Did Detroit Kill the Motor Industry?

 

Takeaway

  • Urban vibrancy refers to the characteristics of a city that attract talented and creative employees.
  • When a company is headquartered in a vibrant, urban city, it attracts more talented and creative managers who make better investment decisions for the company.
  • Companies headquartered in the same city, even in different industries, will also show improved investment decisions, indicating the city as a whole is attracting higher caliber employees.

In his 2004 book, From Motor City to Motor Metropolis: How the Automobile Industry Reshaped Urban America, author Thomas Sugrue wrote, “Detroit rose and fell with the automobile industry.”

The damage to the Michigan city caused by the industry’s decline has been well documented. From a population of almost two million at its height in 1950, Detroit became over-reliant on a sector that, while experiencing rapid change, lacked innovative thinkers at the helm. Now with a population closer to 700,000, the city reached a new low in 2013 when it filed the largest municipal bankruptcy case in U.S. history.

But is the motor industry really to blame for Detroit’s downfall? Perhaps the urban culture within Detroit itself was responsible.

Sheridan Titman, professor of finance at the McCombs School of Business, looked at 20 cities, including Detroit, as part of a nationwide study to gain insight into the factors that shape urban culture and the businesses that thrive or wither as a result.    

In a paper entitled “Urban Vibrancy and Corporate Growth,” Titman and co-authors Casey Dougal from Drexel University and Christopher Parsons (Ph.D. ’08) from the University of California, San Diego provide a useful reminder of the importance of local factors in the success of any firm or industry.

After analyzing corporate financial data, they found a connection between a company’s expenditures, including investments in plant and equipment, and the spending of other firms from different sectors headquartered in the same area. “We have focused on the co-movement of investment within cities,” explains Titman. “Even when firms are in very different industries, the investment expenditures of firms in the same city tend to go up and down together.”

The reason for this, Titman concludes, relates to urban vibrancy, a broad term that refers to the characteristics of a city that attract talented and creative employees. As a city becomes more vibrant, the investment opportunities of firms within the city improve as well.

Efficient public transport, the presence of respected educational institutions, and even good weather can all contribute to a city’s vibrancy. Such factors tend to attract the brightest and best workers to an urban center. They, in turn, improve the quality of top management at locally headquartered firms and cultivate better investment decision-making overall. 

The authors examined the behavior of investment expenditure for various public firms around the country. “We found that positive local spill-overs influence corporate investment decisions,” Titman says.

And when it comes to Detroit’s demise, he offers a unique perspective.    

“Did the auto industry kill Detroit, or did Detroit kill the auto industry?” he asks. “There were several other companies in the city that were failing at the same time.”

To illustrate this point, Titman compares two similar retail companies competing nationally in the same markets but that experienced different fates.  

“Take discount retailer Kmart, originally headquartered in Detroit, and Target, located in Minneapolis,” he says. “They were basically in the same business, with stores competing in the same cities across the country. Yet Target systematically beat Kmart in every market.” 

Titman continues, “Although both retailers have stores nationwide, the top executives of Target were in Minneapolis and the top executives of Kmart were in Detroit. Whatever it is that makes one city more attractive than another is going to affect the quality of the management team and, ultimately, the quality of their ideas.”

On the flipside to Detroit, you have a city like Austin, one of the fastest growing, information-driven economies in the the U.S. Based on the number of cranes in the sky and startups on the ground, there’s clearly no shortage of urban vibrancy.

“Austin is a city that, for various reasons, attracts talented people from all over the world,” says Titman. “That has a positive impact on the performance of firms with headquarters here. Take the example of Whole Foods. It is able to attract more and more creative managers as the city continues to draw in more people. Talented management develop innovative store designs, and the company thrives as a result.”

This study is part of a three-part research project using financial data to examine key characteristics of urban culture in the 20 largest cities in the U.S. Future papers will examine levels of fraud and bankruptcy in various urban centers. “Urban Vibrancy and Corporate Growth” appears in the Journal of Finance.

 

Faculty in this Article

Sheridan Titman

Walter W. McAllister Centennial Chair in Financial Services McCombs School of Business

Sheridan Titman is a professor of finance at The University of Texas at Austin and a research associate of the National Bureau of Economic...

About The Author

John Holden

Writer,

John Holden is a journalist, researcher, and professional writer. Originally from Dublin, Ireland, he has been writing for the Irish Times...

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