Bigger isn’t better in Amazon’s contest

The competition to host HQ2, as Amazon’s planned second headquarters is called, has captivated the nation. The lucky city can expect an economic bonanza: 50,000 jobs plus the tech ecosystem that the online retail giant’s presence will inevitably attract.

But the winner doesn’t have to be a big metropolis. On the contrary, Amazon has the power to create an entirely new American technology hub.

In a recent piece, Bloomberg View columnist Conor Sen discusses some of the factors that will (or should) influence Amazon’s decision. These include an educated workforce, an airport, tax incentives, and—perhaps most importantly—a tolerant local culture. But Sen makes one assumption that I’m not sure holds true: that the winner of HQ2 is going to have to be a large city.

“Amazon says it’s considering metro areas of a million or more, but realistically to provide 50,000 employees a metro area is going to need to be significantly larger than that. … Is Amazon, a company that thinks of growth in terms of decades, going to locate a headquarters in a place where it might have to hire over 4 percent of the metro area’s labor force[?]”

HQ2 would not do all of its hiring locally, any more than Amazon’s current headquarters hires exclusively from Seattle. Its mere presence would increase any city’s educated workforce—indeed, boosting the tax base is one reason cities want it in the first place. The number of tech workers in the area would also rise when a bunch of other tech companies moved into town to be close to Amazon. This would, in turn, increase the skilled labor pool that Amazon could draw on—an effect economists call “thick markets.”

Economists have long debated whether jobs tend to go where the workers are or vice versa. The most likely answer is both. Amazon certainly could decide to feed off an existing tech hub like Boston, or a huge metropolis like Philadelphia. But it could also choose to create its own.

There’s actually an important precedent: Austin, Texas. In the early 1990s, a group of American technology companies and universities, along with the U.S. Department of Defense, decided to band together to combat Japanese dominance in the semiconductor industry. The resulting consortium, called Sematech, held a highly publicized competition to decide where to locate its operations. Contenders included the Silicon Valley and Boston, but in the end, the prize went to an up-and-coming college town: Austin.

Austin’s surprise victory was no random event. The area was already home to reputable tech companies like Dell, Texas Instruments and Motorola. And it had the University of Texas, an unusually large and high-quality college. But the city also had an unusual group of visionary leaders determined to transform the sleepy college town into one of the country’s premier tech hubs. These included George Kozmetsky, a former technology entrepreneur who had been a professor at UT for 16 years, and Pike Powers, a consultant with a passion for regional development.

In a 2004 essay, Powers listed what he saw as the factors behind Austin’s success. Corporate incentives were important, but he argues that creating capacity was even more crucial. This entailed ensuring sufficient land and water resources, encouraging university-business cooperation, building high-quality infrastructure, and creating a livable environment. Austin had it all—a tolerant, diverse culture, plenty of open space, good restaurants and bars, sports facilities, and a legendary live music scene.

Sematech is long gone, but Austin’s reputation remains. It’s known as one of the country’s premier tech hubs, probably second only to Silicon Valley. Although it’s undoubtedly in the running for HQ2, Amazon could also choose to create the next Austin, a place that’s more like Austin was back in 1991.

Which up-and-coming tech cities might fit the bill? Raleigh, N.C., would be one. The population of the metro area barely exceeds Amazon’s threshold of 1 million, but the city is growing at a startling pace, with tech industries at the forefront. With its close proximity to Research Triangle Park, and to three good schools—Duke, the University of North Carolina at Chapel Hill, and North Carolina State University—the area looks like the top contender.

Other possibilities include Nashville and Minneapolis. Both have the requisite population size and international airports. Both have large universities nearby, plenty of cheap land, and reputations as rising startup hubs. And both, like Raleigh, are located far from Amazon’s current headquarters on the West Coast.

So while a big city would be fine, Amazon clearly has another option. It could use its HQ2 to create the country’s next great Technopolis.