But are the streets paved with gold? Interesting research has come out in the last few months focusing on the potential opportunities and influence of emerging and established urban markets. Cities punch well above their weight compared to non-urban areas in terms of creating economic growth, high-paying jobs, intellectual capital and more. Their influences are substantial politically, socially, economically and culturally. Already we are past the tipping point where more of the world’s population lives in urban than rural areas, with an estimated 70% of people joining the urban throng by 2050. So let’s take a look at the opportunities that these growing cities offer from four different lenses: Economic growth engines, consumer markets, reinventing cities and infrastructure, and global influence.
Economic Growth Engines: From West to East
Last week the Brookings Institution, with the London School of Economics, published research that evaluates how the largest 150 metropolitan areas worldwide have weathered the recession. They focused on pure economic measures of value added and employment in urban areas. Cities punch above their weight in terms of creation of GDP and jobs, with some 12% of the world’s population in the 150 largest metropolitan areas creating around 46% of global GDP. New York City’s economy alone is larger than 46 of sub-Saharan Africa’s economies combined, according to Foreign Policy magazine. They are also magnets for talent and hubs of knowledge and innovation. So how did they fare in the recession? Not surprisingly, city level data reflects similar trends to national data – economic power is shifting from West to East. Cities in rapidly developing economies have recovered much faster than those in the US and Europe, where some are still struggling economically, for example Dublin which faces national debt woes, and many including Las Vegas are struggling with continued or rising unemployment and the aftermath of asset bubbles.
What is interesting in the Brookings report is also the impact of the economic mix in terms of industries and constellations of capabilities on a city’s recovery from recession. Not surprisingly, metro areas with strong construction industries fared very well pre-recession but worst post-recession, particularly in high income regions. Financial and business services focused metros did less well than others both pre and post-recession, while energy and manufacturing drove strong economic performance in low income metro areas pre-recession and are key parts of the recovery particularly in emerging markets. The sectors that helped metros weather the recession best included government, health and education – emphasizing the importance of focusing on basic human needs. However, these sectors are not growth engines in their own right as they depend on population growth at a fundamental level – for a metropolitan area to drive future growth it will require a broader mix of activity. For businesses the question is which metro and urban areas will be best suited to enable the growth of your organization?
Large and Growing Consumer Markets
A final element in the Brookings report assessment was growth trajectory, with moves beyond the city to national levels. Those economies – and their cities – on a strong growth trajectory, i.e. BRIC plus the next tier of rapidly developing economies (RDEs), saw small blips from the recession, not the massive impact felt in developed economy markets.
All of which makes RDE metropolitan and urban areas extremely attractive consumer markets of the future. A September BCG report was entitled “Winning in Emerging Market Cities: A Guide to the World’s Largest Growth Opportunity,” which basically says it all. Urban markets are inherently attractive because you can access a lot of people in a small area, with infrastructure in most cases. The extra factor that RDE cities offer is a growing middle class population, as incomes rise alongside economic growth. And there are LOTS of emerging market urban consumers: BCG suggests one third of the world’s population, or some 2.3 billion people, live in emerging market cities. By 2030 another 1.3 billion people will join them, versus just 100 million new residents in developed market cities.
The rapid growth of consumer demand in emerging market cities – many beyond the traditional megacities – is what BCG suggests could be “ the single largest growth opportunity globally in the decade ahead.” Megacities, says the report, are just a fraction of the opportunity, which is going to be driven by smaller cities, with 83% of the emerging markets’ urban residents living in cities with populations of 5 million or less. But how many of these cities are international (non-local) businesses familiar with? How many of the 717 cities with over 500,000 inhabitants in emerging markets today can your company name – without the report – or serve? BCG asserts that emerging market cities already drive 60% of world economic growth today and will account for 30% of private domestic consumption by 2015, consumption that is growing at 11% per annum. The question is who is going to win in these attractive markets – local competitors (who may become future global leaders) or multinationals? Where would you place your bets? And should you be thinking about city-based markets or national markets?
Reinventing Cities and Infrastructure
The growth of cities is not just an opportunity for consumer-facing businesses. As city populations grow, along with pressures on resources, urban infrastructure needs both to be built and to be reinvented so these areas become more sustainable. Water, sanitation, housing, transportation, electricity and urban public areas all need investment and attention. BCG suggests that cumulative investment in these areas of the order of US$ 30 to US$ 40 trillion will be required in emerging market cities between now and 2030 to meet these needs – or 60% to 70% of total global investment in infrastructure.
This represents a massive opportunity for companies serving the infrastructure sector, whether cement companies or water utility suppliers. The question again is who will win? Local companies serving the needs of these cities are already seeing huge growth and with the massive domestic demand base have the opportunity to grow into global players. If multinational companies want to play in this arena, they need to move fast.
Global Influence: Islands of Power
Foreign Policy published its annual Global Cities Index in October, offering another lens on how much sway a city has over what happens beyond its own borders – its influence on and integration with global markets, culture, and innovation. Their analysis focused on 65 cities with over 1 million inhabitants across the globe. As with economic power, it was clear that Asian cities are rising in terms of global influence, with five of the world’s ten most global cities in this region. However, the established capitals of “old school” capitalism and culture – New York, London, Tokyo and Paris – remain the top four most global cities. Global influence does not however necessarily correspond to the seats of political power, with only four of the top 10 being national capitals – and two, Hong Kong and Singapore being city-states.
Again this analysis raises questions for businesses. Where does it make most sense to locate company operations and/or global headquarters? Where are the richest seams of talent, knowledge and influence to tap into? How will the rising global cities of the world exert their influence on trade, knowledge, popular culture and geopolitics?
Food for Thought
These different lenses on the roles and importance of cities offer much food for thought for businesses and organizations of all types. There is no question that cities need to become a more important consideration in strategies, beyond and complementary to national, regional and global perspectives. Among cities, while the “traditional” city power bases will endure, many more cities – from massive metropolitan areas and smaller urban centres – will help shape the world’s future. This future world order may well be characterized by more fragmented city-based islands of power versus nation-state geopolitics and economics – which while increasing complexity may also present new niches and new opportunities. Your thoughts?