most importantly, the technological revolution.

First came the decline of American manufacturing. Cities such as Pittsburgh, St. Louis, Philadelphia, Cleveland and Baltimore lost much of their global relevance. The decline also affected New York and Chicago, which, as financiers and corporate centers for American-based industry, now saw many prime decision-making functions shift to business centers in both Asia and Europe.

Secondly, the cost pressure on companies operating on a global basis began to force companies to place operations—including headquarters—in lower-cost, less densely populated, more family-friendly locales and places where most technical or managerial talent is now concentrated. In 1969 only 11% of America's largest companies were headquartered in the suburbs; a quarter-century later roughly half had migrated to the periphery.

Suburbs, not central cities, are home to world powers such as Microsoft, Intel, IBM and Amgen. In historic terms the gains of Redmond, Washington; Santa Clara, California; Westchester County, New York and Thousand Oaks, California are the losses of Seattle, San Francisco, New York and Los Angeles.

Thirdly, the rise of telecommunications networks and discount air carriers allowed for even the most global of players to operate from smaller towns, from increasingly distant suburban locations. Warren Buffett, arguably America's most important investor, operates from out-of-the-way Omaha, Nebraska. The largest retail firm in the world—Wal-Mart—is based in the cosmopolitan center of Bentonville, Arkansas.

In the process, the landscape of corporate power in America has shifted with remarkable speed. By 2005 the percentage of the largest firms headquartered in the primary corporate cities of New York and Chicago had shrunk to barely 10%, one-third its level of 40 years earlier.

The beneficiaries for the most part have been fast-growing, lower-cost, highly suburbanized cities—Atlanta, Orlando, Charlotte, Houston, Dallas and San Antonio—situated largely in the south. By 2003 that region, long a backwater in the corporate world, boasted the largest concentration of Forbes 500 companies measured by sales, profits, and assets.

Similarly, the very functions that corporate leaders depend on—professional, business and financial services--were also shifting to peripheral locations. New York, which once dominated the securities industry, has seen its share of jobs drop from nearly 40% to less than 25% over the past decade, a process further accelerated by the events of 9/11. The subsequent recovery in the region has been centered not in Manhattan but on the periphery, notably New Jersey and the hedge-fund precincts of Connecticut.

Similarly, since 2000 the traditional corporate centers like Chicago, Boston and San Francisco have suffered massive, double-digit losses in business and professional services jobs. Big gainers have included such places as Fort Lauderdale, Sarasota and Fort Meyers in Florida, mountain boomtowns Reno and Boise, as well as several suburban areas, including Dutchess County, New York.

"Global cities" advocates note that, in many cases, the highest-wage jobs still concentrate in the primary city cores even as their overall job numbers stagnate and populations drop. Yet over time talent has tended to disperse and urban amenities spread to the second- and even third-tier locales. "These places now have more to offer," Brookings Institution demographer William Frey notes. "After all, the Starbucks culture is now coast-to-coast. They get satellite TV, read good books and can go to good restaurants in all kinds of places."

These patterns of deconcentration can be seen around the world. After 1960 central London--the primary global city in greater Europe—began to lose population while the overall region, particularly the outer fringes, experienced considerable growth. As H.G. Wells had predicted a century earlier, much of southern and even central England was rapidly becoming a vast, dispersed suburb, including once distant rural areas such as Kent and Cornwall.

Similar patterns could be seen in western Europe's cities, despite powerful regulatory biases against suburban growth and low rates of population growth. In the 1980s populations in such cities as Madrid and Dusseldorf fell, even as the outer ring expanded dramatically. Between 1970 and 1997 Frankfurt, the German financial center, saw its core population drop, while the less densely populated suburban periphery, now extending to as much as 50 to 80 kilometers away, expanded dramatically. Employment followed, dropping in the city while growing in surrounding areas. Hamburg experienced a similar pattern.

The lack of a pressing need to concentrate corporate centers can be seen in the failure of Berlin to emerge, as widely hoped, as a major European business capital. Once known as "Chicago on the Spree," the German capital is today best known as a trendy bohemian tourist spot. Meanwhile, major European companies like Bertelsmann, Phillips and Volkswagen all operate out of small towns or second-tier cities.

Even Paris, long the bastion of chic urban centralization, has experienced an outward movement, particularly in high-tech and in some business services. Throughout the last decades of the 20th century, middle-class families, and, increasingly, jobs, headed out of the core city for the grand couronne far outside the capital, skipping over the poorer, heavily immigrant suburbs closer to the center.

Further European declustering may be in the offing, with improved telecommunications, lower cost of living and less regulated markets strengthening the hand of other locations. For example, Leeds' financial industry has been growing far above the U.K. national average—up nearly 40% over the past decade—and seems positioned for further expansion.

Recent developments on the Continent, particularly the entrance of eastern European countries into the EU, could spur even more deconcentration. Greater investment in places like Hungary, the Czech Republic and Slovakia by American, Japanese as well as European multinationals suggests a potential shift away from the traditional "global cities."

Even in highly centralized Japan, software, call centers and other technology-centered activities have begun to move away from the great centers of Osaka and Tokyo, both of which have been losing population over the past decade. In the same way, Hong Kong has hemorrhaged both high-tech manufacturing and engineering positions to surrounding, less densely populated parts of mainland China.

Perhaps most critical to the future of world cities are emerging trends in the developing world. In the past size almost always dictated which cities would become the dominant business capital.

But today the very girth of the most populous megacities—Mexico City, Cairo, Lagos, Kolkata, São Paulo—increasingly appear more as a burden than an advantage. In India, for example, much of the technology-related growth has gone to smaller, better-managed and less socially beleaguered settlements, such as Bangalore and Jaipur, or to the rising suburban developments ringing Mumbai and New Delhi.

In east Asia, the critical nursery of 21st-century urbanism, relatively small-scale cities like Singapore and, to a lesser extent, Kuala Lumpur, have integrated themselves into the global economy more successfully than far more populous Bangkok, Jakarta and Manila.

The same phenomena can be seen in Latin America. Mexico City's bloated size, as one observer noted, has "robbed" the city "of its economic logic." Burdened by crime, congestion and pollution, La Capital is often bypassed by entrepreneurs and ambitious workers for faster-growing, better-run cities such as Chilango, Guadalajara and Monterrey or across the border, to urban areas of el norte itself.

In the Near East, megacities like Cairo and Tehran have suffered to keep pace with their exploding populations, while smaller, more compact centers such as Dubai and Abu Dhabi have flourished. Dubai, a dusty settlement of 25,000 in 1948, saw its population approach 1 million 50 years later, while avoiding the economic stagnation that has haunted most of the Arab world.

As in Dubai, cosmopolitan attitudes and the accumulation of unique skills continue to have a major impact in determining successful cities. Similarly, in the 21st century, a small cosmopolitan city such as Luxembourg, Singapore or Tel Aviv can often wield more economic influence than a sprawling mega-giant of 10 million or even 15 million people.

In the global configuration of the 21st century, cities, to be successful, will need to compete with an ever-growing number of geographies, from suburbs to small towns to new cities in a host of locations. Most likely to thrive are those places, regardless of size, that offer the best quality of life and value for companies, individuals and industries.

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