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1 You have downloaded a document from The Central and Eastern European Online Library The joined archive of hundreds of Central-, East- and South-East-European publishers, research institutes, and various content providers Book: Location: Author(s): Title: URL: Czech Republic Piotr Raźniak, Sławomir Dorocki, Anna Winiarczyk-Raźniak Innovative Industry Sectors in World Economic Centers Innovative Industry Sectors in World Economic Centers

2 INNOVATIVE INDUSTRY SECTORS IN WORLD ECONOMIC CENTERS Piotr Raźniak Sławomir Dorocki Anna Winiarczyk-Raźniak Abstract Purpose: The purpose of this paper is to analyze the geographic distribution of key corporate headquarters locations and changes therein for innovative sector corporations. The paper attempts to identify innovative sectors in world economic centers throughout the world and discuss contemporary processes affecting changes in their hierarchy. Design/methodology/approach: The analysis in the paper uses data obtained from the Forbes Global 2000 list of corporations aggregated at the level of major metropolitan areas home to major corporate headquarters. The innovativeness index for cities is based on the financial potential index for innovative sector companies (acronym: FPIS), which is calculated using selected economic and financial data such as return on assets, return on sales, and company market value. In addition, the index is also based on the number of corporate headquarters per city. Findings: Therefore, in spite of globalization and relocation of production, the largest revenue growth is still recorded by companies headquartered in the United States, which is particularly evident in the case of San Jose. A significant decrease of the importance of the innovative sector was recorded by the Japanese World Economic Centers, and especially that of Tokyo. In Asia, a few newer innovation centers such as Hong Kong, Bangalore, and New Delhi have emerged in the last few years, while several U.S. cities have declined substantially in terms of their role in the innovative sector. Research/practical implications: The analysis of the impact of innovative sectors on the development of world economic centers will show their importance in the generation of the command and control function of cities in the event of economic crisis. Originality/value: The issue of the command and control function of cities created by corporations headquarters their international conectivities are point of interest for several years. The new concept is, the idea of World Economic Center where the city has strong command and control function, even in the main industry sector economic crisis. This study shows the impact of innovative sector to the world economic center cities power. Keywords: innovation, city, command and control function, corporation, world economic centers JEL Codes: F02, G03 810

3 Introduction Globalisation represents a transfer of power from national states to a network of global cities; the world today is more cities than countries A.T. Kearney (2012) Economic analysis is most often focused on country-level analysis and that of selected companies and even entire continents. However, the economic potential of cities is less often analyzed, although this type of research has been conducted since the 1960s (e.g. Hall 1966). A number of models of cities as world-leading economic centers have been produced since the 1970s (Hymer 1972, Friedmann 1986, Sassen, 1991) and connectivity between cities has been investigated (Beaverstock, Smith, Taylor 1999, Derudder, Hennemann 2014, Meeteren, Bassens 2016). In addition, the financial performance of the largest corporations is analyzed in terms of their command and control function in the world economy. The largest companies perform a leading role in the world economy (Sassen 2000), which has led to the formulation of the command and control function concept of cities (Csomós 2013), whereby the potential of cities is determined by the sales revenue, net income, market value, and asset value of the largest companies listed by Forbes Global 2000 ( The strength of a city may also manifest itself in its ability to resist economic crisis. This has led to the emergence of a new concept known as the World Economic Center (WEC), which is a way to show the rank of a city relative to the value of selected companies by sector as well as the stability of each given city in the event that a given sector begins to lag. This method of analysis provides not only information on the economic potential of a city, but also on its path of development and specialization. In short, world economic centers are cities that maintain their command and control function in the world economy in the event of a key crisis in their dominant economic sector. World Economic Center concept assumes that Stability of the city can be good if it has at least four sectors, because the loss of the dominant sector does not significantly change the command and control function of the city and economic stability during an economic crisis. (Raźniak, Dorocki, Winiarczyk-Raźniak 2017). It is also important that the potential of world economic centers be created by leading sectors, which are not at risk of structural change and determine competitive advantage in the global markets. In today s economy, sectors often deemed not vulnerable include IT and the life sciences, which also includes the pharmaceutical industry and biotechnology or what is 811

