Innovation, like real estate, really does depend on “location, location, location.”
While tech company employees are using COVID-19 remote working as a way to escape high-cost areas such as San Francisco, speculation about an exodus may be temporary. Business leaders and their teams need to understand a fundamental truth about large cities: They are crucial for innovation.
As new research my colleagues and I conducted indicates in Science Advances, breakthroughs in innovation are best fostered in cities with a minimum population of 1 million, such as Dallas, San Diego, San Antonio, Phoenix, and Houston.
Even as real estate investment focuses on smaller cities—from Boise, Idaho (225,000), to Nashville, Tennessee (660,000)—our research indicates that startups and other innovative companies should locate in the biggest city they can afford. There are tradeoffs in larger cities, such as higher rent and labor costs. However, that cost can be offset with greater innovation.
Not just where—it’s also why
One of the most visible corporate real estate decisions in recent years was Amazon’s well-publicized (and much-speculated-on) search for a second headquarters, HQ2, which landed in Arlington, Virginia. For logistics, this makes perfect sense, as space and an affordable workforce were primary concerns. Moreover, Amazon’s primary headquarters, in Seattle (population 750,000), is an ecosystem unto itself: with 45,000 people and an emphasis on “collaboration and innovation.”
Other technology companies, though, should think twice before focusing on cities below the 1 million mark, especially smaller cities such as Arlington, Virginia, with less than 250,000 people. It’s not just the “where”—it’s also the “why.”
Startups and other disruptors need to be part of broader, more diverse communities—not only in terms of demographics but also ideas. The larger the city, the more likely the human resources available are diverse in background, thinking styles, experience, and perspective. Larger cities also tend to have cultural institutions, universities where research is conducted, and multiple industries and business sectors. As a result, people are regularly exposed to creative ideas, professionally and personally.
The limit of telecommunication
During COVID-19, of course, person-to-person interaction has been limited, especially in larger cities with denser populations. As a result, many people who could do so opted to escape the cities for more remote locations to work virtually. New apps and other technology tools did make it possible to work anywhere with internet coverage—possible, but not probable for the long term.
Admittedly, remote working has shown that productivity can be maintained, which has led tech giants to consider how to extend this workforce option. However, it’s important to distinguish productivity and innovation. Productivity is often maximized when exploiting recent innovations but will soon attenuate unless continual breakthroughs occur, which could prove challenging when people connect and communicate only digitally.
When ideas and concepts are truly cutting edge, there are few words in the accepted lexicon to express them. Without that common ground, people need physical interaction to express and experience ideas and concepts. Such nonverbal communication among group members is very difficult to accomplish with remote communication that occurs episodically.
Over the past several months as organizations have used Zoom, Skype, and similar technologies to bring people “face to face” virtually,” the limits of digital communication have been exposed. Screen-based communication does not fully replicate how people interact in person, particularly when brainstorming new ideas or engaging in collective problem-solving. People are often experiencing “Zoom fatigue” or complain of being “Zoomed out” after a long day of virtual meetings for work and online social gatherings.
In addition, humans are social creatures, and being socially distant from each other has proven challenging for many. Workplace settings not only foster collaboration but also allow for bonding and mentorship, which tend to occur organically as people interact. This fact may draw people back to their offices at least some of the time post-COVID-19, even though that means commuting.
As time goes on, full-time remote working for most of the workforce will probably not be the norm. The location decision for companies’ headquarters and operations will become all the more important. Being in a city large enough to foster innovation and creative thinking should be a primary consideration.
What cities need to know
Municipal leaders and policymakers should understand how to make their cities more attractive, particularly to startups and other innovators. The conventional wisdom is that individual cities develop in an idiosyncratic way, depending on their history and geography. However, as our research and analyses of prior studies showed, cities all follow a similar baseline of development, depending on population growth.
To “scale” their cities, leaders and policymakers should consider the kind of companies and workers that can foster growth. As our research showed, cities that attract “cognitive labor” scaled faster in terms of population and economic growth than those that were dependent on manual labor.
Businesses and municipal leaders alike need to not assume that people should—or will want to—work anywhere post-COVID-19. Location still matters, especially to create and benefit from an ecosystem of innovation.
Hyejin Youn is a professor at Kellogg School of Management at Northwestern University.