The Benefits of City Locations

Urban environments can substitute for internal resources in driving process innovation.

Process improvements don’t grow on trees, say three business school professors, but they might be native to cities.

Take productivity-boosting intranets, for example, the private Internet capabilities that enable companies to improve information sharing and collaboration within a company. Developing such projects often requires a substantial investment of resources, largely devoted to programming talent. One source of programmers, of course, is a company’s information technology staff, whether from the particular office or transferred from other field offices.

When talent isn’t available inside the company, however, cities may act as a substitute, the three professors found. “The primary reason is the thick labor markets inside major cities,” explains Shane Greenstein, Elinor and Wendell Hobbs Professor of Management and Strategy at Northwestern University’s Kellogg School of Management.

Greenstein, along with Chris Forman, assistant professor of IT management at Georgia Tech’s College of Management, and Avi Goldfarb, assistant professor of marketing at the University of Toronto’s Joseph L. Rotman School of Management, examined company- and office-level survey data from 1998 through 2000, from Harte-Hanks Market Intelligence’s Computer Intelligence Technology database. In all, they covered 86,879 offices of 100 or more employees, belonging to 47,966 different companies.

The 2007 working paper Understanding the Inputs Into Innovation: Do Cities Substitute for Internal Firm Resources? — in press at the Journal of Economics and Management Strategy — explains how the authors looked at rates of investment in process innovation (or at least in intranets), based on company and office programming staff and office location. Sure enough, offices in urban areas — in metropolitan statistical areas with populations over 500,000 — were 3.26 percentage points more likely to make such investments, suggesting the city’s process innovation benefits.

Further reasoning that large companies — those with multiple offices — had more resources to implement cutting-edge technologies, the authors expected to find higher rates of investment for field offices of larger companies than for single-office companies. “We were sure that the big firms move programmers around,” explains Greenstein. “They have pilot projects in one location and then re-implement them elsewhere.” The data confirmed that to be true — but only just. “It looks like single establishments in urban areas are not at much of a disadvantage. That was an interesting thing we found,” says Greenstein. “[Single-office companies] seem to be able to go to their labor markets and achieve an outcome that looks similar to the multi-establishment firms.&

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