4 often called healthcare (Dorocki 2014, Dorocki, Boguś 2014). It is these two sectors and related collaboration (e.g. nanotechnology) (Dorocki, Kula 2015) that currently determine the rank of a given region or country on the world innovativeness scale. Innovative sectors of the economy rely on several key factors including human capital, R&D infrastructure (i.e. research institutions), investment capital, and a legal framework (Dorocki, Brzegowy 2014). In most cases, large urban centers already fulfill these requirements, with all key factors available onsite. However, historical differences as well as differences in soft factors strongly differentiate these sectors rates of development across geographic space. An increasingly common trend driven by current globalization processes is the relocation of innovative sectors to developing countries as well as peripheral areas of cities (Wójtowicz, Dorocki 2014, Dorocki et al. 2014). The purpose of this paper is to analyze the geographic distribution of key corporate headquarters locations and changes therein for innovative sector corporations. The paper attempts to identify innovative sectors in world economic centers throughout the world and discuss contemporary processes affecting changes in their hierarchy. 1 Methods The analysis in the paper uses data obtained from the Forbes Global 2000 list of corporations aggregated at the level of major metropolitan areas home to major corporate headquarters. For a city to be considered a World Economic Center, it must be home to at least four sectors (Raźniak, Dorocki, Winiarczyk-Raźniak 2017) of the economy based on the classification by Standard & Poor s (Global Industry Classification Standard GICS). The innovativeness index for cities is based on the financial potential index for innovative sector companies (acronym: FPIS), which is calculated using selected economic and financial data such as return on assets, return on sales, and company market value. In addition, the index is also based on the number of corporate headquarters per city. = (log( ) ; ; ; ) (1) HQ number of corporate HQs ai return on assets (ROA) ri return on sales (ROS) mv market value = 100 (2) = 100 (3) 812

5 where: p - profit, a - assets, r - net income City index values obtained for two years were normalized in order to yield comparable data by using the standard deviation of FPIS and its mean value. 2 Location of the headquarters of the largest corporations in the world. All of the 10 sectors listed by Standard & Poor s are found in the United States, Japan, and China. The largest number of corporate headquarters are found in the United States or 533 in This is more than the combined number for Europe, Africa, and Australia. Most studied regions are dominated by financials: Middle East (60.8%), Australia (42.8%), China (37.9%). The overall number of highly ranked corporations headquartered in Eastern Europe is rather small resulting in the presence of only six sectors in the region. The most often encountered sectors are materials and energy (25% each), while the financial sector ranks fourth. In Japan, financials constitute the second largest group of firms, with the industrial sector being dominant (29.3%). Significant variances are noted across the world in terms of the number of headquarters and sectors. The dominant sector among major corporations is financials, while sectors deemed innovative such as healthcare and IT stand at only 10.6% and are located mainly in the United States (Fig. 1). Fig. 1: Number of corporate HQs by sector large differences by continent; therefore, regions are used in the study instead. 813

6 Fig. 2: Corporate HQs in 2012 for the IT and healthcare sectors (specialization: eastern and western USA). World Economic Centers in the United States are strongly specialized in the area of innovative sectors such as IT and healthcare. The western part of the country is dominated by IT, especially the city of San Jose, while the central and eastern parts are dominated by healthcare. In Europe, the distinction between east and west can also be observed, although the reasons for this are different. None of the examined companies can be found in Eastern Europe, although the area is home to corporate headquarters listed by Forbes (Raźniak, Winiarczyk- Raźniak 2015). This area of Europe does feature innovative companies, although these are fairly small (Raźniak, Dorocki, Winiarczyk-Raźniak, Płaziak, Szymańska, A.I. 2017, Raźniak, Dorocki, Winiarczyk-Raźniak 2018). The western region of Europe is dominated by Dublin, while London ranks second. Both cities are dominated by the healthcare sector, with Dublin at 60% and London 75%. Healthcare sector companies from the Forbes list are also found in Asia. In Japan, healthcare is dominant, while IT maintains a lead in other regions of Asia. In addition, both sectors are poorly represented in Africa and Australia (1 company each), with no companies at all in South America (Fig. 2). 3 Financial potential of the IT and healthcare sectors Companies in the IT and healthcare sectors are some of the wealthiest companies in terms of market value and profits. Both in 2006 and 2012, the mean market value and profits per company exceeded mean values for all 2,000 analyzed companies. In addition, both key indicators increased substantially in the period Market value for the IT sector increased 49.2% and 10.0% for the healthcare sector. IT profits increased 84.3%, while profits 814

