Productivity, Location and Growth in the Service and Manufacturing Sectors

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Business service and headquarters activities locate disproportionately in the largest metro areas, while manufacturing is found disproportionately in smaller towns and cities. The question is why; and, hence, what is the role of large metro areas versus small and medium size cities in the USA. To start to understand the forces at work, this project examines local growth patterns, productivity, and out-sourcing decisions in the service and headquarter sectors. For the case of headquarters, by locating in the largest metro areas, headquarters separate themselves from their production facilities, creating significant internal company face-to-face communication costs. To what extent do they choose to be in these metro areas to take advantage of the diversity of local intermediate service inputs such as advertising, legal, and financial services found there, as opposed to gather information about innovations, export markets, financing, and the like through local information spillovers from, say, other headquarters? Similarly, why are business services located in the largest and most expensive metro areas? To what extent is it local scale economies within the service sector, versus upstream and downstream linkages within the service sector, versus linkages to sectors using services (e.g., headquarters) where those sectors may experience high own sector scale economies? The first two sections of the project examine these issues through a detailed analysis of city growth of headquarters and service industries, out-sourcing decisions, and productivity of headquarters and service sector firms. One issue is that for headquarters, there is no direct output measure, so productivity benefits must be measured through their effects on wages and rents. Another issue concerns the role of firm structure and the relationship between operating units and their headquarters in determining out-sourcing decisions. The last section of the project looks at the determinants of industry mobility across cities and compares mobility for service versus manufacturing sector industries, an issue for cities in planning and competing for industries. Manufacturing industries are highly mobile across cities, so that over the course of a couple of decades a smaller city may switch from being a textile manufacturer to specializing in electronics. Are service sector industries so footloose?