Reasons for Boeing’s Relocation to Chicago

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Table of Contents

Introduction
Discussion on Boeing’s Reasons for Relocating in Relation to
Boeing’s Actual Search and its Relation to the Standard Model
Evaluating the Economic Impacts of Boeing’s Relocation on Chicago
Public Subsidies and their Influence on Boeing’s Relocation
Conclusion
References

Introduction

When Boeing considered its options of cities for relocating its headquarters in 2001, it mainly viewed three cities, namely Chicago, Denver, and Dallas-Fort Worth. Schmeltzer and Hilkevitch (2001, www. Jessejacksonjr.org)) in their now historical report in the Chicago Tribune clearly mentioned that Boeing’s Chairman Condit considered a city offering more economical transportation costs, decrease in overall cost of operations, with a gain in incentives and which would help create a growth and value-driven enterprise, as the city of choice. Obviously the company bosses wanted to improve the stock value of the enterprise. Condit was also quoted by the report as having stated his choice of a city that would be culturally diverse, provide ready access to global markets, have a strong business environment, and would also facilitate easy operations for the aeronautical major. However, it is worth examining how far classical location theory, agglomeration issues and externalities relating to the chosen location, viz Chicago, actually influenced the relocation decision of the company. The following is an attempt to do just that.

Discussion on Boeing’s Reasons for Relocating in Relation to

Classical Location Theory

Arguably the location of an enterprise’s corporate headquarters is of great significance not only to the enterprise itself, but also the state that hosts that enterprise. The earliest theories in explaining the location of firms or enterprises have origin in the economic models due to Ricardo and Adam Smith. Adam Smith viewed the firm’s location as necessitated for optimizing production. Ricardo had similar views, but in his case, the model considered comparative advantages in production that a location granted the business enterprise. Both these models thus considered production firms. But such theories were simplistic. They did not consider various market distortions like controlled wages, market monopoly, etc. A later model due to Heckscher and Ohlin (1933), also called factor endowment model, explained the location preference of production firms in places where the costs of production were lower (as per existing factor prices).

In contrast, Krugman (1979: pp. 469-479, 1980: pp. 950-959) explained the location preferences of firms on the basis of technological differences, varying economies of scale of operations, etc. Krugman stated that firms try to concentrate their production activity near their markets so that they can lessen transportation costs and gain economies of scale. Harris (1954, pp. 315-348) had even earlier stated that production firms were driven to locations where they had greater access to markets. But perhaps the most well known of the models is that by Weber (1929), who argued that firms operating in fixed markets, using existing inputs and fixed population were constrained to locate their production activity in places where the costs of transportation and production were minimal. Variation of inputs and location was later attempted and built upon Weber’s model by Moses (1958, pp. 259-272), Hoover (1937), Greenhut (1956), and Isard (1956). Location theory has mainly attempted to develop formal mathematical models to predict the optimal location of industry when transportation costs are known. It has been found that firms usually try to locate near markets or near raw material sources.

Boeing’s decision to relocate to Chicago may be examined in the light of the above theories. However, it is notable that only the headquarters and not the entire production units, shifted to Chicago. As per the statements made by the Chairman of Boeing, Mr Condit, the company hoped to have access to larger and nearer markets. The company also wanted to lessen its transportation costs and ensure economies of scale. It could also carry on its production elsewhere at the existing levels and better control the activities of the production and operating units which were dispersed spatially. Both Ohlin’s model and Krugman’s theories appear to be confirmed by the action of Boeing in such relocation of the company headquarters.

Even the theories by Harris and Weber do relate with Boeing’s selection of Chicago as the headquarter host state. Perhaps the statements of the company top bosses immediately preceding the relocation announcement are ample indication as to the objectives of the company in so relocating to Chicago, in preference to either Dallas-Ft Worth or Denver. The downtown of Chicago was vibrant and may have played an important role in the ultimate decision to relocate the company there. Additionally, Chicago was viewed as a global city, had a well laid mass transport system, had a surfeit of international air linkages, was culturally diverse and was located so as to connect by air routes with greater number of international locations than either Dallas or Denver.

