Danger of an extreme spatial agglomeration of firms
"Financial Firms Are Scattering Operations," New York Times, September 21, 2001
When deciding where to locate a firm, two considerations are important: spatial mutual attraction and spatial repulsion between individual firms. Certain economic activities are complementary to each other and benefit from being located in close proximity, while other activities are antagonistic to each other and are better off being located as far away from each other as possible. For example, a theater and a restaurant or nightclub are complementary to each other and benefit from being located in the same place. A large department store and a warehouse also need to be nearby each other. On the other hand, a large manufacturing plant and a high-class residential neighborhood are best located away from each other. Often this separation is mandated by the zoning laws of a city or town.
New York's World Trade Center was the center for world finance, and the two main towers of the Center housed many prominent firms in the financial industry. Firms including investment, banking, accounting, law, and consulting located at the World Trade Center, because the business of these firms complemented to each other. The extreme agglomeration of the related firms in one location afforded significant economies (cost savings) of scale (the size of operation) due to the physical proximity of the related firms. Rightly or wrongly, many firms still believe that a face-to-face personal relationship cannot be replaced by communication vie the Internet or websites, because, as conventional wisdom goes, the Internet cannot accomplish a personal "handshake." In addition to this advantage, a high rise building provides a significant savings on rent in a metropolis with very high real estate prices.
However, the September 11, 2001 terrorist attacks rendered serious doubt about the economic advantage of the over-concentration of a firm in one location. Giant companies like American Express and Merrill Lynch were mainly concentrated in the World Trade Center and suffered serious losses of employees and business. In comparison, a big Swiss bank, UBS, lost only two employees in the disaster and their investment banking operation was largely unaffected, because the bank scattered its operations far away from the financial center, including such places as its trading center in Stamford, Conn. and its brokerage operations in Weehawken, N.J. UBS used modern videoconferencing technology to effectively interconnect its scattered branch offices without undue difficulties or delays. UBS has 10,000 employees, only 3,000 of whom work in New York city.
Firms must now consider a possible terrorist attack as a potential cost of over-concentration in one location, and this cost has to be subtracted from the economic benefits of spatial agglomeration. The New York tragedy illustrates that such a cost may be very high. If other investment and banking firms were to adopt the dispersion model of UBS, then there would be a significant outflow of financial activities from the Wall Street area. Not only would investment and banking firms relocate, but related firms such as accounting and law firms, would follow the exodus to remain close to the activities of banking and investment firms. This could cause Wall Street to lose its prestige and power as the world center of investment activities. The actual outcome of the location decisions of financial firms remains to be seen.