How Much Are Headquarters Worth?
Earlier this month, Mittal Steel USA announced it will locate its headquarters in downtown Chicago rather than in Northwest Indiana. Mittal USA employs 21,000 workers in 14 states. The parent company, Mittal, headquartered in London, is the largest steel maker in the world.
Mittal’s U.S. headquarters will employ only about 200 people. Even so, the company will reportedly receive $7.5 million in tax credits from the State of Illinois for job training and infrastructure, and the City of Chicago will contribute $2 million toward equipment, furniture, and fixtures. At a cost (undiscounted) of $40,000-$50,000 per job in tax incentives, why are public officials so pleased to have the Mittal headquarters?
For one reason, the Chicago area economy, along with the rest of the Midwest, is lagging the nation in this first decade of the millenium. Moreover, an intense matter of pride and branding of Chicago’s economy is at stake. The Chicago area ranks second only to the New York metro area as a headquarters city (figure 1). And, as reported by Lyssa Jenkens, chief economist of the Greater Dallas Chamber, even Sun Belt cities that are gaining headquarters admire Chicago and New York (Chicago Fed Letter). Yet, although Chicago snagged a big prize with Boeing’s move from Seattle in 2000, the city has lost other headquarters in recent years, such as Ameritech, BankOne, Quaker Oats, and Amoco.
1. Fortune 500 headquarters count 1975-2005
Such concerns may lie behind the willingness of Chicago and Illinois to court relocating headquarters with tax incentives. So too, city and state development officials believe that the “ripple” effects of the headquarters will greatly augment the economic impact of the 200 direct jobs that the headquarters will bring. Part of these expected ripple effects are based on the tendencies of headquarters operations to purchase local business services, such as accounting, legal and financial, not only for their local operations but often for their entire organization.
This idea is borne out in a recent study by Yukako Ono (2002 Working Paper). In a statistical study using the 1992 plant-level data from the 1992 Annual Survey of Manufactures, Ono examines manufacturing plants’ outsourcing of advertising, bookkeeping, accounting, and legal services, and how the degree of plant outsourcing changes with the location of their headquarters. She finds that plants rely more on headquarters if their headquarters location offers a greater supply of such business services. And so, if business services in areas of accounting, legal, and finance are cheaper or more accessible in larger cities, headquarters operations will be motivated to locate there. Indeed, the CEO of Mittal USA cited the availability of support services such as accountants and lawyers in the company’s decision to locate in Chicago.
In courting Mittal, Chicago may also be anxious to put back together the clustering of business functions that propelled its economy during the 1990s. Back then, business service employment expanded rapidly (previous blog), along with corporate and organizational headquarters. At the same time, both headquarters and business service establishments brought customers in, and sent company execs out, via booming O’Hare airport. Local business meetings and conventions added to the allure for those same customers and local execs, and Chicago’s diverse economy enhanced its reputation as a business capital city for the mid-continent and as an emerging global city.
From this perspective, the tax incentive package to Mittal appears to be thoughtful and stragetic. Still, in the aftermath of business relocations like this one, the question always lingers as to whether Mittal would have chosen Chicago anyway and paid full freight to boot. Even if Mittal had chosen Northwest Indiana in the absence of any incentive offer, it would not have greatly limited the company’s ability to purchase high-level business services from Chicago.
But apparently, Chicago is taking no chances. Tax sweeteners have become a signal to footloose firms that they are welcome, and that local government and civic organizations will partner with them in the future as the business environment changes. Chicago would like to see other headquarters follow Mittal’s lead.