German Inter-city Competition Enters a New MillenniumPublished: April 07, 2009 in Knowledge@Wharton
Not many European cities have a reputation as attractive places to do business. They may have scenic vistas with winding rivers and tall castles -- which make them nice places to visit -- but with high taxes and tough labor laws, few places between Dublin and Bratislava are likely to make the hearts of corporate real estate executives leap for joy.
Yet common sense suggests that Germany is an exception. After all, despite the growth of emerging economies during the last 15 years, the German economy remains the world's greatest export machine: More than $1.3 trillion in goods and services are shipped out every year, generated by a population of 82 million. This makes German exports more valuable than China (number 2) or the U.S. (number 3) -- and certainly on a per-capita basis, it makes Germany by far the biggest exporter in the world. An inward-looking country with unsupportive business infrastructure could hardly achieve that kind of record.
In fact, business executives and economic development officers in Germany and experts at Wharton say that many German cities are quite business-friendly and outward-looking. But they do have their own set of challenges. They are working to reinvent their traditional competitive advantages -- including a cross-border mentality, skilled labor, a tradition of precision engineering and a strategic location -- for the 21st century economy.
The most basic challenge German cities face in publicizing themselves is that there are so many of them. Unlike most European countries, Germany has no obvious commercial center. Instead, economic activity and development is divided among a number of cities and regions. By some measures, Germany is even more decentralized than the United States, another federally organized country.
Fragmentation and Its Effects
The reason for this fragmentation is historical. The political unity of most other European nations was established hundreds of years ago, which tended to focus economic growth in just a few places within each country. Germany was different. Before the middle of the 19th century, Germany was divided into dozens of principalities and self-governing cities. A centralized government took power only in 1871, hundreds of years later than in England and France. Then, after just seven decades of unity, the country was re-divided in the aftermath of the Second World War, when the Soviet Union established East Germany as a strategic counterweight to the U.S. and Western Europe's support of West Germany.
The downside of this fragmentation is that most German cities are not especially well-known names, but the competition it induced gave many leading German cities a competitive outlook and skill set well-suited to today's economy.
Indeed, supporters of German economic development argue that the apparent shortcomings of lacking a single commercial center like London or Paris has evolved over time into a source of strength for a number of reasons. First, the relatively small size of German principalities meant that Germans always had to think beyond their borders. Unlike U.S. companies, where a firm might be content to grow domestically for a long time before venturing abroad, 19th century German companies sometimes needed to cope with import and export regulation even if they wanted to sell to customers in another province, for example from Bavaria to Saxonia.
Most importantly, regional competition led eventually to the development of specialized industrial clusters. Over time, products manufactured by these clusters have changed, but some of the lucky towns and cities have been able to transfer their traditional specialties into a new world. For example, Göttingen, the home of 19th century mathematician Carl Friedrich Gauss and a center of mathematics, is home to 39 specialized measurement companies, a group that markets itself as "Measurement Valley," after Silicon Valley. The town of Tuttlingen in the Black Forest, which began manufacturing cuckoo clocks in the 18th century, is now home to more than 400 companies that make medical instruments. The BASF production site at Ludwigshafen, where the chemists Fritz Haber and Carl Bosch developed the process to produce ammonia, is today the largest chemical plant in the world.
And the process of reinvention continues. Düsseldorf, a leading commercial city in the old Rhine-Ruhr industrial heartland, has capitalized on its easy access to most of Europe. It redirected the technical talent that once made German steel manufacturers the envy of Europe into media and wireless telecommunications, and also developed leadership in several other 21st century sectors such as consulting, fashion and retail. Berlin, meanwhile, is now trying to market itself as the number one city for green development, and Munich is known as a home for technology and start-up businesses. Regions also take part in this competition: The south-western Rhine-Neckar Metropolitan region, a cluster of neighboring cities like Heidelberg, Mannheim, Ludwigshafen and Worms, positions itself as an outstanding business location with attractive employers and research centers.
