The Magnetic Power of Global Cities

Who says location doesn't matter in the age of globalization? Here's why strong brand-based firms gravitate to global cities and IP-based firms stay away

The essentials

To multinationals exploring where to locate a branch operation, global cities hold three trump cards: global interconnectedness, cosmopolitanism, and abundance of advanced producer services. Not merely centres of high population (like “mega-cities”), global cities are the most open markets for foreign firms because they reduce the “liability of foreignness,”  says Anthony Goerzen, Donald R. Sobey Professor of International Business at Queen’s School of Business. 

Based on his research with colleagues Christian Asmussen (Copenhagen Business School) and Bo Nielsen (University of Technology, Australia), Goerzen says firms that trade on their strong brand assets are particularly drawn to global cities. By contrast, technology-focused firms that aim to leverage their intellectual property tend to locate outside global cities.

In conversation with QSB Insight, Goerzen discusses the implications for multinational managers, government policy makers, and economic development officials.

Globalization accelerated the importance of global cities 

What distinguishes global cities from mega-cities are a number of markers, including certain kinds of infrastructure and connectivity. Infrastructure is relevant to business in that it has to do with the quality and cost of transportation from that location, whether it’s voice, data, products, or people. As well, it offers quality of life that attracts managerial talent. Global cities have certain qualities that make them different from the rest. 

One of the early ideas in the analysis of globalization was that it would homogenize our economies because it wouldn’t matter where you were located. Years ago, there was discussion about telecommuting, offices becoming obsolete, and the “death of distance.” The technologies that we were expecting to have a bearing on this have, in fact, become better, cheaper, and more available to all. But when you look at the location of economic activity over time, you see that it’s concentrated; that is, businesses locate in certain places and less so in others. As globalization becomes more prevalent, we used to expect those concentrations to diminish, if not to disappear. In fact, we’re finding that location is  becoming even more important than it has in the past. The early notion that location doesn’t matter simply doesn’t hold. In fact, it matters even more now.

 

Global cities trade on their lack of foreignness

For multinationals, foreignness is a liability. Being an outsider usually creates additional costs because firms need to find ways to bridge the gap or buy information, expertise, or advice. Costs are higher at the outset, so managers have to find ways to mitigate those costs or create value in such a way that they can afford the cost of the liability of foreignness. Global cities are among the most open markets for foreign firms, which is a key attractor to these locations. The liability of foreignness is inherently lower in these cities. 

 

Brand-based firms favour the "spill-in" effect of global cities

From a managerial perspective, what are the benefits and costs of locating in global cities? Firms that have strong brand assets, where the value they create has to with managing and trading on their brand, can derive significant benefits from locating in global cities. In these places, they are able to access and influence opinion or fashion leaders. These firms will often release products in global cities to generate buzz, with the expectation that brand awareness washes outwards. Many cutting-edge ideas around markets and consumer behaviour circulate on the street in global cities. 

At the same time, firms that trade more on their technical assets and their ability to create intellectual property (IP) don’t seem to benefit from being located in global cities. We believe that many of these organizations at the cutting edge of IP development are more concerned about the spill-out of their ideas to competitors — commercializing their ideas — than spill-in of ideas from the street to the firm. The prospect of being located in an environment of high-velocity information flow is unattractive to them. In contrast, firms with strong brand assets are interested in spill-in; hearing what people are saying and making better decisions as a result. 

 

Policy implications for governments and economic development officers

As economic activity tends to aggregate in fewer locations, the ripple effect starts to draw investment, jobs, and all the associated things — good and bad — to global cities. It also makes other locations wither. 

This should cause city leaders to focus on the kinds of organizations that would be attracted to their particular cities’ attributes. Cities may be like bird feeders in that certain types of birds are attracted to certain types of feeders: if you want finches, for example, you put out millet, and if you want blue jays, put out sunflower seeds. In other words, policy makers and economic developers should become more aware of who they are and what is attractive and not attractive about their location. 

For smaller communities that surround global cities, like Kingston to Montreal and Toronto, how should they go about presenting themselves to the investment community? If we can identify the kinds of organizations that are attracted to Montreal or Toronto, what does that mean for us? 

The other conclusion is that multinationals seem to focus on the city level — not Canada or even Ontario but rather Toronto. That tells you who should be involved in those types of investment discussions and in creating economic development plans. Should it be Canada, Ontario, or the city? Where should resources be allocated to develop the plans and do the recruiting? 

 

Are global cities disconnecting from their home countries?

One question we’re starting to look at has to do with connectivity among global cities. It’s important for a number of reasons. One is that when you start to identify the international patterns of multinational location, you see that the global city economy is disconnecting, in a way, from domestic economies. This is being reinforced by investment that is connecting these special places. And another is that if we uncover patterns in which multinational organizations are starting to locate in places connected to each other but not to the local environment, that creates a system of investment and management of these organizations that is completely different from what we’ve seen in the past.

Interview by Alan Morantz

Smith School of Business

Goodes Hall, Queen's University
Kingston, Ontario
Canada K7L 3N6

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