Chapter 1
The Economic Power of Global Cities
Companiesāmidsize and large multinational companies (MNCs)āneed to figure out where to sell their goods and services. In their home market, they must decide geographically where to plant their headquarters, regional offices, production, distribution, and sales management. Companies have to choose the right cities, because city advantage is more decisive for business success than national advantage.
As companies move abroad, they decide which nation or nations to produce and sell in and choose specific locations where they intend to carry out their administration, production, distribution, and sales work. If a company chooses to sell in China, where does it locate its headquarters for China? Will it be Beijing, Shanghai, Hong Kong, or any of a dozen other cities? And in each Chinese city where it plans to operate, the company needs to develop specific presences and locations. Choosing a pattern of locations around the world is a gigantic task that can make a major difference in the company's success.
Every nation contains a set of cities that differ in their importance and national and global reach. Some of the world's cities are bigger than many nations. The 2007 Greater Tokyo metropolitan region of 13,500 km2 had 35 million residents. It was roughly equal to the population of Canada and larger than that of Malaysia, the Netherlands, and Saudi Arabia.1 Other megacity regions include Shanghai, Beijing, Mumbai, Delhi, New York City, Los Angeles, London, Mexico City, SĆ£o Paulo, Buenos Aires, Rio de Janeiro, Dhaka, Lagos, Moscow, Cairo, and Istanbul, and they are likewise bigger than many country populations. These cities generate a huge level of gross national income for the nation. Each has extensive economic, political, and social relations with other cities and nations.
We assert that the growth of nations is intimately tied to the growth of their major cities. Top cities have grown faster in gross domestic product (GDP) than the rate of their country's GDP growth. Major cities are the source of a nation's wealth, not the other way around. In the markets of a nation's major cities, investment, trade, and consumption take place.
Yet development economists have spent the last nearly 70 years focusing on nation building and national economic growth, not city growth. Following World War II, the United Nations, World Bank, and International Monetary Fund, as well as the hegemonic powers of the United States and the Soviet Union, pursued policies of building national economies as the route to economic development and growth. Nation building deals with central government policy and structure, military modernization, social planning, large-scale infrastructure, global and bilateral trade agreements, global financial integration, and agricultural support.
When central planners in the Soviet Union, China, India, and other nations propounded central policy and held a tight rein on local initiative, many of their cities declined in economic growth, environmental quality, and social stability. The Soviet Union sank because its cities sank. The same warning could be applied to the United States. The federal government has paid little attention to the economic growth of key American cities. They let the cities economically decay in the face of suburban sprawl, financial liabilities, social engineering, and outmigration of businesses and talent to other parts of the country and offshore. Cities were seen as a place to improve the lot of the poor, not places to launch economic growth. To a lesser extent this was true of Europe, as well.
The net result has been the rise of financially draining central government bureaucracies, sluggish economic growth, political polarization, major corruption, and persistent social upheaval. National resources are politically spread across the regions of a country, with little ability to concentrate resources in top market cities for accelerated growth and greater contribution to national revenue. This attenuation of resources to politically favored regions of the country is one of the economic perils of both democracy and autocracy.
The United States and India are good examples of this. U.S. grants-in-aid programs to states and cities spread federal resources across the nation's cities according to āfairnessā criteria that bear no relation to the productive potential of recipient cities. It is too little for too many and never enough for what can spur economic growth. The National Congress Party of India has departed from an earlier policy of targeted infrastructure investment designed to stimulate economic investment to embrace a policy of guaranteed income and discounted grain to the countryside (at 10 percent of the market price). The result is a reduction from 9.3 percent GDP growth (2010ā2011) to 5 percent GDP growth (2012ā2013).2 Because central governments are generally not able to invest resources in key growth cities, local city governments and city regions have been forced to step up to the plate and initiate investment promotion programs.
A good example is the work that Mayor Michael R. Bloomberg undertook to improve the economic prosperity of New York City. Later we describe the many initiatives he undertook to strengthen New York City's role in the global economy. After his 11 years as mayor of the city, he created a high-powered consulting group to use his vast fortune to help reshape cities around the world. He views large cities as laboratories for large-scale experiments in economic development, public health and education, and environmental sustainability.3
This idea of stressing the key importance of major cities in the growth of a nation's GDP is also on U.S. President Barack Obama's mind. On December 13, 2013, Obama met with more than a dozen new mayors and mayors-elect and told them that the ānation's cities are central to the economic progress of the United Statesā and that he wanted āto work with mayors to provide an environment that makes them [the cities] key job creation hubs.ā4
There are strong reasons why global companies must focus investment on growing cities in the developing world. Major cities in the United States and Europe are declining in population, and their consumption, trade, and investment are weakening. They cannot be relied on by Western MNCs to provide sufficient markets for business growth and adequate return to shareholders. The fastest-growing cities are in developing countries, especially in Asia and Latin America, which are having rapid growth of their middle and affluent classes. This is where money can be made, and both developed- and developing-country MNCs and large domestic businesses are exploiting these opportunities. Western MNCs must move more aggressively before they are outpaced by new developing-country MNCs.5
We repeat: Midsize and large cities in developing countries generally have a growth rate exceeding that of their host countries.6 The sum total of a nation's top cities comprises the greatest part of its GDP. In developed countries, cities provide as much as 80 percent of the national GDP. In the United States, cities contribute 79 percent of the national GDP. In developing countries, the range is 40 to 60 percent. Chinese cities contribute 60 percent of the national GDP and 85 percent of China's GDP growth rate. Thirty-five Chinese cities alone contributed just under 50 percent of China's GDP in 2013.7
Although many developing nations were in turmoil during the last decades of the twentieth century that precluded investment, they have since stabilized and attracted investment. The road to economic growth is still rocky in the Middle East and in parts of Latin America and Asia, but the major city regions of China, India, Brazil, South Africa, Chile, Colombia, Indonesia, South Korea, Mexico, Singapore, Vietnam, and elsewhere are open for business.
The premise of Western nation building has been that economic development springs from democratic institutions. Although democratic nations such as South Korea, Taiwan, India, Brazil, and Mexico are doing well, autocratic nations such as China, Singapore, Saudi Arabia, and the United Arab Emirates are doing just as well without democratic political institutions. Even Russia, a dubious democracy, is rising from her ashes.
If economic prosperity does not necessarily come from democratic institutions, where does it co...