How much of this reinvention of German cities has been the result of conscious planning is hard to say. Consider the case of Düsseldorf. Certainly, in the past, Düsseldorf had a privileged position as the capital of the old Rhine-Ruhr smokestack economy. Attracted by the density of the region's corporate headquarters, a number of law, accounting and consulting firms moved to the region to support those old-line businesses and eventually became a core section of firms that supported a range of newer businesses as well. Today, even though the smokestacks are long gone, Düsseldorf remains a corporate services hub. In fact, more than 5,000 international companies have set up branches there, including nearly 500 from the U.S. and 500 from Japan.
It is tempting to see Düsseldorf as profiting merely from its location in one of Germany's largest population centers and its former role as the capital of the Rhine-Ruhr industrial heartland. Indeed, Hermann Klein, the delivery center head of Tata Consultancy Services Deutschland, an India-based consulting firm, said the company located in Düsseldorf in part because of its easy access from India and all over Europe, and in part because many potential customers are nearby. "Many big companies are within an hour's reach," says Klein.
But given that there are a number of alternatives relatively near by -- such major cities as Cologne and Bonn are under 50 km away -- it seems likely that more than luck was involved, and in particular, that the city's own efforts to lure new companies played a role in attracting so many foreign companies.
In fact, the Düsseldorf city development team actively courted businesses both within Germany and around the world, touting the virtues of the city as a place both to live and to set up a business. City planning also helped bring in some industries in. Many media companies, for instance, were attracted by the old harbor area after a renovation that included a number of buildings by top-name architects, such as Frank Gehry, and the rechristening of the area as Medienhafen or "media harbor."
For QVC Germany, the German edition of the home shopping network familiar to U.S. viewers, the presence of high-quality infrastructure and many highly skilled production employees were both important draws. Ulrich Flatten, CEO of QVC Germany, says that the strength of the workers was a big part of the reason he chose to invest in Düsseldorf rather than nearby Cologne.
Düsseldorf's business-oriented approach isn't unique. Other cities have also sought to jump-start development through large projects like the Medienhafen (Media Port), according to Saikat Chaudhuri, a professor of management at Wharton, who grew up in Germany and retains close family ties with the country.
Frankfurt, for instance, asked the European Union to locate the European Central Bank's headquarters in Frankfurt, betting that whichever city was home to the bank would become an important finance center, according to Chaudhuri. The city also expanded its airport, making it a major hub for Lufthansa and helping to raise foreign recognition of Frankfurt. Munich, too, has worked hard to make itself more visible. "When Lufthansa decided to build a second hub, Munich pounced on it," says Chaudhuri. "That's helped position them internationally."
The Rhine-Neckar Metropolitan Area has set itself the goal of becoming one of the most competitive and attractive regions for business and industry in Europe by the year 2015. It is characterized by a blend of innovative enterprises, excellent scientific research and a high quality of life. Companies such as BASF, SAP, Heidelberger Druckmaschinen and Roche Diagnostics emerged from this area. Today, 50% of Germany's top 500 companies are based within 250 km. Innovative entrepreneurs are also embedded in the region's history: Carl Benz built the world's first automobile only a few miles outside the city of Mannheim. In addition, the bicycle was invented there.
The general reputation of a city as a place to live is also important, especially as the number of non-manufacturing jobs grows. For example, Bernhard Wendeln, president of WEGA Support, a global investment company, chose to settle his firm in Munich in large part because of the quality of life. "I chose Munich because I think it's the best place to live in Germany and it's the best place for me to do business in," Wendeln notes.
Although the roots of the investment business are in northern Germany, where the family's industrial bakery business first grew, Munich appealed to Wendeln because of its family friendly atmosphere, its cultural activities and the close proximity of mountains and lakes. In addition, the city's high standard of living makes it easier to attract employees, according to Wendeln.
