BERLIN -- In a suite of renovated lofts near the former border between East and West Berlin, something unusual has happened in Germany's beleaguered capital: A major company has opened its doors instead of closing them.

This summer, Universal Music Germany moved here from Hamburg, traditionally the headquarters of this country's $2.3 billion music industry, the fourth largest in the world. The move by Universal, which is part of the French-American media conglomerate Vivendi Universal, sparked excitement in the city because Berlin is in a dreadful economic state. Though the city has incubated a few small Internet-related firms, big companies have either left or are leaving.

"With every new job at Universal [Music], a new job within the realm of services and smaller labels will be created," said Christoph Lang of the city government. The company leads the national market with 30% of sales in Germany, and it employs 500 people.

That has helped to put Berlin on the map in at least one major industry. By 2000, the most recent year for which figures are available, 430 companies of the music industry called Berlin its home. The German branch of Sony Corp.'s Sony Music was the first big player to move, arriving in summer 2000. Offices of BMG Entertainment, a division of Bertelsmann AG, also recently moved away from Hamburg. Now, more than 50% of the German music industry is based in Berlin, according to Media Office Berlin-Brandenburg.

Culture may be Berlin's only strong point. The city used to be a major economic center, home to electronics company Siemens AG and insurer Allianz AG. But the Cold War destroyed the city economically, with one-third of the city under communist rule and two-thirds under Western rule -- but located in the middle of east Germany. Siemens and Allianz moved, while other companies lived off subsidies.

German unification exposed the eastern smokestack industries to international competition, forcing most into bankruptcy. In the western part of the country, subsidies were cut, bankrupting the rest of Berlin's once-mighty industrial base. Many economists think this trend is irreversible, forcing the city to rely on services to compete. "We can't expect that Berlin will be like Paris or London -- an economic center," said Karl Brenke of the German Institute for Economic Research.

Instead, the city is banking on government jobs -- the capital moved here from Bonn in September 1999 -- as well as services, including Internet start-ups and music. Though the music industry isn't labor-intensive, the jobs are welcome. The bulk of Sony Music's 400 employees work in Berlin, and Universal's move is expected to create a similar number of new jobs. Universal also brought 300 employees from Hamburg.

Ironically, the music industry benefits from the city's high unemployment rate of 17%. The depressed economy has led to low rents -- bad for the real-estate market but great for the clubs that have sprung up around the city and small service companies looking for cheap rent. "Berlin is the cheapest metropolis; its internal flair and young creative potential give the location an unmistakable advantage," concluded a study by the German Institute for Economic Research.

After the Berlin Wall fell in 1989, "techno" music began to flourish in clubs on what was no-man's land between the eastern and western parts of the city. Independent studios noted this development and turned disc-jockey projects and sessions into small labels such as !K7 Records or the Kitty Yo during the mid-'90s. The more pop-orientated label now celebrates international successes with bands such as Peaches or Gonzalez and !K7 Records has bureaus in remote places such as San Francisco.

That sort of flair is something that could help Germany's depressed music industry. Though music piracy was responsible for most of the 10% drop in sales last year, companies say they also need new stars and more innovation.

"Berlin is incredibly poor, but innovative," said Jacob Bilabel of Universal Music. The company hopes to be inspired by the city's drive and likewise to participate in the city's making. "The branch has to reinvent itself," Mr. Bilabel said.

The working conditions in Berlin are meant to stimulate creativity. The new offices are in Kreuzberg, the immigrant-artist district in the western part of the city that borders the former eastern suburb of Friedrichshain, which has quickly become one of the city's hippest neighborhoods. In lofts overlooking the Spree River, employees work in open, spacious rooms broken up by stylish leather lounges, or in futuristic cubicles around photocopiers.

Universal's office also will feature a public club and restaurant, and the company hopes people off the street stop by to share ideas. Says Daniela Bruggemann of Team Move, which promoted and conducted the company's move: "We hope Berliners stop by to have a beer."

The music scene in Hamburg, however, isn't worried. The city that gave the Beatles a regular gig is still the country's traditional music capital, according to companies that have stayed behind. "Hamburg remains the No. 1 as music location," said Benedikt Loekes, speaker for Warner Music Germany, which remains in Hamburg. He says location isn't crucial: "Musicians will come to us even if we aren't based in Berlin."

Other big players agree, saying they have no plans to move to Berlin. BMG Entertainment says it will keep its headquarters in Munich, while EMI Group PLC of the U.K. just moved to Cologne's "Media Park" in 2000.