Enterprising Cities

iStock textile factoryDoing business in a locality that has access to dynamic and growing markets, where information, ideas and contacts are shared between firms and institutions, both within and across sectors, and where firms can access the inputs they require to operate competitively makes a lot of sense. Governments and the business community can work together in a local area to foster the development of an enterprising city or district that exhibits these traits.

In a recent paper by Shanker Singham, Managing Director of the Competitiveness and Enterprise Development at Babson College in the US, the options for the creation of special city zones are explored.

With rates of urbanisation increasing, the idea of an “Enterprise City” is being promoted as a means of helping countries to rethink their approach to economic policy and the best strategies to promote broad-based job creation and growth. Driven by industrialisation and the search for better jobs, millions of people are moving from the countryside into cities. This is proving challenges for governments as it creates increased demand for public services and expensive infrastructure projects to meet the needs of citizens.

Singham refers to “the trust problem” in many developing economies, where foreign investors and traders do not trust the investment and regulatory environment: “They don’t trust the governance structure”. Furthermore, there is widespread reluctance to implement comprehensive reforms to address the burdensome legal and regulatory regimes investors face.

Enterprising Cities are special economic zones with autonomous regulatory systems that bolster competition and foster the growth of competitive markets. They are an attempt to cut through the regulatory gridlock and bring prosperity to the burgeoning cities of the developing world. While Dubai, Hong Kong and Singapore are clear examples of what an enterprising city might look like, these are largely city-states. The challenge of creating such cities in a larger nation-state is somewhat more daunting.

Babson Global and CIPE have launched the Competitiveness and Enterprise Development Project to promote the idea of Enterprise Cities. The project aims to use these cities to:

“create the pre-conditions of entrepreneurship, without which no amount of teaching will succeed. We see a conveyor belt of entrepreneurship starting with Enterprise Cities and ultimately leading to Centers of Entrepreneurial Leadership around the world teaching entrepreneurship to millions who now have the environment in which to take risk.”

I have many misgivings about the use of special economic zones and the dangers they create. The use of fiscal incentives and wage restraints are particularly problematic. Furthermore, the insulation of these zones from the challenges facing the national business environment can reduce the opportunity for such zones to stimulate the adoption of wide-scale reforms over time. This can dramatically inhibit the “conveyor belt” Singham desires.

On this point, a 2011 study by the World Bank (Thomas Farole & Gokhan Akinci) on Special Economic Zones concludes: “achieving success with SEZ programs in the future will require adopting a more flexible approach to using the instruments of economic zones in the most effective way to leverage a country’s sources of comparative advantage, and to ensure flexibility to allow for evolution of the zone program over time. Most fundamentally, this will require a change in mind-set away from the traditional reliance on fiscal incentives and wage restraint, and instead focusing on facilitating a more effective business environment to foster firm-level competitiveness, local economic integration, innovation, and social and environmental sustainability. It also will require proactive, flexible, and innovative policy approaches to address today’s significant macroeconomic constraints and the many unanticipated challenges that no doubt will shape the environment in the years to come.”