Moneybox

This Week Showed Us a Lot About Why Rich Cities Tend to Get Richer

U.S. President Donald Trump participates in a groundbreaking for a Foxconn facility at the Wisconn Valley Science and Technology Park in Mount Pleasant, Wisconsin, on June 28.
Some Republican notables participate in a groundbreaking for the totally misbegotten Foxconn facility in Wisconsin.
Brendan Smialowski/AFP/Getty Images

If you want to better understand why wealthy, coastal cities like New York and San Francisco continue to pull away economically from the rest of the country despite their absurd housing costs and soul-sapping public transit systems, consider a few of the big business scoops that broke this week.

First there was the news that, after months of making cities dance for the honor of playing home to its second headquarters, Amazon had chosen to split its new office between two locations. The likely finalists? Crystal City, Virginia—a suburb of Washington, D.C., where CEO Jeff Bezos recently purchased a mansion—and Long Island City, a waterfront neighborhood in Queens offering lovely views of the Manhattan skyline.

Almost 1,000 miles away, a different sort of plot-line is unfolding in Wisconsin. There, Foxconn, the Taiwanese manufacturing beast that likely assembled your iPhone, is in the process of building a new factory that will eventually produce LCD screens. The project has become a bit of a political millstone for the state’s electorally endangered governor, Scott Walker, who lured the company by offering such generous financial incentives that economists believe that Wisconsin won’t make back a return on its investment until 2042. There have been doubts recently that Foxconn will actually hire the 13,000 employees to staff the plant it initially promised. And now, the Wall Street Journal reports that the company is looking to bring in engineers from China to work there, though it’s having trouble convincing some to move.

These stories are really two sides of the same coin. One of the few iron rules of economic development is that industries tend to cluster geographically, in large part because it’s much easier for companies to hire in a city with a big pool of already existing talent. This is especially the case when it comes to the tech sector, since companies like Google and Microsoft are constantly in need of new engineers and coders. That fundamental fact of the industry is one major reason why, since the recession, large cities with tech-heavy local economies have been adding jobs faster than the rest of the country. When Amazon announced its plans for HQ2, executives said they planned to hire some 50,000 employees and wanted to locate in a city with a sizable tech workforce capable of supporting those plans—which is to say, a thriving, cosmopolitan city with a strong local economy. According to recent reports, the company decided that recruiting would ultimately be easier if they split the office evenly between two cities. In New York and northern Virginia, they’ve apparently picked two areas with decent-sized tech scenes of their own and plenty of highly educated workers. In order to attract tech jobs, you need to already have tech jobs.

Some cities manage to get around this Catch-22, in part because they’re fun places where college graduates like to live. Berlin used to be known as a haven for artsy Europeans and American expats. Now its the startup capital of Europe. Los Angeles has Silicon Beach, anchored by Snapchat. Other cities sprout tech or biomedical industries out of their universities—Pittsburgh being one of the best examples.

What really tends not to work is simply throwing a bunch of financial incentives at a company to move to your state and hoping it will bear fruit. Which brings us back to Foxconn. The company chose to locate its American plant in southeast Wisconsin, near the economically struggling city of Racine, for what appears to be a combination of political motives—Donald Trump first suggested the idea to Foxconn Chairman Terry Gou during a helicopter ride—and the sheer amount of money Walker threw at it. Wisconsin has plenty of manufacturing—Harley-Davidson, among other large industrial companies, is based there—but it isn’t exactly a magnet for engineering talent, and with the statewide 3 percent unemployment rate (similar to a lot of its Midwestern neighbors), Foxconn is finding it hard to staff up. Hence, the Journal reports that it’s looking to bring in some Chinese engineers.

The problem? The company’s employees aren’t quite sold on the charms of cheese curds, brats, and Aaron Rodgers.

Foxconn Chairman Terry Gou is looking to company engineers in China to transfer, according to people familiar with the matter. Some engineers have expressed reluctance to relocate to Wisconsin, which is less well-known to Chinese workers than U.S. tech hubs in California or New York.

One engineer who declined to give his name said he wouldn’t want to move to a place he worried could be as cold as Harbin, a northern Chinese city known as “Ice City.”

It’s possible that once the Foxconn factory starts operating, it will become the seed of a new tech manufacturing cluster near Lake Michigan. But as of now, it seems more like an example of why companies tend not to set up shop in the Rust Belt, even when they can get a sweet land deal. They need to go where the talent is.