The degree to which a city helps new firms settle in may also play a role in a company's enthusiasm for a particular city or state -- in this case Düsseldorf and the state of North Rhine-Westphalia. "The local business development agency for the German state of North Rhine-Westphalia recognized the potential of teleshopping at an early stage, supporting the development of the necessary infrastructure," says Flatten. "Politicians here understand our goals and are more willing to show flexibility." In particular, he points to the enthusiasm of Wolfgang Clement, the former minister-president of North Rhine-Westphalia, for turning Düsseldorf into a media location. Others point to the vision and drive of the late mayor Joachim Erwin, mayor of the city from 1999 until his death in 2008.
Interestingly, Düsseldorf never includes tax advantages as a deal-sweetener. Unlike many U.S. cities, the city shies away from offering special tax advantages to particular companies. Economic development officers instead stress its general virtue as a relatively low-tax city, which exists in part because the city is one of Germany's wealthiest and lives debt-free. "It's an interesting paradox," says Chaudhuri. "It's the wealthiest city in Germany and yet average costs are much lower."
Successful German cities also seem to spend as much time thinking about bringing in small companies as big ones. Düsseldorf, for example, does this in two ways -- first, by trying to provide a high level of support to newly arrived businesses. Often, this can mean something quite simple. For instance, the city development office has Russian, Chinese and Japanese speakers on staff to minimize any confusion that may arise. "I think that's a secret of our success, and I think only a few German cities [do] this," says Winfried Kruse, head of the City of Düsseldorf's economic development office.
This commitment extends beyond helping newcomers with corporate paperwork, to understanding the particular needs of their workers. For example, the city works hard to provide information to help expat workers -- such as Düsseldorf's 7,000 Japanese residents -- feel safer and more at home. The Japanese, for instance, are often concerned about moving their families out of ultra-safe Japan, where even small school children often take the subway alone. Such consideration isn't just a matter of being a good neighbor. Kruse says that "soft" considerations like these actually play an important role in a location decision.
Nor do they always wait for these companies to show up at the city gates. Instead, Düsseldorf development officials make a substantial effort to lure foreign businesses to set up shop. The city's economic development team regularly schedules trips all over the world, particularly to China, to extol the city's virtues, stressing both its livability and central location.
Competing for Advantage
Other cities, even some located near Düsseldorf, have not been quite as lucky or smart. For cities with debt or the social problems caused by being home to dying industries, such as coal mining, it's more difficult to attract new businesses. Occasionally, these kinds of downward spirals can be broken -- and in unexpected ways. In general, however, several trends seem likely to change the balance of competitive advantage in the future:
- More regional cooperation. The focus on city competition may have distracted from the possibilities of communities working together to attract new business to a region. Kruse of Düsseldorf says he is now looking into the possibility of encouraging cities outside Düsseldorf to work together on joint promotions.
- New companies. Fast-growing, middle-sized companies are a core strength of German cities. Aurich, for example, used to be nothing but a windy town of 40,000 near the North Sea. Today, Aurich is still windy, but it profits from its predicament. It is home to Enercon, one of the leading wind turbine producers in the world, and an employer of 11,000 people in Aurich and in production locations that include Portugal and India.
- The first and second most-important middle-sized companies in a particular industry segment are often located in the same town. Herzogenaurach in southern Germany, for instance, is home to the global headquarters of global sportswear brands Adidas and Puma. In fact, companies can find safety in even greater numbers. In Düsseldorf, for instance, more than 400 advertising companies now call the city home.
- Independent universities. As part of the educational reform currently under way, state universities are now much freer to set their own course. Over time, it seems likely that this greater degree of freedom, combined with a growing trend toward student-launched garage businesses, could create the sort of high-technology ecosystems that gave rise in the U.S. to Silicon Valley in California and the Research Triangle of North Carolina. The federal government is also supporting certain universities to develop special centers of excellence. Through government encouragement and support, institutions in Munich, Freiburg, Heidelberg and Mannheim, among other cities, have been designated centers of excellence.