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April 5, 2007 

 Q&A: Federal Reserve Bank’s William Testa on Headquarters, Exports 4/19/2005
The mission of Going Global, which appears on ePrairie on most Tuesdays, is to educate and inform Midwest technology companies on what local technology companies are doing internationally so other firms can learn from the successes of like-minded peers.

CHICAGO – Late last year, the University of Illinois Press in conjunction with the Chicago Council on Foreign Relations published “Global Chicago,” a book that depicts the city of Chicago as a global city. William Testa contributed chapter two of the book, which is entitled “A City Reinvents Itself” and focuses on the role of the global economy in Chicago.

Testa is vice president and director of regional programs in the research department at the Federal Reserve Bank of Chicago.

He has written widely in the area of economic development programs, the Midwest economy and state-local public finance. He directed a comprehensive long-term study and forecast of the Midwest economy entitled “Assessing the Midwest Economy: Looking Back For the Future” and has fashioned a series of conferences on school reform.

Testa also serves in an advisory or director capacity to a variety of professional journals, non-profit organizations and economic development initiatives in the Midwest. Currently, Testa and his co-workers are midway through an analysis of the prospects for manufacturing in the Midwest.

Prior to joining the Chicago Fed in 1982, Testa was a visiting faculty member in the economics department at Tulane University in New Orleans and a graduate research fellow at the Academy for Contemporary Problems in Columbus, Ohio.

A native of Cleveland, Testa received his doctorate in economics from Ohio State University in 1981. In part one of a three-part Q&A, Testa sat down with international expert Michael Muth to discuss shifts in company headquarters, export successes and the pros and cons of companies relocating to Chicago.

Michael Muth: What has Chicago gained from the net addition of 13 company headquarters since 1990?
William Testa: In terms of mere workforce, the contribution isn’t that great especially because headquarters themselves are becoming smaller even as corporations grow larger. Earlier, we had the vision of the large corporate campus, but now it’s much more a small cadre of corporate leaders and thinkers with most routine services outsourced to business service firms.

Headquarters are important regional indicators of global business importance and bellwethers of business service growth and activity. HQ employees tend to be those very highly skilled and active people who often contribute greatly to civic life and philanthropy.

A look at Millennium Park in Chicago, which is funded by owners and leaders of Chicago-based companies, attests in a very visible way to that.

City school reform is an even more prominent example. At a more basic level, headquarters add somewhat to local demand for business services, which they often procure locally for their whole company network. Finally, the big city and important image they add is important (such as Boeing’s move to Chicago).

MM commentary: When a company relocates its headquarters to Chicago, people expect that to bring jobs. It no longer does. However, by hiring local service providers, that does add to the economy and thus creates jobs indirectly.

MM: There are 1,200 foreign-owned firms at more than 3,000 locations around Chicago employing approximately 200,000 people. Is this a good or bad thing for Chicago?
WT: I would argue it’s a very good thing for Chicago. When you speak with consultants and those who scour the Midwest for investment by foreigners, they say it reinvigorates local companies. The target business is scaling up to worldwide standards of technology and productivity.

It keeps our standard of living high and rising. Though it might not be happy for everyone (though it often is), that’s the system we’ve adopted whether it’s a domestic or foreign acquisition. If foreign companies find our technology and expertise interesting enough to invest in it, that helps the local economy.

MM commentary: I wholeheartedly agree here. Jobs, tax revenues and business culture exchanges are just a few of the benefits we realize when foreign companies move into Chicago.

MM: How does Chicago benefit from Boeing’s Office of Technology, which had formal affiliations with universities and technical institutes around the world?
WT: Technology networks from large companies are worldwide. To the extent that good ideas and technological advantages are a public good, they benefit everyone through new products and lower prices. That our companies are looking worldwide is beneficial locally, nationally and worldwide. Investment by companies like Boeing have a very high return when we repatriate profits and foreign income back to stockholders in the U.S.

