Friday, May 26, 2006

May 2006 Early Indications: Of Spaces and Places

Hurricane season is starting on the east and south coasts of the U.S., with residents hoping for a respite from the extensive damage of recent years. On the other end of the country, California is prone to mudslides, brush and forest fires, and earthquakes. A vaguely defined "tornado alley" runs south from the Dakotas to Texas, and as far east as Indiana. Waterfront areas in New England flooded earlier this month, and Katrina damage in the Gulf coast region last year was only partially hurricane-related.

As the world and the North American economy become more virtual, businesses are encountering new layers of the paradox of place. An Internet connection can link two people by voice, text chat, or video almost anywhere in the developed world, with many developing nations catching up fast. As Alan Blinder points out in an important article in Foreign Affairs, many kinds of work can be done in the lowest-cost environment and rapidly moved to less expensive surroundings switching costs are dropping as work seeks out low cost workers and infrastructure. For product work, that migration implies moving factories. More recently, services from radiology to call centers to coding have begun to be outsourced and/or offshored. One shorthand prediction calls China the emerging factory to the world, with India its back office. But costs are only one aspect of the tension between place and space.

The paradox of place also shapes how companies support their presence in the etherworld. I spoke with two major companies in the past month that have located a desirable geography for backup operations centers -- away from tornadoes, hurricanes, earthquakes, and floods, and near skilled workforces -- in Minnesota. Omaha's favorable positioning relative to major telecom connections has helped fuel the growth of call centers near what used to be a railroad interconnection center; the fiber optic cables were often laid in railroad right-of-way, linking the 19th century to the 21st.

The dynamics of place affect many business choices. Locating a factory or distribution center near a prime customer, as Dell's suppliers have near Austin, tightens tolerances on deliveries and can support higher levels of customer service. Moving R&D operations near major university centers, as Novartis and other companies have around MIT and Harvard, can impose extremely high housing prices, and thus wage scales, onto employers. For employers outside those sectors that require such specialized (and localized) expertise, Massachusetts is undesirable as a new business destination, and high housing prices are noted as a major deterrent to job growth there.

Richard Florida's influential book The Rise of the Creative Class argued that rather than lobbying with tax breaks and other inducements for large Toyota or Mercedes factories, states and localities in search of jobs should instead seek to attract creative individuals. These people tend to migrate to places with good music and culture, good restaurants and diverse populations, and strong educational institutions. After arriving, they put their skills and networks together and make jobs for themselves and others. His examples -- San Francisco, Minneapolis, and Pittsburgh, among many others -- appear to support his thesis. But another characteristic joins these places: essential but non-creative people like plumbers, police officers, teachers, and support personnel get priced out of cities that Florida lists as exemplars.

The increase in commuting distance for the working people who make creative centers work is increasing. These jobs matter for quality of life. Places like Marin County and Greenwich, Connecticut are undeniably appealing in many ways. But what happens when auto repair shops and dry cleaners can't survive? Many skilled jobs can be performed remotely, to be sure, but how can affluent, attractive locales keep nurses, delivery truck drivers, and other people whose skills are in short supply right now? Societies at all stages of economic development are experiencing the effects of selective job mobility in the aftermath of the Internet and cellular telephony revolutions.

There's another recent phenomenon of skills and place: workers in skilled jobs (such as information technology) often are trained at academic centers far from an employer base. Kathy Brittain White served as CIO at Cardinal Health before founding Rural Sourcing, an American company that seeks to provide the cost savings of displacing work to a lower-cost, lower-wage environment. Her twist to the offshore model is locating programming and support centers in such places as Greenville, North Carolina - home to East Carolina University, which now enrolls over 20,000 students.

Rural Sourcing uses networks to take relative isolation and turn it into comparative advantage. In a parallel move, Google is opening major facilities in New York and Pittsburgh, the latter because of Carnegie Mellon's powerful computer science presence. In the 19th century, proximity to water power made New England mill towns economic engines for the shoe and textile industries that were centered there. Detroit built on access to freighter ports that delivered the bulk materials for the auto industry (and on the venture capital provided by timer barons enriched by the need for mass-produced wooded furniture and building supplies).

Today, universities are vying to attract knowledge-intensive industries, but what are the other sources of advantage for the next 25 years? If the air taxi model driving Eclipse Aviation and other companies takes hold, the need for an airport with commercial carriers may drop in priority for example. If home schooling continues its strong rise in popularity, more people might move to places without demonstrably good school systems. Telemedicine could reduce the urge to live near major medical centers. Many such wild cards remain to be played.

Far from the fields that White is cultivating, the place of cities remains contested and important. The Economist recently ran an obituary for Jane Jacobs, a powerful force in 20th century American urbanism. Jacobs lacked academic credentials but argued for the organic aspects of cities. She opposed zoning for example, reasoning that people should be able to live near their work. Her energy and ideas helped defeat some of the more sweeping "urban renewal" efforts of the 1950s and 60s as citizen movements began to oppose the bulldozing of neighborhoods that happened to lie in the path of expressways. Criticized for advocating gentrification, she herself was priced out of Greenwich Village in the 1990s and found Toronto more hospitable to her thinking (and financial means) than her adopted New York, which she tended to idealize. Jacobs' crusade served as a reminder that the cost of the suburban model can only partially be measured in fuel consumption or rising commute times.

Thomas Friedman famously asserted that "the world is flat": anyone anywhere can participate in the global economy via various connections. Florida replied last fall that rather than being flat, "the world is spiky" in that concentrations of talent and resources matter more than the ubiquitous access Friedman chronicles. Rather than forcing these two arguments into false opposition, it is useful to use the insights of both to examine how connection is changing work, culture, and economics.

Blinder article on offshoring (long version):

New York Times article on air taxis (1 March 2006):

Florida response to Friedman: