A company establishing a new headquarters, or going as far as picking up its bags and shipping out to a more welcoming location, is nothing new, but in the wake of the financial crisis the spotlight has been focused more firmly on businesses that are relocating.

 Companies are increasingly looking for areas where their businesses might operate more efficiently or that might give them access to new markets.


 Today, new regulations and tax hikes, brought about by the crisis in a number of Western countries, have prompted howls of protest from many companies, particularly in the financial sector. Several have threatened to move their headquarters to more tax-friendly countries, such as Switzerland, and a few have actually followed through and left.

And now the hard part...

 But these moves and investments are not as simple as one might think, especially when it comes to relocating a corporate headquarters and not necessarily the entire company itself. This could be part of the reason why to date there has not been a mass or noticeable corporate exodus from one country to another. However, figures show that such moves and the building of new headquarters are still happening and have been growing steadily in number over the past few years.

 This implies that under the right circumstances a company will choose to relocate elsewhere.

 According to data from investment monitor fDi Markets, greenfield headquarter investment projects have grown by an average of 13.9% a year on a global basis since 2003, and in some sectors this growth reached record levels during the global financial crisis.

 The fastest annual growth has been in the US, which has registered an average annual growth in inbound headquarter investments of 40.9% since 2003, though other countries such as Singapore, the UK and Germany have also impressed. Companies from these countries, especially Siemens and General Electric, were particularly active in making outward headquarter investments.

 So why are these destinations attracting investment over others? The truth is that the most traditional factors – tax and regulations – are only two of many key considerations that firms must look at before undertaking such a venture. Also taken into account are personnel, strategic location, infrastructure and intangible factors such as lifestyle and reputation, which are arguably just as important.

 While a few clear trends are emerging on headquarter investments, the key issue remains one of the most basic. The first thing a company has to consider is the role of the headquarters itself. The functions of a headquarters can range dramatically, and in some circumstances a move to a new town or city would scarcely matter, or could even be detrimental.

 For example, if a hedge fund were to move from London to Geneva, there would be less tax on the headquarters’ operations, but some UK taxes would be unavoidable since a large part of its client base and market would likely come from the UK and other jurisdictions where the tax climate is not as advantageous. Financial firms made significantly more moves in 2009, but the number of moves compared to other sectors was relatively low.

 One company that made a move was Mauritian private equity firm Aureos Capital, which made a headquarter investment into the Asian finance hub of Singapore. The group mainly deals with emerging markets and plans to open a new head office in the country. In the move, several senior executives will be relocated from London because of rising costs.

Outside of tax

 Mike Curran, director for tax at professional services group PricewaterhouseCoopers, says that for many of these companies: “Tax is a factor, but not the only one. Most companies can’t relocate because they will have a UK tax anyway if a large part of their profits are coming from the UK. If that is the case, then moving hasn’t really changed anything. They might find that in the end a move costs more.”

 He also points out that a financial services firm is not creating or delivering a physical product, so the location of its headquarters is based more on access to markets than regulation or tax. Without question, there are advantages to a financial firm operating in Switzerland, but the decision to pack up and move is not as cut and dried as it might seem.

 Compare this to a firm where the headquarters have a much more intricate role in the manufacturing and distribution of its products, such as for an IT company. Interestingly, the IT sector has accounted for the highest number of headquarter investment projects every year since 2003, even though the annual growth rate of these investments is below average, at 5.1%.

 In the case of an IT firm, it will have several diverse issues to think about before investing in a new headquarters or moving. One critical element is the willingness of staff members to move with the company. If the destination does not offer as good a quality of life, then the firm will have to ensure that there are enough people who would want to move, or that there is enough talent near the target destination to fill the gaps. Perhaps employing a workforce would be cheaper in a different location, but decision-makers will need to ask if new employees will be as skilled and efficient.

 Another issue could be basic infrastructure. If officials at the headquarters have difficulty moving around and accessing other markets, it makes sense to move to an area where this could be improved. The situation is compounded if a company’s products are made at the headquarters, as the need for ease of shipping and transportation of goods is crucial.