MM commentary: While we might not see anything explicitly, we do benefit from a trickle-down effect when progressive foreign technologies are implemented locally.

MM: If global companies are increasingly “thinking globally and acting locally,” how are local Chicago resources contributing to the remarkable export successes from Motorola (foreign sales are 87 percent of total sales), Abbott (37 percent), Baxter (54 percent) and Molex (65 percent)? WT: The local environment is much like John Warner’s quote. When you have a business, your cultural learning environment steers you in the direction of export success. A big city like Chicago ensures that. O’Hare enables that very easily. We can also recruit the right people here (especially young people).

Unlike other urban environments, we offer many lifestyle possibilities affordably: a ranch home in the suburbs, an urban lifestyle in the city and everything in between.

We’re having problems with elementary to secondary education in the city and road congestion in the suburbs. Those are issues being confronted by Metropolis 2020. We want to make government work together with business to work out those problems and to keep this marvelous place working on the inside and connected to the outside.

MM commentary: I do believe much of these successes are due to the ability to afford to act locally.

MM: Any idea how much of the remarkable exports to Mexico (106 percent growth from 1993 to 1999) are of high-tech products and services?
WT: I think a lot of that will end up being capital goods such as Caterpillar construction equipment, John Deere agricultural equipment and communications products from Motorola. We contribute the R&D and high-end products to our trade relations. Part of those exports are exported there and then exported back.

We may send the labor-intensive stuff to Mexico for processing and bring it back in for our own use or to export it to third markets. In a way, it’s losing some jobs, but in another way, it’s also keeping other jobs because we are exporting what we don’t do well. By doing so, we keep our high productivity jobs here in the Midwest.

MM: Why does Chicago receive less well-educated immigrants rather than potential knowledge-industry workers? Is this a result of the demise of H-1B visas after Y2K and September 11?
WT: I don’t know the specifics on H-1B visas. You hear pervasively of the recent difficulties that are dampening the flow of knowledge workers. We have brought in both types of workers to Chicago in the 1990s (including engineers and technical workers into the western I-88 tech corridor).

For most skilled professions, it’s more difficult for workers to emigrate.

You must have credentials and great language skills to be productive in a new country. For example, it’s very hard in medicine to pass the licensing exam or the bar exam for lawyers. It’s easier in engineering because it’s more numbers-oriented. So-called “unskilled” or “manual” tasks are also easier.

MM: You lump Ontario in with other Midwestern states. Should local companies look at Ontario that way?
WT: In manufacturing, they are indeed another state. The border has been mostly seamless (especially in automotive). There is an absence of tariff barriers since the Auto Pact of 1965 and the Trade Agreement of 1989.

Ontario is very much the industrial center of Canada. It has a sizable automotive component that is highly integrated with the Midwest states. The two caveats to our open border are that September 11 has put a chill on the border and integration with Canada. In just-in-time manufacturing, that’s critical to multi-national location and trade.

About 40 percent of trade comes through the port of Detroit-Windsor and nearby Port Huron-Sarnia. Can we continue to count on an open border given the heightened security and delays that may emerge if we have another incident of terrorism?

Secondly, despite no tariff barriers, it’s estimated that we’re only 50 percent there in terms of integration with Canada because regulations just aren’t harmonized and because of other bureaucratic hurdles. We’re not a single economy. For Canada, these issues are critical. Canada is just a thin ribbon of a nation along the U.S. border.

For the Midwest, the issues are much more important than we realize; trade creates wealth and well-being. Borders are barriers that put an economy on the edge, on the periphery, rather than in the healthy center.

MM commentary: As a former employee of the country of Canada, I reiterate: treat Canada and especially Ontario (which has 40 percent of the GDP and population of Canada) just like Ohio. It’s the closest, cheapest and easiest foreign destination and it requires little more effort to do business there than Parma.

MM: Is there any reason to be concerned that Chicago (6.7 percent) lags the Midwest (7.6 percent) and the U.S. (6.9 percent) in terms of manufacturing exports and gross state product?
WT: Probably not. In Chicago, we’re only as manufacturing intensive as the rest of the nation. Exports reflect that. The surrounding Midwest areas do more of both.