The workforce was also well educated, culturally diverse, and capable of working in higher corporate positions. As Klier and Testa (2001) state in an article, very few cities like Chicago in the USA provided for such facilities as legal, advertising, financial, communications, transportation, highly skilled white-collar workforce, etc (p. 1). Elsewhere in the same article, the authors argue that “Large metropolitan areas continue to have a comparative advantage in hosting headquarters of large companies. A detailed analysis of the changing location pattern of publicly traded large companies over the last decade reveals little change in the overall share of large company headquarters domiciled in the 20 largest Metro areas. When we examine the considerable growth variation among the largest metro areas, we find that population growth—reflecting a regional shifting of markets—are important in explaining observed changes during this period. In addition, industry mix and geography seem to matter” (p. 4)

Agglomeration Issues and Other Externalities

That firms tend to cluster together in certain locations have been observed over time. Studies have also found that small firms tend to cluster together based on technological externalities, while larger firms do so based on market related externalities. While traditional location theory tried to explain the location of firms based on transportation cost considerations, firms also tended to cluster together based on external economies. Hoover (1957) observed that these external economies could be either localization economies caused by firms from the same industry clustering together in the same location, or urbanization economies caused by firms across diverse economies coming together in a single location. External economies could be due to pooling of labor, knowledge economy, etc. The external economies are what are also termed as agglomeration economies. Basically, when production firms cluster in a particular location, there are advantages in the economy of operations, and these economies in turn contribute to the cluster formation. Krugman (1991, pp. 70-71) observed that while external economies are applicable at the local level, industrial agglomeration operates at regional or national levels.

Boeing’s decision to relocate its headquarters to Chicago are obviously driven by the need to have access to larger and nearer markets, high skilled population, minimization of transportation costs, and economies of scale, as previously noted. Chicago does offer a host of advantages like its business-friendly environment, easy access to North American customers and operations, nearness to global markets, a culturally diverse population, a vibrant downtown, etc. Chicago as the centre of the North American economy also provides for ease of business traveling, offers over 145 non-stop domestic air routes, has diverse facilities and skilled populace for supporting high-end sophisticated executive functions, facilitates economical costs of doing business, and also has a vast lakefront. In addition, the hefty incentives offered by the government may have clinched the deal in favor of Chicago.

Boeing’s Actual Search and its Relation to the Standard Model

Boeing’s search for the city for housing its headquarters does relate to the classical models of location theory. The company’s major consideration appears to have been the need to minimize transportation costs of raw materials and finished products. Classical location theory hypothesizes that firms tend to locate to places where the transportation costs are minimal as also enable economies of scale. The company also attempted by means of the relocation to be near to its markets, inputs, etc. By operating from headquarters at Chicago, the company hoped to successfully control its national and international operations, minimize travel time of its chief executives, access the services of skilled population, and also assume a central position in North America that Chicago afforded it. In other words, both location theory, in its simplest form, as also the influence of external economies in a heterogeneous environment like urbanization, population, business environment, etc, that contribute to industrial agglomeration or regional development, stood substantiated by the relocation of Boeing to Chicago.

Evaluating the Economic Impacts of Boeing’s Relocation on Chicago

While the advantages in locating a firm like Boeing in Chicago played a key role in the relocation of that airline major from Seattle, it is also true that such relocation played a strong role in enhancing the business and economic value of Chicago. The most immediate result was that Boeing employed around 500 personnel, although most appeared to have been brought over from the Seattle HQ. Yet it could also be argued that Chicago gained a host of agglomeration economies by bringing in Boeing HQ to its fold. For one thing, the entry of such a major firm like Boeing meant the gain of knowledge spillovers. Boeing, in the course of its operations, had to deal with various local firms and businesses, and its highly knowledgeable and skilled personnel interacted with the personnel from these smaller local firms and businesses.

Those local personnel thus gained vital knowledge and skills. The most benefit was to law, advertising and marketing firms which began to function better with increasing exposure to the Boeing operations. Thus the economy grew in strength and made Chicago more attractive to investors and new businesses in the short and long run. Also, production costs tended to decline further, thus catalyzing inflow of further business and hence enhancing the city economic growth. The increase in private capital as contributed by continuing HQ operations, as also development of human resources could step up the growth in the local economy and also enhanced the positive global perception of the city. Added to this were the obvious welfare benefits and quality of human life brought in by major companies and their top executives.

Public Subsidies and their Influence on Boeing’s Relocation

Public subsidies and tax incentives are often offered by host countries or cities to incoming business enterprises. While governments may have their considered reasons for the same, yet it cannot be denied that the action in providing extra benefits to the company or firm has an impact on the country or city and its common people on whom the entire taxation and subsidy are ultimately incident. In case of Boeing Corporation’s relocation decision, the Chicago government offered the company a high $ 63 million tax incentive. The company was also exempted from paying property taxes on the prime property forming its local headquarters in Chicago. This worked out to a rough $ 40 million over the twenty-year period. Additionally, Boeing was to get state income-tax credits under the EDGE program (of Illinois) for as many as 15 years, and the total worth of such credits worked out to about $ 22 million in the 15 year period. Also, the company was granted a waiver from the regulatory prohibition in force in the state on exhibiting company logos on top of buildings.

