07 Nov 2011 | Technology

Signs of Greatness 

Why do some cities become dynamic hubs of innovation,
creating companies that conquer the world?
Identifying the top locations of the future is vital for
investors, so Susannah Hickling looks for common
traits among these key centres.

According to the United Nations’ population division in the Department of Economic and Social Affairs, it is estimated that by 2030 six out of every 10 of the world’s inhabitants will be living in cities compared with the 50 per cent of us who are urban dwellers today.  But not all cities are created equal.  Some stand out for their dynamism, their abundant ideas and great companies and institutions.  These are the supercities, attracting talented people and investors, driving growth and creating wealth.

Prime US examples are San Francisco, on the edge of Silicon Valley from where high-tech behemoths like Apple, Google and eBay have already conquered the world, Los Angeles, home to Hollywood and the global entertainment industry, and Nashville, the heart of the music business. There are many other places around the world where skills and ideas cluster with huge success – think Bangalore with its reputation as the Silicon Valley of India, or Shanghai, the financial and manufacturing hub of China. 

Increasingly, social scientists, economists and even traditional scientists want to define what characterises a dynamic city and what that can tell us about the future. Studying urban societies can, these experts hope, give us reliable clues about the cities that will matter in years to come, the benefits they will offer and what will be required to sustain their success.

WHERE TO INVEST

But why should identifying future supercities matter to fund managers? Surely their job is to spot the most promising companies, wherever they’re based.  That’s no longer enough, according to Tom Slater, deputy fund manager of Scottish Mortgage Investment Trust PLC. “We are trying to get away from the traditional view of dividing up the world into emerging and developed markets,” he explained. “If we look at our portfolios, what’s happened on the West Coast of America has been really important in terms of where we invest, from Seattle with companies like Amazon down to San Francisco. It’s very striking that the culture of innovation is a West Coast phenomenon. We have very few holdings on the East Coast. We do see genuinely different business models.” 

This has led his team to consider which 20-30 places in the world might be really important in 10-15 years’ time, especially given the huge changes that are taking place in rapidly developing economies such as China. “When you’re approaching a place as big and diverse as China, how do you whittle down that huge universe of places and people and think about these issues?” he asked. 

Opening an office in Shanghai will go some way towards helping crystallize Baillie Gifford’s thinking on the nation that last year became the world’s second largest economy. Already, lesser-known cities such as Chengdu, a global centre for electronics, IT and telecommunications and rich in research and development institutes, are snapping at the heels of established giants such as Shanghai and Beijing. 

The McKinsey Global Institute predicts that by 2025, 100 of the 136 new cities that enter the world’s top 600 will be Chinese, including Haerbin, Shantou and Guiyang. Many in China and beyond will be middleweight cities that are not currently household names. Step forward Cancun (Mexico), Hyderabad (India) and Huambo (Angola).

KEY FACTORS IN A CITY

McKinsey is basing its predictions on expected contribution to global GDP (gross domestic product), but what makes cities great and how do you spot them? 

Theoretical physicist Geoffrey West of the Santa Fe Institute has applied the biological principle of scaling – in which the larger the animal the less energy it needs – to cities, and discovered that they do indeed achieve similar economies of scale. In other words, whatever the geography or history of a city, the bigger it was, the fewer filling stations, roads or cables you needed per head of population.  So if a city’s population doubled, you needed 15 per cent less infrastructure per person. But on a socio-economic level, there was a surprise. “The thing that’s extraordinary is if you double the size of a city, on average you get a 15 per cent increase in wages, cultural events, the number of Aids cases, police and patents,” explained Professor West. This suggests that looking at deviations from the norm such as higher than average wages or an explosion in patents might just help identify supercities. 

Certainly, Michael E Porter from Harvard Business School, an authority on competitive strategy, maintains that there is an increase in competition as a result of clusters of industries and the companies that service them. This leads to higher wages, and to greater productivity, innovation and cost savings.

SILICON VALLEY

LinkedIn co-founder Reid Hoffman would seem to back that up. “The advantage to being in Silicon Valley is that you think you’re running fast,” he said in a recent BBC World Service interview, “but then you look around and see how fast other people around you are running and it makes you pick up the pace.” 

According to Professor West, cities that produced a higher than average number of patents 50 years ago tend to be the same cities that are churning out patents now. San Jose is a case in point. “San Jose was over-performing in the 1960s in the same way as it’s over-performing now. That would suggest that that city has a local buzz, that there’s something in the DNA of San Jose and Silicon Valley that allows this thing to blossom.” What this means, West believes, is that it takes a long time for a city to become a supercity. “Silicon Valley didn’t just happen overnight. It was there ready to happen.” 

To understand how we might bottle the buzz that West mentions, we need to look at the culture of a city. Dynamic cities are open-minded. They have immigrants.  As Vivek Wadhwa, the US-Indian tech entrepreneur and commentator said: “Immigrants, when they go to a new country, have nothing to lose – they are starting at the bottom of the social ladder. So they take big risks and work extraordinarily hard. This is what gives them and their host countries an advantage.” 

Progressive urban centres also have mavericks. “Cities tolerate crazy people, people on the edge, whether in the arts, technology, inventors, right down to the loony people who walk the street,” said Professor West. “That’s why all kinds of things bubble up in cities.” 

Richard Florida, professor of business and creativity at the Rotman School of Management, University of Toronto, and best-selling author of The Rise of the Creative Class, claims that a third of all working Americans now ‘create’ for a living – whether they work in engineering, theatre, biotechnology or set up small businesses. Whether cities thrive or dive depends on these creative types and where they congregate. We now live in a highly mobile world and, increasingly, skilled and talented people are drawn to a small number of densely populated areas.  You know these places from the growth in their house prices. 

But it’s clear that the real key to successful cities lies with networking. A study of more than 1,600 businesses in Norway by Rune Dahl Fitjar, senior research scientist at Norway’s International Research Institute of Stavanger, and Andres Rodriguez-Pose, professor of economic geography at the London School of Economics and Political Science found that the most important drivers of innovation were openmindedness and having global channels of communication. 

And an effective network appears to be a feature of entrepreneurial success the world over. “Part of why Silicon Valley builds a lot of very big companies is because they build very effective networks around companies and it’s that network that really helps accelerate it,” Hoffman told the BBC.

While there’s no surefire formula for spotting a supercity as yet, it’s clear that even in this über-connected world of computing and tele-commuting, location is more important than ever.

Please remember that the value of a stock market investment and any income from it can fall as well as rise and investors may not get back the amount invested. Investments with exposure to overseas securities can be affected by changing stock market conditions and currency exchange rates.

Author: Susannah Hickling
Susannah Hickling is a London-based journalist, writing on a wide variety of subjects ranging from property and personal finance to health and family. She has contributed on money and property to The Guardian, The Independent on Sunday, The Observer, Mail on Sunday and Moneywise magazine.