September 30, 2016
Concentrating Prosperity
By Wim Naudé
Dean of Maastricht School of Management

Entrepreneurs hasten urbanization and urbanization in turn provides fertile ground for entrepreneurs, creating a virtuous circle. With 10 cities the size of New York coming into being in the developing world every year, opportunities and obstacles will abound in equal measure. How policy-makers deal with these challenges will decide which cities flourish and which will decline.

Urbanization and entrepreneurship go together, like a horse and carriage. But like love and marriage, the relationship is not a simple one.

Both urbanization and entrepreneurship are central “demographic facts” of the early 21st century. The majority of the world’s population already resides in urban areas — and the rest are joining them quickly. The number of megacities is also on the rise, with 10 cities the size of New York coming into being in the developing world every year. Likewise the number of entrepreneurs — defined as those who are self-employed — has risen to at least 500 million. Most entrepreneurs are based in cities.

Entrepreneurs hasten urbanization, but urbanization also benefits entrepreneurs, so that a virtuous cycle is formed. The ensuing process of structural transformation is one of the salient facts of development: entrepreneurs create jobs in urban areas in new sectors such as industry or services and this draws other entrepreneurs and labour away from the agricultural sector and rural areas.

At early stages in a country’s development people looking for a job (and better health and education) will flock to an emerging city. Many will succeed as the probability of a finding a job is higher in most countries in a city than a rural area. However, many will not and will instead resort to survival or necessity self-employment. Therefore, in cities in developing countries we find, almost without exception, large numbers of small, micro informal and formal enterprises providing all kinds of consumer products and services.

A lot of these enterprises play a role in sustaining the informal and illegal economy, including the illegal drug trade, prostitution and people smuggling. It starkly reminds us that entrepreneurship is not always good for development — entrepreneurs can be unproductive and even destructive. Therefore, the policy quest is to design an urban entrepreneurial ecosystem that will offer strong incentives for high-growth, productive and legal entrepreneurship while also discouraging illegal activities. The difficulty is that sound political decision-making and governance institutions are required to create such an ecosystem: in most rapidly developing and urbanizing countries these are largely missing. Good urban planning and management skills, including urban policing, may be amongst the most sorely needed tools in the emerging world today.

Countries at relatively early stages of development will also attract larger foreign businesses into their growing cities. These foreign “entrepreneurs” arrive to make use of the large pool of low-wage labour, access raw minerals and natural resources in the hinterland and to sell goods to the local population. As with the case of small and informal businesses, these large foreign businesses can also have negative side effects on development. Rent-seeking, lobbying, bribing, exploitation are just some of the nefarious activities large foreign businesses based in the fledgling capitals of developing countries have been found to indulge in.

Over time, if a country succeeds in managing its fledgling cities well and thus limit the negative spillovers from entrepreneurship, many of the small startups will scale up and employ more people. More foreign entrepreneurs will be attracted. The growing city will become an entrepreneurial hot spot, as local and foreign firms vie to build houses, office space, retail centres and public infrastructure. Entrepreneurial support services such as banks, transport providers, export and import agents, ICT specialists, job placement agencies and business schools will thrive. Productivity, and hence average wages, will rise.

Eventually, rising property prices and rents, urban congestion and fierce business competition will drive entrepreneurs into the property development sector to claim and develop more land for urban expansion. Cities will become larger and multiply in number and the spatial form of cities will change shape. Industry will, under pressure of competition, become more technologically advanced and environmentally cleaner.

Entrepreneurial innovation will become an important driver of productivity and economic growth and will be almost exclusively found in larger cities. Jobs will move out of mechanized and automated industries into services — and the high tech, high skill requirements of these services will spawn many new entrepreneurial opportunities. Think of new business models and markets being created by the intersection of new technologies and entrepreneurship in congested cities, such as Uber (solving transport problems) or Airbnb (solving short-term accommodation problems) as well as many other service apps.

At this stage, cities will compete to attract what Richard Florida, the American urban studies theorist, called the “creative class”. Quality of life becomes central. Security, health, education, a beautiful environment and efficient public services are required to attract and keep the “creative class.” Now many cities become the centres of the circular economy. An example is the Dutch city of Almere, where in 2016 Europe’s first eco-village will be built, a completely self-sustainable urban community. An entrepreneur, who plans to roll out the concept across Europe, drives this initiative.

As the virtuous development cycle of urbanization and entrepreneurship continues, most people end up living in or near a city. The high concentration of billions of people in a few geographic spots across the globe, many of them on the coast, raises the vulnerability of a highly interconnected system of production and consumption to natural disasters (2011 Fukushima nuclear disaster caused by a tsunami) and urban terrorism (9/11 attacks on New York). These risks pose new challenges for urban management and city planning, as well as create opportunities for entrepreneurs to generate and implement technologies to deal with these risks. Strides have already been taken in the development and use of better surveillance systems and prediction models based on “big data,” and in the emergence of urban agricultural systems, such as vertical farming, aimed at reducing food insecurity.

As we have seen, the process of urbanization and entrepreneurship goes together, like a horse and carriage. But like love and marriage, the relationship is neither linear nor certain. There is nothing inevitable in the rise and development of any particular city. Cities do not only generate, they also degenerate: think of many great world cities of the past that have lost their entrepreneurial splendour such as Alexandria, Angkor, Detroit and Glasgow. Cities also differ in economic structure, some tend to specialize (London in financial services) while others are more diverse (Shanghai) depending on its entrepreneurs. For some cities, three million people may be the optimal size, while others seem to be functioning well with 20 million inhabitants.

There are many questions for researchers and policy-makers as to the future of entrepreneurship in cities. Compared to Asia, Africa has few megacities at present: where will these be located in a hundred years from now? Will London decline once the U.K. exits the EU? Will the architecturally stunning cities of the Gulf states be sustainable in a post-oil era? How will China’s responses to clean up its polluted cities influence its role as manufacturer of the world? Will the rise of robotics, networked production and the age of industry 4.0 put a break on the speed of urbanization we have seen over the past century? Will entrepreneurs from Silicon Valley create their own floating city-states in the Pacific?

The heterogeneity, serendipity and context-specificity that shape the patterns of global urbanization (no one city is alike) implies there is much that is still unknown about the specifics of the relationship between cities and its entrepreneurs. After all, urbanization is a relatively recent phenomenon in human history, considering that in 1800 only 3 per cent of the world’s population was urbanized.

The most interesting period in the world’s urbanization is clearly still to come.

Wim NaudéWim Naudé is Dean of Maastricht School of Management and Professor in Business and Entrepreneurship in Emerging Markets at Maastricht University. He is also Professorial Fellow at UNU-MERIT and Research Fellow at IZA- Institute for the Study of Labour. He has published widely on the impact of entrepreneurship on economic development and has directed a multi-year project on the topic for the United Nations University. He regularly acts as expert advisor on entrepreneurship to global development agencies such as UNCTAD, UNIDO, the World Bank, EC, OECD and others, and have made contributions to flagship reports such as the World Bank Development Report, European Report on Development, and Industrial Development Report.