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Commentary By Aaron M. Renn

5 Lessons From the Amazon HQ2 Frenzy

Most places were never going to land the company’s next headquarters. But there are still some key takeaways for them.

The epic feeding frenzy set off by Amazon’s search for a second headquarters has been unprecedented, not just among the cities and regions bidding for the prize, but also among journalists and analysts covering the event. I have not been immune. After all, it’s hard to imagine another offering on the scale of Amazon’s. But the online retailer’s play wasn’t the first big economic development competition, and it won’t be the last. There always will be plenty of lesser but still significant opportunities for cities, regions and states to compete against one another. Once Amazon makes its choice, the world of economic development will move on. Still, there are some important lessons one can take away from this process.

First, tax incentives and other giveaways are here to stay. Many people have decried the immense public subsidies that communities and regions have offered to Amazon. I personally signed an open letter organized by urbanist Richard Florida calling on cities to forgo subsidies. But let’s be realistic: For deals like this, it’s essentially impossible for cities and states to resist. It’s like being caught in the prisoner’s dilemma, when two parties acting in their own self-interest take actions that result in a negative outcome for both.

“Tech is unlikely to be a mass-scale employer in the vast majority of places. Cities that pin too much hope on the technology business are likely to be disappointed.”

Second, talent is still king. Amazon’s selection of 20 finalists was heavily driven by where the company believed it could readily find the talent it needs to fill 50,000 high-paying white-collar jobs. This includes huge cities with large labor forces, but also smaller cities that have been developing the kind of talent Amazon might want to hire. This is most evident in the Midwest, which despite being slower-growing overall had four finalist cities: Chicago, Columbus, Indianapolis and Pittsburgh. The last three were among the top cities in the region for growth since 2000 among people ages 25-34 with college degrees. Detroit, despite being bigger than all three, didn’t make the cut because of the talent factor. Since 2000, Detroit ranked last in Midwest growth for young adults with college degrees.

Third, only a limited number of cities will win big in tech. There were 238 entrants for Amazon’s HQ2. But even if the company ends up putting facilities in multiple cities -- a definite possibility as it is already expanding in places like Boston and New York -- most of the finalists are going to end up as losers in this competition. In that respect, it’s metaphoric of the tech industry in general. Software-based platforms like Facebook and Google have very high fixed costs but very low marginal costs -- the expense of producing each additional unit of a product or service. This makes them hyper-efficient as they scale up. Network effects on these platforms can also promote a winner-takes-all outcome: People are on Facebook because their families and friends are on it. This means a relatively small number of firms dominate in many categories. Amazon itself is an example of this, though it is much more of a physical business than these others. This means that by nature the major headquarters will be located in a limited number of cities.

That doesn’t keep lots of cities from aspiring to create a high-tech hub. Realistically, most of them are not going to be a major player. That doesn’t mean it’s not worth pursuing the tech business or trying to build something of a local tech community. But tech is unlikely to be a mass-scale employer in the vast majority of places. Cities that pin too much hope on the technology business are likely to be disappointed.

Fourth, mature corporations are becoming the drivers of tech. The image of a tech company may be as a startup in a garage, but gigantic, mature technology firms like Apple, Facebook and Google increasingly dominate today’s Silicon Valley. Salesforce, whose market capitalization hit $90 billion this spring, is building the tallest skyscraper in San Francisco.

It’s not that cities outside Silicon Valley won’t benefit from tech growth. The tech industry is swelling with new jobs in New York City, for example, but the major employers are in most cases established big names. Facebook employs 5,000 there and is growing. Google already owns one building in New York and employs 6,000 people. It just bought another building, Chelsea Market, for $2.4 billion. And even before the HQ2 bidding got underway, Amazon announced that it was hiring 2,000 people in New York.

So for cities desiring to grow employment in the tech sector, convincing these companies to open offices in them may be increasing in importance relative to traditional new startups, though the latter remain critical. In this light, the HQ2 competition may be a preview of coming attractions.

And finally, don’t get too focused on the huge, sexy deals. It’s understandable why cities and states went hog wild over HQ2. But most of the growth in a local economy is going to come from existing businesses. Places need to put the same effort into growing the companies they already have that they do into luring companies from elsewhere. They also need to do what they can to grow new local startups, and not just in the tech sector. There’s no substitute for doing the hard work of starting and scaling up locally based companies.

This piece originally appeared in Governing


Aaron M. Renn is a senior fellow at the Manhattan Institute and contributing editor at City Journal. Follow him on Twitter here.

This piece originally appeared in Governing