Chicago has become more of a service center. The sunshine in that story is we’ve become a successful service place in the past 30 years and have raised our incomes in that time. It’s a heroic story. It’s absolute success that is the real story and it shows the ability of our economy to regenerate itself.

Michael Muth is managing director of GATA, an international business development consultancy that helps technology companies build international partnerships. He can be reached at mike@intlalliances.com.
Click here for Muth’s full biography.

Previous Columns:
Q&A: Lisle Technology Partners CEO Adarsh Arora on Keys to Outsourcing (4/5/2005)
Q&A: Lisle Technology Partners CEO Adarsh Arora on Outsourcing in India (3/22/2005)
Q&A: Lisle Technology Partners CEO Adarsh Arora on Offshore Outsourcing (3/15/2005)
Q&A: CEC’s David Weinstein, Kapil Chaudhary on International Experience (3/1/2005)
Q&A: CEC’s David Weinstein, Kapil Chaudhary on Internationalization (2/22/2005)
Q&A: Brian Briggs of Acclaro on Whether to Outsource Localization (2/8/2005)
Q&A: Brian Briggs of Acclaro on the Complexities of Localization (2/1/2005)
Q&A: Brian Briggs of Acclaro on International Localization Services (1/25/2005)
Q&A: RPX’s Robert Okabe, IEC’s John Janowiak on Global Events (1/11/2005)
Q&As: FastRoot’s Terry Howerton, Doug Cogswell of ADVIZOR Solutions (1/4/2005)
Q&A: Opportunity International’s John Kamperschroer on Partnerships (12/21/2004)
Q&A: Opportunity International’s John Kamperschroer on Technology (12/14/2004)
Q&A: Opportunity International’s John Kamperschroer on Innovative Financing (12/7/2004)
Q&A: IEC Senior Director John Janowiak on Trade Show Realities (11/16/2004)
Q&A: International Engineering Consortium Senior Director John Janowiak (11/9/2004)
Q&A: Founder John Lee of Chicago’s Hostway on Web Site Localization (11/2/2004)
Q&A: Founder John Lee of Chicago’s Hostway on Growing Globally (10/26/2004)
International M.B.A. Guide to Moore School of Business, Thunderbird (10/12/2004)
Your International M.B.A. Guide to Northwestern, Loyola University (10/5/2004)
Entrepreneur’s Guide to International M.B.A. Programs in Chicago (9/28/2004)
Q&A: Prairie Angels Founder Bob Okabe on Diction, International Cities (9/7/2004)
Q&A: Prairie Angels Founder Bob Okabe on International Adaptation (9/1/2004)
Q&A: Prairie Angels Founder Bob Okabe on Managing U.S. Subsidiaries (8/24/2004)
Q&A: Origin Ventures Founder Steven Miller on Investments, Angels (8/17/2004)
Q&A: Origin Ventures Founder Steven Miller on the Canadian Way (8/9/2004)
Q&A: CPCP Founder David Baeckelandt on Multilingual Importance, Mentoring (8/3/2004)
Q&A: CPCP Founder David Baeckelandt on Japanese Disclosure, Due Diligence (7/27/2004)
Q&A: Chicago Pacific Capital Founder David Baeckelandt on Overseas Funding (7/20/2004)
Q&A: ADVIZOR Solutions CEO Doug Cogswell on the Art of Partnering (7/13/2004)
Q&A: ADVIZOR Solutions CEO Doug Cogswell on BP, AstraZeneca Wins (7/6/2004)
Q&A: ADVIZOR Solutions CEO Doug Cogswell on Global Software (6/29/2004)
Q&A: CEO Terry Howerton on Why Chicago, Ukraine Made FastRoot (6/22/2004)
Q&A: FastRoot CEO Terry Howerton on Blended Chicago Approach (6/15/2004)

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