A new report, Hot Spots: Benchmarking global city competitiveness, was just released by the Economist Intelligence Unit. Hot Spots is the result of a comprehensive study that analyzed the competitiveness of 120 of the world’s major cities. The study evaluated their performance along eight distinct categories, from which it developed an overall Competitiveness Index for each city. The study was commissioned by Citigroup as part of its Citi for Cities initiative.
Hot Spots observes that over half of the world’s population now lives in cities, generating over 80% of global GDP. As a result, companies are planning their global business strategies from a city, rather than from a country perspective. The 120 urban centers ranked in Hot Spots have a combined population of about 750 million and collectively account for almost 30 percent of the global economy. They are fiercely competing with each other to attract business investment and top talent that will enable them to grow their economies, create jobs and improve their overall standard of living and quality of life.
What determines a city’s competitiveness and growth potential? Hot Spots defines competitiveness as a city’s ability to attract capital, business, talents and visitors. Competitiveness, according to the report, “. . . is a holistic concept. While economic size and growth are important and necessary, several other factors determine a city’s overall competitiveness, including its business and regulatory environment, the quality of human capital and indeed the quality of life. These factors not only help a city sustain a high economic growth rate, but also create a stable and harmonious business and social environment.”
The research team assessed each of the 120 cities benchmarked using 31 different indicators. Working with a number of experts, it then grouped these indicators into eight major categories, assigning a weight to each toward the final overall ranking: economic strength (30%), human capital (15%), institutional effectiveness (15%), financial maturity (10%), global appeal (10%), physical capital (10%), environment and natural hazards (5%), and social and cultural character (5%).
US and European cities have the highest overall competitiveness index. Despite their slow growth, budget deficits and aging infrastructures, they continue to lead in the four key elements of competitiveness, - capital, business, talent and tourists. Not surprisingly, New York and London, the world’s most prominent global cities, hold the two top positions. They are not only the world’s top financial centers, but they appeal to a wide range of businesses and talented people. Rounding out the top ten are Singapore, Paris, Hong Kong, Tokyo, Zurich, Washington, Chicago and Boston. 24 of the top 30 cities are from North America and Western Europe. Their legacy advantages and global connectivity enable them to be the top all-round performers.
However, Asian cities dominate the economic strength category, which includes market size, GDP growth prospects, purchasing power and income levels. This is the highest weight category comprising 30 percent of the overall index. Tianjin, Shenzhen and Dalian top the list. New York (4) and Tokyo (8) are the only cities in developed markets among the top ten in the economic strength category. Chinese cities comprise 12 of the top 20 positions. The top 30 Asian cities are forecast to grow by at least 5 percent over the next five years, - with a third of them growing by over 10 percent, - compared to low single digit growth for most cities in developed markets.
Cities in developed markets lead in human capital, which accounts for 15 percent of the overall index. The ability to attract highly educated, skilled workers is critical to many companies, especially given our transition to an information and knowledge-based economy. The report includes a quote from New York City Mayor Michael Bloomberg: “I’ve always believed that talent attracts capital more effectively and consistently than capital attracts talent.”
Talented workers are attracted to cities that offer them a high standard of living. Most such cities are presently in the developed world. They hold a clear advantage in key indicators like education. For example, in the 2012 Times Higher Education ranking of the top 200 universities in the world, only three are from mainland China, and none from India. US and Western European universities dominate the list. Similarly, they lead in other key human capital indicators, including quality of healthcare, entrepreneurship, and the ability to hire foreign nationals.
Emerging market cities are mostly at the lower end of the human capital ranks, with Santiago placing the highest at 35. For now, this is not a problem as these cities are primarily focused on driving economic growth by competing with lower cost, lower skilled workers. But, as the evolution to a knowledge-based economy accelerates, cities in emerging markets will need to develop, attract and retain the higher skilled workers that such an economy requires.
The physical capital category reflects the quality of the city’s physical and telecommunications infrastructure as well as that of the transportation system. Even though physical capital accounts for just 10 percent of the overall competitiveness index, its actual importance is higher. There is a clear correlation between a city’s overall competitiveness index and its ranking in the physical capital category. Physical capital is a prerequisite for competitiveness. It is needed for businesses to operate efficiently, as well as being a key ingredient in the quality of life of city residents. It is perhaps the most concrete manifestation of a well-functioning city, and thus plays a major role in attracting business and capital, as well as talented workers and visitors.
European and North American cities dominate this category, with their well established public transportation systems and utility networks, their high quality residential and commercial real estate and much more. It takes a long time for a city to develop its physical assets, - metro lines, roads, airports, skyscrapers, stadiums, and so on, - which gives cities in developed markets a built-in advantage over up-and-coming cities in emerging markets.
But, cities in emerging markets are fast improving their physical assets. Many have invested heavily in their telecommunications infrastructure and are thus now able to offer mobile phone and Internet capabilities on a par with those available in more developed cities. Moreover, their fast growing economies are enabling them to invest in their physical infrastructures, as is so evident when one looks at the modern and efficient airports that many have built in recent years.
Cities in developed markets, with their slow growth and large deficits, are having trouble coming up with the necessary investments to modernize their aging infrastructures. It is quite possible that a major rebalancing process with potentially far reaching consequences is underway, especially if developed market cities cannot muster the political will to invest in their aging infrastructures and remain competitive.
The concept of smart cities is one of the most innovative ideas for the future of cities. It is built around the notion of leveraging information and communications technologies to better manage all of a city’s assets, including physical, environmental, economic and social. IBM’s Smarter Cities is likely the best know such initiative, but a number of other technology companies have similar programs, including Siemens, Cisco, and GE. This recent excellent NY Times article, Mission Control, Built for Cities, features the collaboration between IBM and the government of Rio de Janeiro to develop a highly sophisticated Operations Center from which to monitor, manage and coordinate the real time operations of thirty separate Rio agencies.
Citi for Cities, with which I am personally involved, is a smart city initiative aimed at helping cities become more competitive by better managing their critical economic and financial infrastructures. It is working with city governments and infrastructure operators in a variety of projects around the world, helping them leverage information technologies to improve the overall efficiency and quality of their infrastructures, and to provide more inclusive access to citizens through the digitization of services.
Let me conclude with another interesting finding from the Hot Spots report. Megacities, are defined as those with populations of 10 million or more. 23 out of the 120 cities in the study fall into this category, with a combined population of 350 million. But, in spite of their outsized economies, only nine megacities were among the 30 top cities in the economic strength category. Mid-size cities are emerging as the key drivers of global growth, especially those with populations between 2 and 5 million.
There is no correlation between size and overall competitiveness. The top ten highest ranked cities include Tokyo and Zurich, with an estimated population of 36.7m, and 1.2m respectively. Bigger cities offer a greater pool of labour, higher economic demand, and potential economies of scale. However, if not properly planned, congestion, crime and other issues can seriously impede their competitiveness. For example, while larger cities generally have greater resources to implement public transportation networks, they can also suffer from urban sprawl and have a far larger physical space to cover. A smaller, well managed, denser city could be much easier to get around and might thus be a more desirable place to live and work.
In its concluding chapter, the Hot Spots report poses a few very important questions:
“The relative positions of these cities will naturally shift over the coming decade, as they sharpen their various comparative advantages. In particular, the rise of emerging markets will likely make a number of largely unknown cities rather more prominent by 2020 . . . A key question is the speed with which this will happen. Do emerging market cities need to follow the same development lifecycle that Western cities have taken over the past two centuries, moving slowly from an industrial to a post-industrial era? Or can they accelerate through this? . . .”
“To truly become globally competitive, these cities will need to work hard to develop softer aspects beyond just growth: their institutional effectiveness, social character, financial maturity and global appeal. Put another way, will these emerging market cities be able to make the leap from attracting just capital to attracting talent as well? . . . These cities will be competing not only amongst themselves, but also against cities in the developed world, which have legacy advantages, such as strong educational and infrastructure foundations, built up over decades. Which emerging market cities will leapfrog their peers? Which developed world cities will be able to maintain their primacy? The decade ahead will offer much guidance to these questions.”