Where the new jobs are

In the digital economy, jobs in high-growth tech industries are being centralised around company headquarters. Cities that cannot foster these companies will lose out in the race for jobs.

Do you know someone who has lost their job in the last few years working in IT, media, finance or retail? These industries (and others) are already feeling the pinch of “online gravity”: a special set of economic forces and drivers that increasingly govern business in the age of the web.

Much has been made of the disappearance of jobs due to the digitisation, automation and networking of many industries, most notably in traditional media. But careful global economic analysis has shown the internet has in fact added more jobs than it has destroyed.

According to McKinsey and Company, the internet has created 2.6 new jobs for every one deleted. What’s becoming increasingly apparent is that the location and setting for where these new jobs appear is often not the same for those which were lost.

Businesses online are being influenced by a different set of economic forces than those that exist purely offline. I call these forces “online gravity”, not unlike the forces that led to the formation of our solar system. These forces favour the creation of planet-like superstructures with lots of white space in between. In a former article (Why there’s no Pepsi® in cyberspace) I outlined this phenomena and here I examine how online gravity is reshaping the future of work.

Online gravity means more centralisation

In the new digital economy, more and more companies are able to centralise their employment around their headquarters. This has potentially profound consequences for the future of employment.

Before the rise of the web in 2000, leading global companies such as Dell, the personal computer manufacturer based in Texas, or Westfield, the retail property group in Sydney, typically employed one in five of their total global employees in their hometown headquarters.

This is great for the regional economies fortunate enough to call these companies home, as company-headquarter jobs are generally higher paid, more global in scope and typically include roles in global marketing, global finance, research and development that are not found outside of headquarters.

In the past, there was a natural limit to the concentration of companies around their headquarters. As global companies grew, regional headquarters necessarily emerged. Previously, companies typically became more decentralised as their geographic expansion unfolded, driven by the twin needs to increase the sales of the company by selling in every territory possible and to decrease the cost by making things wherever it was cheapest.

Increasing the sales in every territory had an unintended consequence that I refer to as the 'Jaguar effect'. In the enterprise software business and others where the products and services are expensive, complex and require a high degree of trust and confidence in the vendor, a very talented and socially connected local team in every market has been required to sell the products face-to-face.

Goodbye to Jaguar jobs

This traditional expansion route required a fleet of “Jaguars” in every major market you intended to serve, and talented team of local managers and sales executives to drive them. But now the days of these Jaguar jobs are numbered.

At Microsoft, around 40,000 (or 40 per cent) of its total global workforce of 95,000 employees are concentrated in or around its headquarters in Seattle.

In online media and services, this figure climbs significantly to between 40-80 per cent of the total team. Younger and early-stage companies such as Facebook, LinkedIn, Atlassian and Zynga have well over half their employees in their city of initial establishment.

Amazon has developed a famously efficient centralised global e-commerce enterprise that ships to and trades in 66 countries around the world from Argentina to Venezuela yet without the need for the need for local operations, sales or distribution staff in most of these locations. Research based on current LinkedIn data indicates over 91 per cent of Amazon’s 88,000 staff are located in only six of the countries where it has significant on-the-ground operations: the US, UK, India, Ireland, China and Canada.

Similarly, Google, Facebook and most other online global ventures trade and derive revenue from customers in most countries around the world, yet have staff and on-the-ground operations in only a select few of these.

As a new generation of companies like Sydney-based Atlassian and Austin and Sydney-based BigCommerce have clearly demonstrated, without the expense of global sales staff you can not only sell and support consumer services online, but also enterprise solutions: globally and online from one or two well-resourced hubs.

This is increasingly important for policymakers. It means unless your city, region or country fosters the creation of global digital economy enterprises, the number of high-value jobs available in your area is likely to shrink dramatically over the next decade.

And it’s not just 'traditional' industries where jobs are at risk. November’s Harvard Business Review chronicles the long-term decline in employment of America’s information industries. After manufacturing, the information sector has had the greatest employment contraction of any sector in the US in the past decade.

While online gravity is leading to many Jaguar jobs disappearing in Western countries, it's not all bad news for the developing world.

The World Bank has said in its recent report “Connecting to Work” that the rise of open global online labour marketplaces such as Freelancer.com, oDesk and elance means that once connected to the internet, many people in developing countries can have direct access to employment opportunities that were previously impossible.

Gazelles and Rocketships

MIT economist David L Birch showed in the 1970s that the majority of national job growth (and losses) in the US came from enterprises with fewer than 100 employees. Nearly 20 years on, Birch refined his thesis to show not all small businesses are equal, with only 4 per cent of these companies – a high growth cohort he terms “gazelles” – accounting for around 70 per cent of jobs created.

Gazelles are companies that routinely demonstrate consecutive, double-digit annual growth. They are now seen by many as the engine room of  future economic development. Follow-on research “Employment effects of business dynamics: Mice, Gazelles and Elephants” by Zoltan J Acs and Pamela Mueller has identified gazelles as “only start-ups with greater than 20 and less than 500 employees” and “only in large diversified metropolitan regions”.

Many of these gazelles, such as Google, eBay and Freelancer.com, are fuelled by the winds of online gravity and also classify as “rocketships”.

“Rocketships” are a new generation of online high-growth global enterprises defined as companies that grow from start-up to $US50 million in revenue in their first five years of operation. Atlassian, Facebook and Google all fit this definition.

In a 2009 article for the Wall Street Journal, “How Long Does It Take To Build A Technology Empire?”, Scott Austin suggested that a previous generation of global technology companies such as Microsoft, Oracle and SPSS haven't made it into the Rocketship club, having taken between eight, ten and 14 years respectively to reach $US50 million of sales.

Employment is being reinvented, and jobs being disrupted are reappearing in different settings and new global enterprises around the world. Policymakers, politicians and parents should be mindful of these changes to best position for employment in a new era of online gravity.

Paul McCarthy is writing a book entitled Online Gravity.

The ConversationThis article was originally published at The Conversation. Read the original article.