What do businesses consider when choosing a location for their HQ? The scope of HQs varies and continues to change, 81 but a range of themes that affect corporate decision-making on location can be identified in the existing research literature. This chapter surveys this literature and the recent Amazon HQ2 case study, combining insights from these with the findings of our interviews to posit 20 “pillars” of city competitiveness.
Existing research has highlighted a number of factors as influential in HQ location decisions. Access to capital markets, favourable legal and regulatory regimes, 82 proximity to customers, and the role of agglomeration economies (i.e. the geographic clustering of industries and firms which serve to facilitate business) have all been cited as influencing where firms choose to locate. 83 The “connectivity” of a global city (which includes everything that can facilitate the effective flow of people, services and knowledge) has also been shown to influence HQ location decisions, particularly for businesses in knowledgeintensive industries. 84 Other factors such as language, time zone, regulatory and business environment, and simple geography can affect the ease of operation in a particular location. “Softer” factors such as culture, nightlife, a strong education system and other lifestyle offerings also play a part. 85
The latter factors are important not so much in themselves but in their ability to attract and retain talented people. Indeed, interviews undertaken for this report indicate that – while all the factors mentioned in the preceding paragraph are relevant – access to talent (and the infrastructure that supports it) is the pre-eminent consideration for HQ investments.
This is reflected in the US example of Amazon’s monumental HQ2 project and the associated bidding war. The HQ2 competition involved North American cities offering Amazon large-scale incentives to invest – something that London is neither able nor inclined to do. However, with the HQ location decision-making process typically shrouded in secrecy, the Amazon example provides a fascinating insight into what companies want from an HQ location, as well as what they claim to be bringing to the table when they invest. This case study reveals the extent to which access to a skilled workforce has become the single most important factor in HQ location decisions – with fiscal and cash incentives playing a surprisingly less important role, despite their prominence in media debate.
HQ2: A case study in HQ location decision-making
In late 2017, Amazon announced its intention to open a second corporate headquarters, succinctly monikered “HQ2”. This new HQ was to be in a metropolitan area somewhere in North America, complementing Amazon’s existing HQ in Seattle. Amazon claimed that HQ2 was expected to employ 50,000 full-time staff, paid an average of $100,000, and involve $5 billion in capital expenditure. 86 To decide where HQ2 would be located, Amazon issued a “Request for Proposals” to cities across North America.
The subsequent bidding war pitted city against city. City and state governments offered competing packages of tax and other financial incentives, while showcasing other assets. Bids from Crystal City (Arlington, Virginia) and Long Island City (Queens, New York) were eventually selected for two new “HQ2s”. Despite the support of city and state leaders, however, local opposition to the New York project emerged – relating to fears of gentrification, upward pressure on housing costs, and opposition to the level of state subsidy being offered. The company subsequently abandoned its New York plans and settled for Crystal City alone (subsequently renamed “National Landing”). 87
The whole process demonstrated how keen city leaders across North America were to attract a large corporate HQ to their particular metropolis. Amazon’s “Request for Proposals” document also provides a useful reference outlining the factors that make a potential HQ location attractive to a large MNC (a summary of the relevant section is included in Appendix 2 of this report). But Amazon’s final decision also tells us something about which factors are most important in influencing HQ decisions.
Importantly, the locations originally chosen for the two HQ2 projects mentioned above were not those offering the highest financial incentives. Between the two sites, Amazon was set to receive “performance-based direct incentives” of varying kinds (including cash grants and tax credits from local and state government) amounting to more than $2 billion. However, an unsuccessful bid from Maryland was reported to be worth as much as $7.5 billion more than Virginia’s winning offer. 88 This certainly suggests that non-fiscal factors were more influential in the decision-making process.
Amazon expressed a clear preference for metropolitan locations. But it appears that the primary driver in making this HQ location decision was access to the right people, rather than place in itself. Transport and other connectivity infrastructure was also important, in order to connect people within and between cities – workers, investors, suppliers and partners. As Amazon Founder and CEO Jeff Bezos said when announcing plans for the initial double-location HQ2: “These two locations will allow us to attract world class talent that will help us to continue inventing for customers for years to come.” 89
Underrated factor: People
Economist Alfred Marshall first identified the benefits to businesses of “agglomeration economies” over 100 years ago. Marshall identified three main benefits that occurred when businesses clustered together in close physical proximity: shared supplier linkages, a shared labour pool, and knowledge spillovers. 90 In 1997, Economist Frances Cairncross predicted that technological change and the “communication revolution” would bring about the “death of distance”. However, whilst communications technology advances have made instant audiovisual communication across borders possible, this has not led to the decline of the role of place in HQ decision-making. Ultimately, the role of physical proximity has not ceased to matter to businesses, but has instead changed in nature. 91
The tendency towards business clustering has become increasingly about access to a shared pool of skilled workers and knowledge spillovers, rather than proximity to suppliers and customers. Academic studies indicate that this is particularly true of the service sector, 92 the importance of which to London’s economy is well documented: in 2013, 77 per cent of London’s exports were in services, with the value of services to London’s economy doubling since 2003. 93
Interviews for this report with “brokers” – those who advise companies on HQ location decisions – revealed the widespread assessment that access to talent is the number one factor in picking an HQ location. Finding a location that appeals to a modern, skilled and ultimately mobile workforce is therefore essential. As one consultant observed: “HQ decisions are probably 90 per cent about people”. 94 This can affect the choice of city or country for an HQ location, but is also reflected in moves away from suburban or business park locations and into city centres.
