Divergence between Corporate and Law Firm Economic Geography

The 2006 Fortune 500 was released a couple of weeks ago, and Fred Tung at Conglomerate has some interesting comments on the geography of the new list.  For the last several months, I have been collecting and analyzing data for a project on the economic geography of the Am Law 200.  Since Fortune 500 (or 1000) companies are the principal clients of Am Law 200 firms, Fred's posting got my attention.  In fact, there is a significant divergence between the economic geography of large law firms and large corporations.

Referencing the print version of Fortune, Fred notes that “that Texas for the first time is home to more Fortune 500 headquarters than any other state.”  This is consistent with a recent study by the Centre for Economic Policy Research (CEPR), "Why and Where Do Headquarters Move?", which documented several significant findings:

• Between 1996 and 2001, there was a net outflow of corporate headquarters from the largestU.S. metropolitan areas (New York City, Los Angeles, San Francisco).

• Net winners tended to be low corporate tax, low average wage cities with good airports (i.e., airline hubs with many direct flights), concentrations of other corporate headquarters in the same industrial sector, and high levels of business services—which means, among other things, capable corporate lawyers.  Sun Belt cities, such as Houston and Phoenix, gained the most.

• Despite a net outflow of headquarters from the largest—and most expensive—MSAs, the top 5 and top 10 metro areas, excluding New York City, garnered a slightly larger proportion of corporate revenues during the 1996-2001 observation period.  In other words, companies with the largest absolute growth in revenues tended to locate or remain in major markets. 

The New York CMSA, which lost both HQs and proportion of revenues, was characterized by the authors as “a declining dominant center.”

My research on the economic geography of large law firms presents a significant contrast.  For example, as shown below, between 1993 and 2003, the New York CMSA dominated the growth in both the number of Am Law 200 lawyers and the number of new Am Law 200 offices.

                                             

MSA or   CMSA	Δ Am Law Offices	Δ Am Law Lawyers
New York City	69	9,920
San Francisco	56	2,937
Washington, DC	25	4,916
Los Angeles	28	2,256
Philadelphia	22	996
Chicago	16	1,986
Boston	14	1,808

Why are Am Law 200 law firms staffing up in New York when that market appears to be losing both corporate headquarters and relative share of total corporate revenues? 

My tentative working hypothesis, cobbled together from what I learned from the economic geography literature, is that New York is the preeminent “global city” in the U.S. “Global city” is a term used by economic geographers to describe key hubs of international commerce.

Although there is much debate on the best methodologies for ranking cities, one point of consensus is that the global cities contain large agglomeration of highly sophisticated “producer services”—i.e., legal, financial, accounting, marketing, and business consulting firms with expertise in global transactions.  Further, the external economies of these agglomerations tend to outweigh the higher operating costs.  As a result, the road to expansion in Asia or Europe tends to run through New York.  This concentration of premium, noncommodity work would explain why the proportion of firm lawyers in New York is strongly correlated with profits per partner (.696, p < .000).

New York is especially important on the global scale because a large proportion of international corporate transactions are tailored to conform to U.S. securities laws.  As noted in an interesting paper by James Robert Faulconbridge, “Embedded Networks of Knowledge Production in Global Law Firms,” the key role of U.S. law in international corporate transactions often has the effect of shifting power to the New York offices of London’s leading law firms.

I will post some additional data on this research project later this week.

Comments

[lucas law center]

I agree and you have a point there. very interesting concept.

LLC

[Corporate lawyer firm]

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[Jeff Yates]

This is really interesting. I'd also be interested to see what the effect these moves have on the economies of the host cities/states. There's a good pol sci literature on the effects of the movement of major manufacturing plants on host state economies and the relative "bang for the buck" states get by luring companies in with big incentives. This might be an interesting extension of those works.

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Jeff Yates
Associate Professor
University of Georgia
http://www.uga.edu/pol-sci/people/yates.htm
SSRN page: http://ssrn.com/author=454290
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