As cities across the United States scrambled in the beauty parade for the new Amazon headquarters recently, there was an underlying suggestion that having such a tech titan would help not only to attract other cutting edge firms to the area, but would bring a lot of skilled individuals to work for the firm into the respective city.
Alas, new research from the University of Illinois suggests that it’s much more likely for a company to locate itself where skilled people already are than for skilled people to follow a firm.
The research found that new companies often establish their HQ within a mile of existing software businesses in a bid to make recruitment easier for them. The findings emerged after analyzing the software ecosystem in Texas over a six-year period, during which time 431 new companies were established, many of them close to established firms.
A growing sector
Employment across the software sector grew from 16,600 in 2002 to 21,000 in 2006, with most of that growth coming not from the expansion of existing firms, but rather new firms emerging.
The authors believe that the findings highlight how common it is for startups to establish themselves close to existing businesses, but how this has a negative impact on their ability to create jobs as they don’t grow as fast as they would if they were located in isolation.
“We found that clusters of software establishments within small geographic areas are highly persistent, as is employment across the sector – though not within individual companies,” the authors say. “The industry is dynamic, with a large turnover of establishments and substantial changes in their scale – approximately half of those in operation at the start of our study had exited by the end.”
The robustness of the software clusters within Texas was clear however, as none of the areas strong in software at the end of the study period were not present at the start of it, despite significant changes in employment at the firm level, and especially at the established firms. Indeed, just 7,015 of the initial jobs at those established firms remained out of a total of 16,645 jobs.
“Instead, many of those jobs lost by one software establishment were captured by another firm less than a mile away as they act as a sponge for lost jobs at neighbouring companies,” the researchers explain.
Recruiting talent
Despite the clear competitive risks associated with locating near to a rival, the authors suggest such are the benefits in terms of recruiting talent that it explains why so many firms do it. They reveal that people are much more likely to move jobs if they don’t have to relocate to do so, which opens up a large talent pool to choose from.
“Software companies tend to enter into locations less than a mile away from other software establishments, and view these locations as significantly more attractive than those further away from other firms in the sector,” the researchers explain. “There are lower costs for employees who switch between establishments, as they can retain their living and commuting arrangements. The large pool of software engineers and programmers within commuting distance allows a firm to expand more easily by poaching the employees of other firms, which reduces the set-up and subsequent recruitment costs.”
As such, they believe their are advantages to locating close to rivals, as jobs appear to go where the workers already are. All of which creates a conundrum for cities, as it’s a clear chicken and egg situation for them, as jobs go where firms already are.
