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January 15, 2019

Quest for Talent Motivates Tech Titans to Look Beyond Traditional West Coast Bases

Corporate relocations are not new, nor are they all driven by the same reasons. In the past, decisions ranged from a desire to be near a key customer, the need to tap into a specialized or cheaper labor force, as well as search for a more business-friendly environment. While many of those same factors may motivate today’s moves, there’s a new wrinkle emerging. To sustain growth and attract the best talent, companies are diversifying their geographic bases of operations and building a presence near the country's financial and political centers of power.

Recent high profile expansions or headquarters moves include such Tech Titans as Amazon, Apple, Google, and Salesforce.com, all of which highlight the shift by technology firms to markets outside their traditional bases on the West Coast. Amazon selected two sites for its HQ2, one in New York and a location in northern Virginia near Washington, D.C. Apple plans to build a $1 billion facility in Austin, TX. Google plans to spend $1 billion on a New York campus. Salesforce.com took Verizon Communications' former headquarters in mid-Manhattan.

Fueling growth and innovation is the goal of development of this strategy by these highly successful firms. To be sure, the moves should be viewed as more of an expansion, rather than an exodus. But, whether those approaches play out as planned or not, it will take years, if not decades, to realize the results. In the meantime, there are a host of additional considerations to factor in, including costs, economic development incentive packages being offered, as well as the long-term growth prospects.

The search for a lower-cost market is always among the site selection factors, although the high costs of the traditional tech markets of the San Francisco Bay Area, or even in Seattle, are not necessarily the culprit driving these same companies away. Experts like the University of California at Berkeley’s Richard Walker point out that costs themselves are driven by the demand to be in those metropolitan areas.

The enormous effort to land a prized tech firm is propelled in part by civic leaders’ visions of regional economic growth that are expected to follow one of these titan’s decision to expand into a market. Cities hungrily roll out the red carpet, touting their advantages and benefits over other markets, and the carrots weren’t small potatoes. Amazon stands to receive as much as $2.2 billion in incentives from New York and Virginia.

However, the ulterior motive behind the scenes of a major expansion has more to do with prestige and bragging rights. Experts say the race is on to become the nation's second-biggest technology hub behind Silicon Valley. Contenders already include Seattle, the Boston area, Denver and Austin, while New York is on its way to making the top tier.

That race to become the next Silicon Valley will be won on the new ideas people dream up in new markets. That is one reason economists note talent is at the top of the list of things tech companies are looking for when deciding where to locate and expand their operations. The depth of tech talent was a big reason Washington, D.C. and New York were selected for Amazon’s HQ2. A more millennial-friendly urban location is viewed as rich recruiting ground for top talent by tech companies.

That’s also a reason venture capital funding of start-ups has soared in New York. Total venture capital investment in New York City jumped 28% to $2.97 billion in the June 2018 quarter. Tech giants believe new and innovative ideas are likely to emerge from these dynamic markets. And, they know the chance to identify, invest in or buy a rising tech start-up early increases as a result of being physically close to them.

Still, the Bay Area and Seattle hold a spot near and dear to industry giants, and that dominant position is not expected to abate anytime soon. In fact, Apple, Facebook, Google, Salesforce.com and Amazon have all made significant investments and expansions in their respective Bay Area and Seattle home bases. Not only does the established talent and educational infrastructure abound in those markets, so too do many of the higher-paying jobs.

A key trend to be watching is the emergence of superstar cities. Economists note firms tend to cluster around talent. In turn, talent is attracted to those firms. That becomes a self-reinforcing trend of increasingly richer and costlier metro areas that are economically dominant over the rest of the country. Some Federal Reserve governors even worry that geographic inequality is forming with “haves and have nots.” They believe the growing divide between urban and rural areas is creating a new inner city in rural America that threatens U.S. growth.

Whether that plays out or not remains to be seen. What is clear is that the quest to capture additional growth currents is being hotly pursued by today’s tech titans. That translates into significant expansions across new markets where those companies can leverage powerful financial and political infrastructures. It also will likely open doors to the brightest minds and innovative ideas that sustain their growth into the coming decades.