 Russian software and IT provider Softline Company recently announced that it was investing in a headquarters project in Cairo that will serve as the company’s brain trust for the Middle East and Africa. Softline, which specialises in software licensing, training, technical support and IT consulting, says it chose Cairo and Egypt for the domestic market growth potential and proximity and ease of access to regional markets and customers.

Adding value

 Michael Goold, director of the Ashridge strategic management centre, believes that the trap that most companies fall into when pondering this kind of investment is that the first priority is cost cutting, when it should be about adding value. He is not convinced that the recession has had a significant impact on these decisions, as the logic behind these investments is essentially the same.

 He says: “Our view of the role of the headquarters is that it should add some value. We recommend looking keenly at cost basis. We’re not against reducing unnecessary costs, but [companies] need to think of it as net of cost.

 “We did a survey on this some years ago, and generally the presumption tends to be that a larger and maybe more expensive headquarters is associated with poor performance and that leaner operations are better. We found the reverse is true, and our research suggested that on average, companies with larger headquarters performed better.”

 While each company has its different needs, it is ultimately up to the destination city to prove that it deserves the business of those seeking to relocate. These places need to have favourable tax regimes, sufficient infrastructure, a talented and educated workforce and a high standard of living. It also helps if the domestic market is in good shape and poised for growth. Without ticking the majority of these boxes, attracting companies is no easy task. Cities and regions trying to attract businesses are taking note and recognising that to be a truly interesting place for relocations, far more is needed than competitive tax rates and less red tape.

 fDi Markets data shows that the cities that have received the most headquarters investment in the past seven years are Singapore, London, Hong Kong, Dubai and Shanghai. In total, these have cities made up 21.6% of all inbound projects since 2003. Of those, it was Singapore that received the most investment, with 200 projects coming from 187 companies.

Meeting the needs

 Magalie Heraud, head of strategy and insight at Think London, a group dedicated to attracting FDI to the UK capital, credits success in this area to meeting key criteria for businesses. However, she adds that following the economic crisis, the competition to attract investment is fiercer than ever and that locations have to continue to be proactive. She believes a major challenge will eventually come from Shanghai, which is positioning itself to become a hub for Asian trade and finance.

 In response to this increased competition, Ms Heraud says: “We’re continuing with an ambitious strategy to promote London as the world’s capital for business. This involves developing transportation, such as a link between Canary Wharf and Heathrow and the development of the city’s east side which will be part of the 2012 Olympics.”

 Aside from the impact a headquarter investment can have on a company, the effect it can have on a town or city can be enormous. Evidence shows that when companies make investments, towns or cities on the receiving end can reap the benefits, especially in the form of revenue and job creation. In 2009, an estimated 74,375 jobs were created based upon these moves, a figure that was 20.9% higher than the previous year. The average number of jobs created per investment since 2003 is 114.

 Other than jobs, cities can see boons in a few other unexpected areas. One is in education. Ms Heraud says that these kinds of investments are an incentive for a location to have the right kind of talent and a skilled workforce available. Politicians have recognised that headquarters can create demand for high-level talent, and the best way to supply this is to have well-funded schools and universities.

 Furthermore, there can be a domino effect from competing corporations. If a rival company establishes a presence in one location, another company might feel obliged to follow suit so that their competitor does not dominate a particular market. Ms Heraud says this can result in a city strengthening an existing cluster of business.

 If a location can get one big name, she explains, others will possibly follow.

Increased competition

 So as the world economy begins to creep out of recession, companies will continue hunting for destinations to make new headquarter investments. Even before the downturn began, groups were looking for ways to access new markets and trim costs, and there is no reason for them stop. Cities have reaped the benefits from these investments, and while some places have more natural advantages than others, new locations are looking for ways they can get a piece of the pie.

 A good percentage of destinations for new investments were not the global financial capitals or obvious tax shelters. Just recently Barcelona-based biotechnology firm Sepmag Technologies invested in a headquarter project in Atlanta, Georgia, and mentioned that it was attracted to the city’s infrastructure, intellectual capital and existing biotechnology industry. Atlanta and other such cities might not have the size and clout of metropolises such as London or Hong Kong, but by playing to their strengths, they are winning new business.