CHICAGO – William Testa is vice president and director of regional programs in the research department at the Federal Reserve Bank of Chicago. In part two of a three-part Q&A, Testa sat down with international expert Michael Muth to discuss the pros and cons of Chicago as a business center.

Michael Muth: Do you think conversations about global business go on below the executive level?
William Testa: I think the productivity and activity does matter below the executive level. Headquarters operations and white-collar activity is all about learning, bringing it into the firm and influencing business decisions. These are all global economic activities.

It’s part of what goes on in business formation in Silicon Valley, New York City and Chicago. How can public policy help? It’s difficult to generalize. For large companies, recruiting and quality of life are probably key. Local government can keep cities functioning in commuting, air transport and public safety.

Education, quality of local schools, recreation, open lands and parkways are increasingly vital. It’s dicey for business-type functions. For example, in technology transfer, large corporations can and do take care of themselves in this regard. They scour the world for new technology like large Chicago companies such as Abbott and Illinois Tool Works.

However, it may be more difficult for smaller manufacturers that may be concentrated on local customers and day-to-day survival.

It’s difficult to find the time for research. Perhaps there’s something that can be done locally that can be expanded to small local companies. I recently met with NEO in Ann Arbor, Mich., which is an organization from northeast Ohio that’s trying to marry the small companies with useful local technology.

He has recently written a book that will further help guide regional development policies regarding technology. “The Past and Future of America’s Economy” focuses on the implications for productivity of the latest economic transformation, how economists have looked at the role of IT and productivity and what we should do going forward with respect to policy.

MM: What contributions do IT services contribute to Chicago’s growth as a business services center?
WT: My sense is that cities such as Chicago are based on being communications hubs both digitally and face to face. IT and face-to-face communications are highly complementary activities that make a global city highly productive. The routine transmission of data leads to more exchange of subjective and creative information as well as new products, processes and business structures.

MM: It is said that corporate control functions of global companies are becoming more dispersed. This suggests that they are shifting toward mid-sized U.S. metropolitan areas with populations in the 1 to 2 million range. This contrasts with the business services industry, which continues to concentrate in the very largest cities. Which way are IT functions going? Dispersed or concentrated?
WT: You can see this kind of filtering as headquarters appearing less in New York City even while the very top tier of business service activity (such as management consulting and specialized legal and finance) continue to concentrate in large global cities. Even so, smaller regional places have done well by housing IT operations, administrative and sales offices and back-office activities.

That is because places such as Cincinatti and Indianapolis are much more interesting than they used to be. They’ve redone their downtowns and built sports stadiums. They have interesting older ethnic neighborhoods and trendy districts. Quality of life and the richness of a city’s job opportunities are increasingly important to attract the highest skilled and most creative people to a city.

At our recent HQ conference, Matt Krentz, who heads up the Chicago office of the Boston Consulting Group, spoke to us of their corporate form and geography. His firm isn’t hierarchal. It’s a “neural network” in organization and form. They don’t really have a headquarters. The number of consultants based in Chicago, for example, is the number they are able to attract or recruit here based on quality of life.

Since Chicago’s surrounding markets for its services are shrinking, it has to grow beyond its boundaries in selling and trading further.

It has to become more global. Can we make the city more productive so our services are sold globally? Computer and similar services seem to be a promising strength and possible direction. As a large city, Chicago may be able to lead the way for a broader regional revival much as London has done for Great Britain.

That’s because digitized information allows you to carry your office with you, which allows you to communicate face to face with the most creative people who in turn tend to live and work not in rural areas but in global cities. You travel to make impressions and do deals. Technology hasn’t dispersed contact. It has facilitated its concentration.

The hubs of meetings are still here in our office buildings, convention centers, restaurants, hotels and airports. The jet age’s growth at and through O’Hare was key to the business meeting industry in Chicago. Global cities are also learning places and a high-density network through which both digitized information and people must flow.

As for the framework itself, I see the Chicago area as the business capital of a very large but shrinking industrial region. Both the income and employment are shrinking. Still, it’s a happy circumstance that we’re more productive and our national output is rising while it takes less workers to do the same work. This means that our standard of living can continue to rise as a nation.

In the process, the size of the region’s economy is shrinking. As that market shrinks, Chicago’s manufacturing and the services that are sold to the surrounding region are naturally downsizing. If Chicago wants to maintain its size, it needs to find new industries aside from manufacturing along with new markets to serve with its business service companies.

Otherwise, if people here aren’t mobile and move onto other locales, their relative income could fall. It’s a continual challenge for Chicago and the Midwest in the development arena to maintain the size of its economy. What are its possibilities? Technology commercialization in Chicago could possibly be stronger.

There is a lot of technological capital that’s a legacy of our industrial past that exists in large corporations and universities. While we’ll never be Silicon Valley, there is a gap between where we are and where we could be. What has saved Chicago so far is its strong growth in business services (such as accounting or consulting).

Because of them, emerging firms are very productive here. Such firms need capital and specialized services, lawyers and accountants. Big cities have always been fertile for emerging firms. Chicago has also been successful because it easily can recruit households of two or more skilled wage earners.