A Cluster Grows in Chicago

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 criticized 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 center 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 realize their own expertise in an area and begin to capitalize 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' loss. 

Comments

[CraigVodnik]

Thanks for writing a positive article about technology in Chicago. Here at http://www.cleverbridge.com, an e-commerce company for software and SaaS businesses, we have been in the Loop, starting with 300 square feet in the Monadnock Building in 2006 and growing to 20,000 square feet in the former Crain's building today.

Although we didn't move from the suburbs to the Loop and did have the option to move to Silicon Valley, we decided to stay in Chicago for the talent, reasonable costs and for time zone benefits when working with Europe. I'm very bullish on Chicago and proud to be staying put.

[Aaron M. Renn]

It's hard to back this up with data, and it may be just because I look at Chicago more, but it seems to me that Chicago may have the strongest suburb to city migration story for business. It demonstrates the continued power of the Loop not just as a tourist and quasi-public sector realm (as in most cities) but as a bona fide commercial center. And clearly economic development via Rahm's Rolodex seems to be paying off. It's good to have a heavy hitter like him running the show.

Clearly this is good news for Chicago, but I don't think it needs to be tied to woes for everyone else. The last bit seems to be suggesting that Chicago will suck the life out of every other city's tech scenes and talent base - and certainly Rahm has made no secret that his plan for Chicago is raiding the burbs and the rest of the Midwest for high end talent and business.

I don't think that's necessarily true. Tech has been decentralizing from Silicon Valley for quite some time. The same forces that enable Chicago to be viable make almost anyplace viable. Indeed, if you look around the Midwest you'll see plenty examples of tech going strong. Even a place like Fargo is home to Microsoft's second largest US office, thanks to the Great Plains acquisition. Pittsburgh is seeing an influx of investors like Google thanks to its top talent at CMU. Indy has managed to build a few pretty large publicly traded tech employers of late like Exact Target and Angie's List. Are these cities as big as Chicago in tech? No, but Chicago is also a much, much larger city.

Tech isn't a zero sum game. So I don't believe Chicago's success has much to do with anyone else's losing. Nor do I believe that Chicago is going to become place Midwest firms have go to for services or funding, though I'm sure some of it will take place.

Also, it seems that Chicago likes to play it both ways on cost. When it comes to explaining why business will pay high prices to stay in Chicago vs. moving to Texas or Columbus or something, the idea is that high prices are good as they show strong demand for the unique location of Chicago. But when Chicago's prices are lower than coastal mega-hubs, lower prices suddenly become a selling point. No one has ever articulated to me a compelling reason to believe that Chicago has some uniquely positive bundle of cost, talent, etc on any type of national or global basis. Certainly on the Midwest I'd be the first to argue that it does, however.

I think one thing Chicago should do it to not put its marketing or civic eggs into the mass market B2C or digital type starts. Not only is there a lot of froth in the market there, Chicago's strengths have always been as a B2B type town. Technology enabled business services is likely much more durable, leads to much more employment, good exits, etc.

[Dr. Pete Fugiel]

Chicago is also very livable. My survey work of higher status home markets produced fifteen high status home markets located in the City, among forty for the entire region. Ownership came on strong in such diverse neighborhoods twenty years ago, that these markets now compete quite successfully with the north shore and Du Page. No one ever dreamed that the City would develop such diversity in its home ownership markets, but it did. River North is part of the huge demographic shift going on in West Town's eclectic communities which reminds me of the Village/West Village, Tribeca/SoHO boom that New York went through as Wall Streeters moved closer to work.