The Midwesterner: A cluster grows in Chicago

By Richard C. Longworth

There's been a run of good news for Chicago recently which, apart from giving Mayor Rahm Emanuel some happy headlines, tell us something about the nature of global cities, about the shape of this new economy, and about who wins and who loses.

The stories involved the decision of three tech-heavy companies to locate in the Loop, Chicago's downtown, or in River North, the trendy area just north of the Loop. Two of the companies, like several others recently, announced they will leave the suburbs to move into the city.

Interestingly, Emanuel didn't have to bribe the companies with tax breaks and other incentives to get them to move downtown. The mayor, like other governors and mayors, has been criticised recently for using taxpayers' money to lure suburban companies into the city, a move that does nothing to increase regional employment or economic vitality.

These moves are different, more complex and more interesting.

The big one involves the smart-phone maker, Motorola Mobility, which announced it will move its headquarters and 3,000 employees from suburban Libertyville to the Merchandise Mart, the hulking old retail center on the Chicago River which is becoming a hub for tech companies. At the same time, a Maryland-based accounting firm, the Reznick Group, announced it will move its Midwest headquarters from the suburbs, bringing up to 200 new jobs downtown. And Braintree, an online payments tech company already headquartered in Chicago, said it plans to hire 150 more employees.

Not so many years ago, older companies were fleeing Chicago and other once-industrial cities for the suburbs, where the air was cleaner and, not incidentally, where their CEOs lived. Start-ups, including high-tech and bio companies, many of them run by Midwestern college graduates, passed up both city and suburb and went straight to the coasts, usually California.

In time, Chicago reinvented itself as a global city largely by becoming a centre for business services, such as banking, accounting, legal services and consulting. But these services dealt mostly with manufacturing and other traditional industries: if your company was investing in factories in China, you still got your advice and services in Chicago, which understood manufacturing. The tech companies, and their business services, stayed in California. If Chicago and its Loop remained solid, they also remained stodgy.

That seems to be changing. New tech companies, like Groupon, are setting up in Chicago and established tech companies, like Motorola Mobility, are moving in. So are venture capitalists, giving Chicago what most of the Midwest sorely needs, which is venture money to get new companies off the ground. So, increasingly, are the lawyers and accountants who understand the 21st century and can give these companies the services they need.

There are reasons why this is happening.

First, California is crowded and expensive. Silicon Valley still puts money and ideas together better than anywhere else, but the price of entry there is steep.

Second, Chicago is beginning to develop what every city says it wants, which is a tech cluster. A cluster is a group of related industries in the same geographic location. Silicon Valley is a super-cluster. Warsaw, Indiana, home to three of the nation's four biggest orthopedic companies, lives off its artificial-joints cluster. San Diego is a bio cluster. Milwaukee is turning itself into a global freshwater hub because of its cluster of water-related companies.

Sometimes, clusters develop when cities realise their own expertise in an area and begin to capitalise on it: that's what's happening in Milwaukee. Sometimes, a local research university spins off ideas that become companies that dominate a field: that happened in Silicon Valley and San Diego.

Sometimes, all it takes is for one or two companies to take off, creating a magnetic field that draws in other companies. Chicago, with its accounting and consulting power, always had a lot of computing knowledge. But Groupon's success, plus a burst of venture capital, seems to be creating a critical mass of tech companies in the Loop.

This feeds on itself. One company's success sends signals to other start-ups. These start-ups want to be where the action is, so they gravitate toward a cluster. Tech workers gather around, because they know that if their start-up employer fails, there are other companies and other jobs next door.

Many of these workers are grads of some of the Midwest's first-rate engineering schools. Before, they had to go to California to get jobs or to find someone who spoke their language. Now they can find their comfort zones closer to home.

Suburbs lose out, because many workers — often young, educated, single — want to be downtown, where the fun is. Many of them grew up in the suburbs and crave the urban action. 

Coyote Logistics, a third-party logistics company, was founded in Lake Forest, a leafy suburb on Chicago's North Shore, because that's where its founder lived. It's now grown from 25 to 1,000 employees, most of whom live in Chicago. Faced with this reality, Coyote too picked up last year and moved downtown.

The Midwest always has had the entrepreneurial talent; both Netscape and Amgen started in Illinois, but quickly decamped to California to find the support they needed. Today, they would be more likely to stay in the Midwest, because law schools and business schools are joining engineering schools in turning out grads who understand the new economy and can work in it.

This process is likely to continue, because it feeds on itself. A cluster creates jobs for educated technology workers, drawing those workers into the city. The workers themselves become a growing pool of talent, drawing in even more companies.

Clearly, this is good news for a city like Chicago. It's not such good news for suburbs, whose days as the engine of the local economy may be ending. But they can comfort themselves in the hope that, as these young techies get married and have children, at least some of them will move to the suburbs.

The real losers, as in the global era in general, are old industrial cities — the Clevelands, Daytons and Rockfords — that have not yet figured out how to reinvent themselves, with clusters or otherwise, and are too far away to benefit from this process. The urban economist Richard Florida has written that a global city like Chicago tends to suck the life — the finance, jobs, and brains — out of the rest of its region. A growing tech cluster in Chicago's Loop is only likely to deepen these cities' losses. 

This post was originally published at The Midwesterner.

3 August 2012