7 for the healthcare sector increased 47.9%. The most valuable companies are those in sectors such as financials and energy, where the mean market value of a company is about 100 billion USD and the mean profit level is 10 billion USD per year. Research has shown that innovative sectors follow main trends set by all the examined corporations and continue to improve their financial performance (Fig. 3). Fig. 3: Mean market value and profit per company by sector in 2006 and Tab. 1: Financial performance of innovative sectors in 2012 per company. Sector Employees per HQ (mean) (1000 os) Mean w (billion USD) cash on hand assets revenue market value profit Health Care 28,20 8,81 56,05 45,21 69,92 4,44 IT 48,74 12,67 45,87 39,25 81,77 5,10 Healthcare sector companies tend to be smaller in terms of the number of employees. This may be a sign of greater innovativeness, as research teams working on new technologies do not need to be too large. However, research and equipment may be costly, which may lead to more valuable assets relative to IT. Despite higher revenues, healthcare sector companies are 815

8 less profitable than IT companies due to larger costs related to long-term clinical research and also long product implementation processes. On the other hand, IT companies tend to be more profitable due to fewer investment costs as well as a more commercialized business model (Tab. 1). Tab. 2: Changes in rank potential index for the IT and healthcare sectors together. Rank 2006 Rank 2012 City Rank 2006 Rank 2012 City Rank 2006 City San Jose x 1 Osaka Montreal 41 New York 1 2 Melbourne Toronto Seattle 2 3 Munich Pittsburgh x 43 Basel x 4 Dallas Denver San Francisco 8 5 Singapore x 25 Geneva Bangkok x 6 Madrid x 26 Helsinki London 3 7 Phoenix Columbus Seoul 9 8 Philadelphia Brussels Paris 5 9 Stockholm Washington Chicago 6 10 Hartford Shanghai x 50 Boston Miami x 31 Nagoya Mumbai x 12 Houston x 32 Hong Kong x 52 Copenhagen Hamilton Austin 13 x Dublin x 14 St. Louis Zurich 17 x Minneapolis 7 15 Kansas City Atlanta 21 x Tokyo 4 16 Johannesburg x 36 Bridgeport 27 x Kuala Shenzhen x 17 Lumpur x 37 Berlin 28 x Beijing 18 Delhi x 38 Providence 31 x Los Angeles Taipei City Kyoto 34 x Tel Aviv Milwaukee Cincinnati 39 x x - not listed as part of the ranking Rank 2012 The American city of San Jose was ranked first in the world in This is also quite interesting, as it did not appear in the ranking at all in Second and third place was given to New York and Seattle (USA). Fourth place went to the Swiss city of Basel, which is not an EU city. Developing markets are noteworthy with dynamically growing innovative sectors. In 2012, cities located in developing countries that joined the Forbes ranking included Bangkok (Thailand), Mumbai (India), Shenzhen (China), Beijing (China), Johannesburg (South Africa), and Delhi (India). This may have been due to the relocation of corporate headquarters as well as production jobs from more affluent to less affluent countries with lower labor costs. Some examples of the decline of innovative sectors in affluent countries include U.S. cities such as 816

9 Austin, Atlanta, Bridgeport, Providence, and Cincinnati as well as Western European cities such as Zurich and Berlin (Tab. 2). Fig. 4: Financial potential of IT and healthcare companies cities ranked in 2006 and Among cities qualified as global centers of innovation in 2006 and 2012, New York City holds a position that may be described as dominant despite being second relative to San Jose. New York City remains an important center of innovative industries, especially in the area of healthcare. The next position among world IT leaders is held by Seattle, followed by a number of innovative cities such as London, Paris, and Tokyo. Nevertheless, these traditional centers of innovation appear to be gradually declining in favor of San Francisco, Seoul, and Copenhagen. Established centers of innovation appear to be in decline due to the rise of newer and smaller centers of innovation such as Tel Aviv (Israel) and Munich (Germany) as well as Melbourne (Australia). Traditional centers such as Osaka, Dallas, Stockholm, and Helsinki are all on the decline due to increasing globalization and technological progress in new regions of the world i.e. U.S. Pacific Coast, Asian Far East, Asian Middle East (fig. 4). This emergence of the new innovative regions is driven by national government policy, investment in human capital, and growing educational opportunities in developing countries. 817

