Global Cities, Connectivity, and the Location Choice of MNC Regional Headquarters

• Author: Helen S. Du,René Belderbos,Anthony Goerzen
• Published date: 01 December 2017
• Date: 01 December 2017
• DOI: http://doi.org/10.1111/joms.12290

Global Cities, Connectivity, and the Location Choice

of MNC Regional Headquarters

Rene Belderbos, Helen S. Du and Anthony Goerzen

KU Leuven, UNU-MERIT and Maastricht University; NEOMA Business School; Queen’s University

ABSTRACT Regional headquarters (RHQs) perform a crucial bridging function between

corporate headquarters, regional affiliates, and other regional actors. Their bridging role and

associated connectivity needs lead MNCs to locate their RHQs in highly connected ‘global

cities’. We examine how the interplay between global city connectivity, geographic distance,

and RHQ roles determine the likelihood that particular cities are chosen as a location for

MNCs’ RHQ investments. Our inferences are based on an analysis of location choices for

1031 RHQs among 48 global cities. We find that while the geographic distance of a global

city to the MNC’s regional affiliates diminishes the likelihood that a given city is chosen, these

distance effects disappear when the global city is highly connected. Well connected global

cities, furthermore, attract investment in RHQs by MNCs from more distant countries-of-

origin. On average, city connectivity is a more important characteristic for RHQs that have

an entrepreneurial role.

Keywords: connectivity, geographic distance, global cities, location choice, regional

headquarters

INTRODUCTION

One of the manifestations of the increasing disaggregation and fragmentation of corpo-

rate headquarter (HQ) operations of multinational corporations (MNCs) is the growing

importance of regional headquarters (RHQs) (see, e.g., Desai, 2009; McKinsey &

Company, 2013). RHQs play an important intermediary or bridging role between

corporate headquarters, local affiliates, and other actors across multiple countries in

their regions (e.g., Hoenen et al., 2014; Lehrer and Asakawa, 1999). RHQs perform

intra-regional coordination and control activities as well as entrepreneurial opportunity-

seeking tasks by building ties with external actors such as existing and potential clients,

Address for reprints:Rene Belderbos, Department of Managerial Economics, Strategy and Innovation,

Faculty of Economics and Business, KU Leuven, Naamsestraat 69, B-3000 Leuven, Belgium (rene.

belderbos@kuleuven.be).

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C2017 John Wiley & Sons Ltd and Society for the Advancement of Management Studies

Journal of Management Studies 54:8 December 2017

doi: 10.1111/joms.12290

suppliers, as well as local governments. At the same time, they maintain close contact

with corporate headquarters to integrate and transfer knowledge and to align regional

with corporate strategies. In doing so, RHQs are generally expected to manage the

trade-offs between global integration and local responsiveness (Hoenen et al., 2014; Pra-

halad and Doz, 1987), to implement global strategies at a regional level, and to act on

regional opportunities (Yeung et al., 2001).

A distinct aspect of HQ operations is that they are disproportionately concentrated in

metropolitan areas (Bel and Fageda, 2008; Klier and Testa, 2002) – a trend which is

also appearing in developing economies (McKinsey & Company, 2013). The economic

geography literature has suggested that ‘global cities’, such as London, New York, and

Singapore, are a preferred location for MNCs. These cities are noted for the availability

of advanced producer services (such as marketing, accounting, law, and finance), their

cosmopolitan environment and, of particular importance for our purposes, their exten-

sive connectedness to local and global actors (Goerzen et al., 2013). Their unique set of

connections to the world economy allows these cities to function as centres of command

and control that provide MNCs with global reach (Friedmann, 1986; Sassen, 1996).

While there is an emerging understanding of the importance of global cities for HQ

operations, our study examines which global city characteristics are most influential in

the MNC’s RHQ location choice. This is important because we currently lack insight

into drivers of the location decision for RHQs, whilst these decisions will have important

consequences for MNCs’ effective operations. More specifically, we examine how the

interplay between global city connectivity and geographic distance influences spatial

transaction costs and the location decisions for new RHQs. Drawing on the extant liter-

ature, we conceive of connectivity as multifaceted, including international flows of peo-

ple, knowledge, and services. We define spatial transaction costs as those expenses (e.g.,

communication, coordination, and monitoring) that relate to the governance and moni-

toring of actions in the alignment of geographically dispersed activities to achieve syner-

gies or other competitive advantage (Baaij and Slangen, 2013). Our core argument is

that city connectivity can reduce several forms of spatial transaction costs, which, in

turn, reduces the role of geographic distance in the location choices of MNCs. Further-

more, the importance of connectivity for city location decisions depends on the function

of the RHQ and its network of affiliates in the region.