The level of infrastructure, cost of living and quality of life in a city (or surrounding city region) directly influence the extent to which businesses can attract and retain the largest possible pool of skilled workers, and are therefore also important. Openness to immigration, in terms of both regulations and attitudes, is another related factor.
Overrated factor: Taxation and incentives
Media discussion of HQ location decisions often focuses on taxation and business regulation. These issues are often perceived to be a significant – if not the single most important – factor in HQ relocation decisions, even if their impact is downplayed by companies themselves (who are often understandably keen to resist the perception that they are moving their HQ in order to minimise or avoid taxation). 95, 96
Research has also found that whilst global HQ relocations are relatively rare overall, the main “push” factor when they do occur is often a major shift in fiscal policy or the regulatory environment. 97 However, while Brexit may free the UK from EU competition and state aid rules, tax consultants interviewed for this report described the UK’s tax system as too “mature” to be likely to see radical change. Ultimately, it is important to remember that taxation is rarely the single most important factor in choosing a location, except in exceptional circumstances: “Don’t let the tax tail wag the dog”. 98
In fact, it appears that certainty over taxation and the regulatory and business climate is a bigger “pull” factor in HQ location decisions than the level of taxation or subsidy on offer. Another management consultant observed that stability in the tax system had been “a key differentiating point for the UK until the last few years”. 98 The ability to plan around a predictable and stable system is a clear asset for any business looking to invest in a particular nation – and especially so when looking at HQ investments. Sudden change can render a location unappealing, leading to relocations in the most extreme cases (as outlined above); and as some of the case studies outlined in the introduction illustrate, the uncertainty about future tax treatment has presented a problem for some overseas firms in London. However, these rules of the game have to change quite significantly to necessitate a move.
20 “pillars” of city competitiveness
In discussions about the relative weight of factors in HQ location decisions, access to talent has been underemphasised, and regulatory elements perhaps overemphasised. However, a wide range of other considerations clearly also comes into play. Many of these additional factors are interrelated, serving to attract both talented people and the HQs that employ them. Some are more important than others, but all warrant consideration.
Informed by a review of the available literature, as well as our interviews with HQ advisers and decision makers across a range of sectors, Centre for London has identified a set of 20 “pillars” that support London’s position – and therefore, presumably, other rival cities’ positions – as a globally competitive location for FDI (and for head offices in particular). The next chapter evaluates how well London is performing on some of these measures, but the list and diagram below establishes a framework for comparing cities’ attractiveness as HQ locations. 100
The factors fall into three overlapping categories:
- Historic factors are long-term assets, and often beyond the control of policymakers.
- Business climate relates to all factors making the location attractive to business in a wider sense.
- Talent includes all factors related to attracting and enabling as large, diverse and skilled a talent pool as possible to access the HQ.
The degree of importance of each of these pillars may vary, and as the diagram demonstrates, many are interrelated. But the more of these factors a city can perform strongly in, the better its chance of becoming a successful HQ city.
Inertia: a caveat
Whilst the above factors are clearly important in influencing HQ decisions, it is also worth noting how statistically rare full global HQ relocations are. Even multinational corporations exhibit a bias towards keeping major operations such as head offices in the location in which they began operating, or grew significantly. Property consultants interviewed for this report noted that the process of helping companies find a location for their HQ, whether new or relocating, normally began with using data analysis to find “somewhere that inconveniences the minimum amount of staff”. The preferred location of most senior executives, and particularly the CEO, is often felt to be more influential than any neutral analysis of the relative merits of different cities in different nations. In most business location decisions – albeit not necessarily for head offices – “the average move in the UK is about a mile”. 94
Much of this reluctance to change location relates to the fact that “despite the increased mobility of the workforce, actually relatively few people tend to be willing and able to relocate with a company to a different city or country” 97 Research also suggests that the global workforce is becoming less willing to relocate to another country to work. According to Boston Consulting Group’s survey of workers in 197 countries around the world, the percentage of workers expressing willingness to move overseas declined from 64 per cent in 2014 to 57 per cent by 2018. 103
Political instability, the rise of populism, shifts in geopolitical power and the rise of emerging economies all appear to have played a part in making a supposedly more mobile global workforce less willing to relocate. However, the Boston Consulting Group survey also found that, whilst the UK has fallen in attractiveness as a whole, London remains the most attractive city in the world to move to. The next chapter investigates how London is currently perceived as a business centre, and looks at some of the risks to London’s status. 104