10 Conclusion Current globalization processes change the distribution of the headquarters of multinational corporations and trigger changes in the hierarchy of key cities in the global economy. This is particularly evident in the case of the innovative sector, which is now a major factor in the economic development of selected countries and provides a high level of development at the country level and across the world. The financial potential of innovative sector companies is located mainly in the United States. Innovative companies require a large number of highly qualified workers. Therefore, in spite of globalization and relocation of production, the largest revenue growth is still recorded by companies headquartered in the United States, which is particularly evident in the case of San Jose. A significant decrease of the importance of the innovative sector was recorded by the Japanese world economic centers, and especially that of Tokyo. In Asia, a few newer innovation centers such as Hong Kong, Bangalore, and New Delhi have emerged in the last few years, while several U.S. cities have declined substantially in terms of their role in the innovative sector. The analysis of the impact of innovative sectors on the development of world economic centers will show their importance in the generation of the command and control function of cities in the event of economic crisis. Future research may include an attempt to determine the role of the innovative sector in modern cities. References Beaverstock, J. V., Smith, R. G., & Taylor, P. J. (1999). A roster of world cities. Cities, 16(6), Csomós, G. (2013). The Command and Control Centers of the United States (2006/2012): An Analysis of Industry Sectors Influencing the Position of Cities. Geoforum, 12(50), Derudder, B., & Hennemann, S. (2014). An Alternative Approach to the Calculation and Analysis of Connectivity in the World City Network, Environment and Planning B, 41 (3), Dorocki, S. (2014). Spatial diversity of biotechnology centers in Germany, Quaestiones Geographicae, 33(2), Dorocki S., & Boguś M. (2014). Regional Variety of Biotechnology Development in Asia. Procedia - Social and Behavioral Sciences, 120, Dorocki S., Brzegowy P. (2014). France's stand on genetically modified food and its reception in the EU. (in:) A. Bobko, K. Cynk (ed.), Genetycznie Modyfikowany Organizm jako 818

11 przedmiot oceny moralnej, Rzeszów, Wydawnictwo Uniwersytetu Rzeszowskiego, Dorocki, S., Jastrzębski, J.P., & Boguś, M. (2014). Biotechnology as an example of high technology development in small and medium towns. (in:) A. Kwiatek-Sołtys, H. Mainet, K. Wiedermann, J-C.Edouard (ed.) Small and Medium Towns Attractiveness at the Beginning of the 21st Century, CERAMAC 34, Clermont-Ferrand, Presses Universitaires Blaise Pascal, Dorocki, S., & Kula, A. (2015). Przestrzenne zróżnicowanie rozwoju nanotechnologii w Europie. Prace Komisji Geografii Przemysłu Polskiego Towarzystwa Geograficznego, 29(1), Forbes Global 2000, Friedmann, J. (1986). The world city hypothesis. Development and Change, 17, Hymer, S. (1972). The multinational corporation and the law of uneven development. (In:) J. Bhagwati (ed.). Economics and World Order from the 1970s to the 1990s, New York, Collier-MacMillan, Kearney, A.T. (2012), Global Cities Index and Emerging Cities Outlook, _Emerging_Cities_Outlook_1.pdf/dfedfc4c-8a e5-2a3f14f0da3a Meeteren, M., & Bassens, D. (2016). World Cities and the Uneven Geographies of Financialization: Unveiling Stratification and Hierarchy in the World City Archipelago, International Journal of Urban and Regional Research, 40 (1), Raźniak, P., Dorocki, S., & Winiarczyk-Raźniak, A. (2018), Eastern European cities as command and control centres in time of economic crisis, Acta Geographica Slovenica (in print). Raźniak, P., Dorocki, S., & Winiarczyk-Raźniak, A. (2017), Permanence of Economic Potential of Cities Based on Sector Development, Chinese Geographical Sciences, 1(27), Raźniak, P., Dorocki, S., Winiarczyk-Raźniak, A., Płaziak, M., & Szymańska, A.I. (2017), Zmiany pozycji ekonomicznej miast Europy Środkowo-Wschodniej w przypadku kryzysu dominującego sektora, Ekonomista, 2017(1), Raźniak, P., & Winiarczyk-Raźniak, A. (2015). Did the 2008 global economic crisis affect large firms in Europe? Acta Geographica Slovenica, 55(1), doi: Sassen, S. (2000). The Global City: Strategic Site/New Frontier. American Studies, 41 (2/3):

12 Wójtowicz, M., & Dorocki, S. (2014). Regional differences in the development of the biotechnology industry in Latin America, with particular emphasis on Brazil and Mexico. (in:) M. Wójtowicz, A. Winiarczyk-Raźniak (ed.), Environmental and socioeconomic transformations in developing areas as the effect of globalization, Kraków, Wydawnictwo Naukowe UP, Contact: Piotr Raźniak Pedagogical University of Cracow Ul. Podchorążych 2, Cracow, Poland Sławomir Dorocki Pedagogical University of Cracow Ul. Podchorążych 2, Cracow, Poland Anna Winiarczyk-Raźniak Pedagogical University of Cracow Ul. Podchorążych 2, Cracow, Poland 820