Our study contributes to the literature on HQ locations and the spatial disaggrega-

tion of HQ functions as well as the economic geography literature on global cities. We

respond specifically to the recent call in Cano-Kollmann et al. (2016) for new insights

into the interplay between geographic distance, MNCs, and connectivity. Our results

inform the geography and global city literatures by demonstrating the role of connectiv-

ity in attracting RHQs with specific mandates and positions in MNCs’ networks. To the

literature on HQ locations we contribute what we believe to be the first study of the spe-

cific drivers of regional HQ locations in contrast to prior research which has focused on

corporate or divisional HQs (e.g., Bel and Fageda, 2008; Benito et al., 2011; Birkinshaw

et al., 2006; Laamanen et al., 2012; Voget, 2011). We demonstrate that the interna-

tional connectivity of cities, rather than their local characteristics, determines much of

their attractiveness to RHQ operations. Empirically, we draw on an extensive database

of new RHQ investments by MNCs and conduct a mixed logit analysis of MNCs’

1272 R. Belderbos et al.

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C2017 John Wiley & Sons Ltd and Society for the Advancement of Management Studies

location choices for 1031 greenfield RHQ investments from among 48 global cities

between 2003–12.

LITERATURE REVIEW

We review the relevant literatures on RHQs and HQ location decisions, the importance

of spatial transactions costs for the (spatial) organization of MNCs, and prior work on

the concept of connectivity.

Regional Headquarters Roles within an MNC

The emergence of RHQs is one of the responses to the regionalization trend in the

world economy (Rugman, 2000; Rugman and Verbeke, 2004). Regionalization has

given impetus to the establishment of RHQs to develop and coordinate regional activ-

ities. According to Ambos and Schlegelmilch (2010), the number of European RHQs

has risen by 76 per cent during 2000–10 and, in 2005, more than 1100 RHQs were

established in the Asia-Pacific region (Enright, 2005). Similarly, our own data on RHQs

include more than 300 new RHQs established annually in recent years.

The general role of the RHQ is to bridge the distance between HQ, regional affili-

ates, and markets. The establishment of RHQs has risen as a solution to the trade-off

between global integration and local responsiveness: to create value within the MNC by

sharing knowledge, synergizing management, and providing support services (Goold

and Campbell, 1998; Lunnan and Zhao, 2014). The RHQ builds links with affiliates

across the host region to monitor, coordinate, and control their business activities. At

the same time, it maintains a strong relationship with the HQ to exchange information

and to achieve intrafirm synergies. Externally, the RHQ collects and reports informa-

tion concerning regional market opportunities and business environment changes. In

their role as brokers, RHQs have to understand local contexts as well as corporate prior-

ities (e.g., Alfoldi et al., 2012; Ambos and Schlegelmilch, 2010; Yeung et al., 2001).

The literature on RHQs has identified two major mandates with which they can be

charged: an entrepreneurial and administrative (e.g., Chandler, 1991; Lasserre, 1996;

Mahnke et al., 2012). An entrepreneurial role entails scouting for talent, seeking out new

business opportunities, signalling commitment to local markets, and sharing information

with corporate HQ. RHQs with an entrepreneurial mandate may also function as a

regional beachhead for business development, preparing for the establishment of other

affiliates (Lasserre, 1996). An administrative role, on the other hand, includes serving as the

command, control, and coordination centre of dispersed activities in the region, orchestrat-

ing resource pooling, and leading the effort to achieve intrafirm synergy.

Given the bridging function of the RHQ and role as a central node in the MNCs’

affiliate networks, RHQs have strong needs to connect to a variety of internal and exter-

nal actors across locations, enabling flows of knowledge, information, and resources.

This implies that the MNC’s RHQ location decision is likely to be influenced by the

international connectivity that a location can facilitate.

While the role of cities and city connectivity in the world economy has received atten-

tion in the geography literature (Alderson and Beckfield, 2004; Beaverstock et al., 2002;

1273Global Cities and Regional Headquarters Location

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