A Look at Why L.A. Was Excluded From Fortune List
This would seem to be a great time to do business in Los Angeles.
The region has become the nation’s top manufacturing center. Local seaports handle more container traffic than any other ports in the country. The local high-tech community is incubating a steady stream of world-class dot-com companies, and venture capitalists are funneling hundreds of millions of dollars into L.A. annually.
Sounds pretty good, right? But don’t tell that to Fortune magazine.
In the publication’s annual list of “Best Cities for Business” in the Dec. 20 issue, Los Angeles doesn’t make the cut.
There’s Dallas topping the list, followed by San Jose, Austin, New York and Atlanta.
There’s also Seattle, San Francisco, Chicago, Denver even Boston.
But no L.A.
As it turns out, there is a logical explanation for the omission: Bum numbers.
Some key data that would offer a more-complete picture of the business environment are either left out or documented in odd ways. Basic indicators like manufacturing output, international trade volume and commercial-space absorption were not considered.
What’s more, the magazine’s cover headline, “Best Cities for Business,” is not quite right. The true aim of the research used to arrive at Fortune’s rankings was to determine the best places to locate a corporate headquarters operation, according to Arthur Andersen, the consulting firm that did the research for the rankings.
Fortune officials declined to comment, referring all inquiries to Arthur Andersen.
Daniel Malachuk, the Arthur Andersen analyst who put together the data for this year’s survey, conceded that compiling lists is a subjective endeavor and that, with magazines’ long lead times, much of the data is outdated by the time the magazine hits newsstands. “We start collecting data each summer,” Malachuk said. “Then we meet with (Fortune) to decide what perspective they plan to take.”
In recent years, Fortune’s surveys have focused on fast-growing “boom towns” and cities with the most-improved business climates. This year, “the survey was focused on corporate headquarters and local knowledge-worker activities,” Malachuk said.
Yet even here, Fortune did not take into account the number of advanced-degree holders living and working in various cities, a measure on which L.A. would undoubtedly score high.
“The problem with surveys like this is that they’re done by East Coast people who have outdated notions of what it’s like to live in Southern California,” said Cliff Numark, program director of the Los Angeles Regional Technology Alliance.
Glenn Yago, director of capital studies for the Milken Institute in Santa Monica, agreed. “These surveys tend to capture the characteristics of boutique cities (like San Francisco or Denver) rather than cities with the depth and breadth of Los Angeles,” he said.
In one area, it was not surprising to see L.A. at the bottom of the list: “bad air days.”
Los Angeles is listed as having violated federal clean-air standards on 106 days. The worst air among Fortune’s top 10 was Atlanta, with 23 bad air days.
But look at the year analyzed 1996. The explanation appears to be that 1996 was the most recently available data from the Environmental Protection Agency’s Web site. More recent data would have been available directly from the EPA.
That would have shown L.A.’s air to have dramatically improved (a point noted in recent national newspaper accounts). For 1999 through Oct. 1 (essentially the end of the smog season), Los Angeles air violated federal standards on 43 days.
In other quality-of-life aspects, the region scores well. It’s considered the second-best cultural center (behind New York) and the fourth-best area for recreational activities.
The cost of living here also isn’t bad. It’s cheaper to live in L.A. than it is in six of Fortune’s top 10 cities: New York, Boston, San Francisco, San Jose, Seattle and Chicago.
And if racial and ethnic diversity of the population is considered a strength (it is in this survey), then L.A. ranks higher than any of the top 10 cities and fourth overall, behind only El Paso, Miami and San Antonio.
Curiously, only one measure of actual business activity was rated: venture capital.
Los Angeles should certainly score well here. During the first three quarters of 1999, L.A. attracted nearly $1 billion in venture capital, 75 percent more than it received in all of 1998. Southern California has passed New York and now attracts the third-highest amount of venture capital of any region in the country, behind Northern California and New England.
The Fortune/Arthur Andersen figures, however, do not reflect this surge. Instead, a single three-month period is used, the first quarter of 1999. That happens to be the weakest quarter for venture capital locally this year (though still placing it sixth among the 75 cities surveyed).
Fortune fails to mention that in the second quarter, L.A. received a record amount of venture capital, $366.4 million, according to PricewaterhouseCoopers. In the third quarter, the area received $327.7 million. While fourth-quarter venture capital numbers won’t be released until early next year, preliminary reports indicate that L.A. may end up getting another record amount of venture capital in this quarter.
Using a single quarter of venture capital activity as a measure of economic activity, as Fortune did, is “totally ridiculous,” Numark said. “To not even use a four-quarter period is a completely unrealistic measure of venture-capital activity in any region.”
And the survey includes no other measure of economic activity, such as international trade, manufacturing employment, retail sales or job growth.
Those broader factors, said Yago of the Milken Institute, can indicate the health and diversity of an overall business environment factors that can also make a region attractive for corporate headquarters.
The final category was the “wild card,” according to the author of the Fortune story, Senior Writer Anne Fisher. Arthur Andersen asked 1,700 executives what city they consider to be the best place for business.
The query provided “an intriguing peek into the vagaries of the executive mind,” Fisher wrote.
And guess what? New York was mentioned 109 times, more than any other city. This despite the fact that the Big Apple, as Fisher noted, “fared only middling in work-force quality, did pretty poorly in the quality-of-life contest , and was soundly thrashed by San Francisco and Boston in overall business environment.” L.A. was mentioned a mere 16 times.
There are, of course, other areas where Los Angeles didn’t score well, such as tax burden, traffic congestion and housing costs. But do those minuses merit being the only U.S. mega-city left out of the top-10?
“If your goal is to measure the best cities for business, by objective criteria, this survey is incomplete,” Yago said. “It should have included economic mobility, business formation rates, the wealth of human capital as measured by educated, high-tech workers. Including the number of Fortune 500 companies is increasingly irrelevant, since large companies haven’t generated much economic growth for the past 10 years.”
Numark suggests a blind spot among executives, analysts and editors.
“Once you start pushing those numbers or the lack of them,” Numark said, “an agenda seems to become unveiled. If this is the best they can do, Fortune ought to change its name to ‘Bankrupt.'”
How L.A. Stacks Up Against Fortune Top 10
Best Fortune Cost of Growing Bad Percent
City 500 Living Venture Business Air Homes Culture
Votes1 HQs Index2 Capital3 Index4 Days5 Affordable Score4
Dallas 62 9 105.4 53.6 60 17 59.6% 93.32
San Jose 39 2 132.4 792.9 46 6 34.6 95.76
Austin 49 0 113.2 80.8 61 0 57.1 64.11
New York 109 45 157.2 343.8 0 10 47.3 99.99
Atlanta 92 11 116.0 25.4 63 23 73.1 95.57
Seattle 27 5 121.5 224.8 35 2 53.5 96.87
San Francisco 23 9 142.8 724.2 46 1 20.7 98.59
Denver 27 2 112.9 78.8 64 3 68.0 90.70
Boston 36 6 154.4 480.0 50 2 67.5 99.42
Chicago 54 14 120.9 41.5 31 5 61.0 99.81
Los Angeles 16 4 120.0 188.3 32 106 47.2 99.84
1 From survey of 1,700 executives
2 Percent of the $48,000 U.S. median annual household income that is needed to live
3 First-quarter 1999 investments, in millions
4 100 = best possible
5 Days that federal air-quality standards were violated in 1996 Source: Arthur Andersen
