Emergence Of Global Cities Economics Essay

According to Sassen et al. global cities have become increasingly important in the last decades because of major changes in the macro-economic landscape. One of these major changes is the ascendance of information technologies and the associated increase in the mobility and liquidity of capital. Cross-border economic processes such as flows of capital, labor, goods, raw materials and tourists, have already existed for a long time. These processes, however, mainly used to take place in the inter-state system. The key actors in this system were national states and the entire international system was embedded in this inter-state system. Due to privatization, deregulation, the opening up of national economies to foreign firms, and the growing participation of national economic actors in global markets the national as a spatial unit has partially been unbundled or at least been weakened. This weakening has resulted in the emergence of other spatial units or scales. Among these are the sub-national, notably cities and regions; cross-border regions encompassing two or more sub-national entities; and supra-national entities, i.e. global digitalized markets and free trade blocs. Sassen states that the changes in the macro-economic environment, which are mentioned before, have led to the emergence of global cities.

Difference global vs world cities

Sassen points out that she knowingly has chosen the term global city, instead of the obvious alternative, world city. She has done this because the term world city refers to a type of city which has been around for centuries. Sassen states that most of today’s global cities are also world cities, but there may well be some global cities today that are not world cities in the full, rich sense of that term. We will elaborate on the world city later, when we discuss John Friedman’s work.

Sassen’s Global City Model

The goal of my thesis is to find out what global-city characteristics induce MNCs to choose a certain global city as the location for their headquarters. In order to fully be able to answer this question it is important that I start with explaining what a global city exactly is. The explanation I provide is based on Saskia Sassen’s global city model, her model consists of seven hypotheses and I will explain these briefly.

First, globalization evokes the geographical diffusion of economic activities and along with the simultaneous integration of such geographically diffused activities, this is a main factor which induces the growth and importance of central corporate functions. When a firm’s operations become more dispersed across different countries, the firm’s central functions become accordingly more complex and strategic.

Second, since these central functions become this complex, the headquarters of MNCs become more and more reliant on outsourcing: they buy a share of their central functions from highly specialized service firms – accounting, legal, public relations, programming, telecommunication and other such services. While, not long ago, the key site for the production of these central headquarter functions was the headquarter itself, nowadays a second key site has arisen. Although this is especially the case for firms involved in global markets and non-routine operations, all headquarters of large firms are buying more of such inputs rather than producing them in-house.

Third, the increasing demand for specialized services leads to a new agglomeration dynamic. The urban environment functions – due to the presence of a mix of firms, talents, and expertise from a broad range of specialized fields – as an information center. Being in a city becomes synonymous with being in an extremely and dense information loop.

Sassen’s fourth hypothesis is derived from the previous one. She states that the more headquarters outsource their most complex, unstandardized functions, the freer they are to choose any location. This is the case since less work that is done in the headquarters is subject to agglomeration economies. This indicates once again that the highly specialized and networked services sector is the key sector specifying the distinctive production advantages of global cities. While developing this hypothesis Sassen was responding to a very common notion, the fact that the amount of headquarters is what specifies a global city. In many countries it may still be the case that the country’s leading business center also possesses the largest concentration of headquarters. In some countries however, there are multiple locational options for such headquarters, since we find well-developed infrastructure outside of the leading business center.

Hypothesis five states that the specialized service firms, present in global cities, need to construct a transnational servicing network. This network consists of affiliates or other forms of partnerships, as a result of this there has been a strengthening of cross border city-to-city transactions and networks. This might be seen as the beginning of the formation of transnational urban systems. A result of this hypothesis is the fact that the gap between the economic fortune of these connected global cities and the economic fortune of their hinterland and their national economies becomes larger. Nowadays these transnational networks are of great importance for the major business centers of the world. In prospect to this, Sassen states that there is no such thing as a single global city.

Sassen’s sixth hypothesis states that there has been a raise in the degree of socio-economic inequality in global cities. This raise is caused by the growing number of high-level professionals and high profit making specialized service firms present in global cities. Since specialized services have gained significantly in importance, the value of top level professionals and their number has risen. The quality of these services depends to a large extent on the talent of the employees who perform these services, this makes proven talent an added value. This means that workers who possess of these attributes experience rapid increases in their reward structure and workers who do not possess of these attributes are likely to get caught in the opposite cycle. This is the cause of the growing level of inequality in global cities.

A seventh hypothesis, is that one result of the dynamics described in hypothesis six, is the growing informalization of a range of economic activities which find their effective demand in these cities, yet have profit rates that do not allow them to compete for various resources with the high-profit making firms at the top of the system. A possible solution, in order to survive under these conditions, is informalizing part of or all production and distribution activities.

The role of innovations in communication technology

Globalized economic sectors tend to be intensive users of the new telecommunications and computer technologies, on top of this, the output these sectors produce is becoming increasingly de-materialize. This raises a question as to whether they should benefit from agglomeration economies. Sassen points out the growing evidence that networks are a crucial variable that is to be distinguished from technical networks. Even before the current technologies were developed, these business networks were crucial. The business networks we have mentioned benefit significantly from agglomeration economies and hence thrive in cities even today when simultaneous global communication is possible.

Firms with large numbers of geographically dispersed factories and service outlets encounter new needs for central coordination and servicing. This implies a dynamic of simultaneous geographic dispersal and concentration and this dynamic is one of the key elements in the organizational architecture of the global economic system. Indeed, the leading financial centers inside countries concentrate a greater share of national financial activity than even ten years ago. This is an unexpected evolution for a globalized and digitized economic sector. This evolution is caused by the fact that national and global markets as well as globally integrated organizations require central places where the work of globalization gets done. In order to implement and manage global economic systems, finance and advanced corporate services are needed to be produced. The preferred sites for the production of these services are cities. Further, the firms who produce these services need a physical infrastructure containing strategic nodes with hyper-concentration of facilities. Finally, Sassen states that even the production process of the most advanced information industries is at least partly place-bound since their production process requires a combination of resources even when their outputs are hypermobile.

The changes in communication technology have not only influenced the degree of concentration of financial activity, they have also altered the role of centrality and hence of cities as economic entities. Formerly, the center was synonymous with the downtown or Central Business District. Due to new communication technologies, this is no longer the case. Nowadays what is seen as the center can assume several geographic forms, ranging from the CBD to a new global grid of cities. Sassen states that today one can observe centrality in three different forms. First, although the CBD has been altered by economic and technological change, it remains a form of centrality with great importance. Second, the center can extend into a metropolitan area in the form of a grid of nodes of intense business activity. The nodes in this grid are both connected by cyber-routes and more conventional forms of communications infrastructure, such as rail and highways connecting to airports. These conventional infrastructures are likely to maximize the economic advantages which follow from the new communication technologies. Finally, through telematics and intense economic transactions, transterritorial “centers” are being constituted, meaning that the major international financial and business centers are linked at the inter-urban level.