The question that is sought to be addressed here is whether or not the provision of such massive tax and other subsidies by the Chicago local government as offered to Boeing played a role on the company decision to actually relocate from Seattle, where it had been set up from inception. Perhaps the answer to this can be found in the observations and comments made by Boeing top bosses like Condit. While the company executives all along attempted to keep their venture and most details a secret as much as possible, the way in which and the time within which the whole transfer operation was executed (in only 167 days), proves that intense planning was involved and also that strong lobbying went on behind the scenes between the Boeing officials, including Condit, and the Chicago government representatives like Mayor Ryan. In fact, Condit himself give his objectives for such a relocation decision away when he says during the annual address to the company shareholders while presenting the Annual Report 2001, “When the headquarters is located in proximity to a principal business-as ours had been in Seattle-the corporate center is inevitable drawn into day-to-day business operations. We don’t want to meddle. Our function is to concentrate on vision and strategy. We are focused on where we are going and how fast, how to allocate capital and resources across the corporation, how to make the best use of the Boeing brand and how best to develop our intellectual capital.” (2001, p. 5).

This statement when taken with the proposed strategic repositioning of organization top hierarchy as also the downturn in commercial aircraft industry during this period provides pointers as to what may have motivated Boeing actually to relocate to Chicago. Obviously, the company wanted to separate its administrative and production units over a geographical distance. Also, the market trends mandated it to adopt strategies for controlling costs (transportation costs, mainly), harness and develop intellectual capital and also try and succeed in giving the company a new direction, as distinct from its past. Still more obvious is the profit objective of the company which can be inferred from the statements of Conduit and others from Boeing. Thus while Chicago did offer some advantages that were absent in the case of both Dallas and Denver, it also offered a host of hefty incentive packages that could have clinched the deal in Chicago’s favor. The company wanting to maintain a lean production team and also a lean corporate office perhaps substantiates the major reasons for such relocation of the company to Chicago.

Conclusion

Boeing had relocated to Chicago from Seattle based upon the company’s changes in management strategy. The Chairman Condit wanted to make the production units autonomous as also divide the company into three distinct business operations, each lead by an independent rank equivalent to a CEO. A company always wants to minimize its operating costs and enhance its profits, and hence shareholder value. That Condit had an eye on the stock markets was pretty evident. The markets were actually close to Chicago. However, the city of Chicago offered a host of other benefits, including a knowledgeable and diverse workforce, a vibrant and business-friendly city culture, presence of major banks, communications points, air links, rail routes, etc. The city could also help the company manage its operations better. The company bosses could also save time and money in the course of their frequent travels to and from Chicago since their routine involved numerous travels and official visits to places far and near. And, additionally, perhaps, the offer of hefty subsidies and benefits from the Chicago government did clinch the issue in favor of Chicago as the global HQ of the world’s best known aeronautical company.

References

Annual Report (2001), Boeing Corporation, Chicago.

Greenhut, Melvin L. (1956), Plant location in theory and in practice, Chapel Hill: University of North Carolina Press.

Harris, C. (1954), “The market as a factor in the localization of industry in the United States”, Annals of the Association of American Geographers, pp. 315-348.

Hoover, Edgar M. (1937), Location theory and the shoe and leather industry, Cambridge, MA: Harvard University Press.

Isard, Walter. (1956), Location and space-economy, Cambridge, MA: MIT Press.

Klier, T. and Testa, W., (2001), “Headquarters wanted: Principals only need apply”, Chicago Fed Letter, The Federal Reserve Bank of Chicago, Special Issue, No. 167a, pp. 1-4.

Krugman, P. (1979), “Increasing returns, monopolistic competition and international trade”, Journal of International Economics, pp. 469-479.

Krugman, P. (1980), “Scale economies, product differentiation and pattern of trade”, American Economic Review, pp. 950-959.

Krugman, P. (1991), Geography and Trade, Cambridge, MA: MIT Press, pp. 70-71.

Moses, L. (1958), “Location and the theory of production”, Quarterly Journal of Economics, pp. 259-272.

Ohlin, B. (1933), Interregional and International Trade, Cambridge: Harvard University Press.

Schmeltzer, J., and Hilkevitch, J., (2001), “Chicago in bidding to be Boeing’s home”, Chicago Tribune, 1A, 21A.

Weber, A. (1929), Über den Standort der Industrien, Tübingen: J.C.B. Mohr [Translated from German by C. Friedrich, Theory of the Location of Industries, Chicago: University of Chicago Press].

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