The Business of Cities: Are Cities like Businesses?

Authors: Greg Clark & Emily Moir

The last blog in this series looked at new roles for business in cities, as identified in the Business of Cities essay. In this post we explore the suitability of commercial strategies for city governance.

The language of business has infiltrated city government and urban studies: concepts such as city branding, city marketing, the ‘CEO mayor’, the investment rate, and the city balance sheet have fallen into common use.  But can cities really be compared to businesses?

In the new global era, cities have taken on some fundamental features of businesses. As globalisation has made the content of national and city economies more mobile than ever before, cities – like businesses – have no choice but to directly compete in contested national, regional and global markets. Cities compete not just in relation to price but also on factors such as environment, provision of services, amenities, quality of life and presence of skilled labour, all of which make them more or less attractive to mobile businesses, people and institutions.

In order to compete more successfully, cities are adopting practices and techniques from the private sector. They are developing strategic plans and setting out to achieve clearly defined goals, whether this be talent attraction, enhanced market profile, a targeted investment rate, or something else altogether.  London, Paris, Auckland, Johannesburg, Sao Paulo, Singapore, New York, and Barcelona are just some of the cities which have developed strategic plans in recent years.  Marketing and branding are also increasingly accepted to be practices that are as important to cities as they are to businesses. Cities need to be able to define their unique offering and communicate it to the world effectively.

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Cities, like businesses, have finite budgets within which they must operate. In the current constrained economic environment, both the private and public sectors have had to innovate in their use of financial resources in order to achieve more with less.  Many cities have looked to business for inspiration as to how to do that. Similarly, just as businesses carry out and fund research and development activities in order to remain ahead of their competitors, cities also have to innovate, invest and adjust to differentiate themselves in the global marketplace. They have to change old patterns of land and resource use, and connect assets with opportunities in new ways and over new spaces.

Some urban theorists have compared the stakeholders in the city to those within a business. Citizens, businesses and investors are seen as the customers of City Hall. They are consumers of its services and wish to receive the best quality service for the lowest price. Some prefer the analogy of citizens to shareholders in the city – they invest in the city ‘business’ by way of taxes and have voting rights to exert control over how the organization is run. Mayors are often described as CEOs – the city ‘boss’ who calls the shots, and is the figurehead and public face of an organization.

The truth in these stakeholder analogies is limited. Unlike corporate shareholders, citizens have wider interests than pure economic success of the ‘business’ – they are also interested in the city as a political and social entity and as a long term environmental stakeholder. As residents of the city, an exit from their ‘investment’ may also be harder to achieve. Likewise, some mayors are more similar to CEOs than others. As Mayor of New York, Michael Bloomberg was a first-class example of a CEO Mayor: a leader who, using skills honed in the private sector, focused on goals, efficiency, customer service, and long-term strategy. However in many cities, mayors’ powers are far more restricted than those of a CEO – they may have no formal authority outside their council, no power to appoint or remove officials, or may be a purely ceremonial figure. Furthermore, mayors are voted into their position of power and are accountable to the electorate. Once they attain office they must try to deliver on promises made in their election campaigns. They may also be constrained by the leanings and preferences of their own political party. Business leaders have more freedom.

Cities remain distinct from businesses in other fundamental ways. Within cities, risk taking is controlled. Companies – within the constraints placed upon them by their shareholders – are free to use their cash reserves,borrow money and /or take new directions.  Cities on the other hand have to work within wider governmental frameworks, which may restrict their access to the cash, financial powers or leverage required to take significant risks. Cities also work with the constant knowledge that their financial reserves are not their own, but belong to the taxpayer.

Cities are also less autonomous than businesses in other areas of decision making. For example, they cannot choose their customers. Cities must provide services to all their citizens, no matter how desirable. Demand for services can often overwhelm the limited resources available to provide them, but city governments cannot prioritise certain citizens over others. Nor can they choose which products and services they sell.  Governments cannot adopt criteria such as how profitable the service is or how costly it is to provide. They must provide a core set of services to all citizens.  When it comes to branding, a city’s identity and brand is often substantially shaped by others. Pre-existing national or state brands, or perceptions of the city’s nation or state, can limit the identity with which the city chooses to imbue itself.

Businesses can organise themselves internally so as to best serve their economic markets. They can divide into appropriate shutterstock_125115182_NYcity-wide, national, or regional units. This matching of institutional and market geography rarely occurs in cities, which are confined to working within – usually inflexible – political boundaries. This denies cities the opportunity to benefit from economies of scale, and to reduce inefficiency and negative externalities across local boundaries. Where services need to be provided beyond municipal boundaries (for example in areas such as crime, transport and water) services must be co-ordinated across multiple jurisdictions.

Neighbouring authorities are not the only external actors that cities have to consider. The governance frameworks within which cities operate are far more complex than those affecting most companies. Cities are almost always subordinate to national governments, who can remain heavily involved in ‘city’ affairs. In Australia, for example, national government provides certain ‘regional’ services such as transportation. In Mumbai, city government is divided between the Municipal Corporation of Greater Mumbai, the state of Maharashtra and the government of India. Some cities have the authority to raise revenue subject to tax limits, but many others, including those in the UK, rely largely on funding from central government.  Businesses are rarely subject to such superior levels of control.

Cities also retain some characteristics that businesses would relish. In particular, cities do not ‘fail’ to point of extinction. Companies have a bottom line. They must make a certain amount of profit in order to retain their viability in the marketplace. Cities can go bankrupt in the same way as businesses can – indeed Stockton, California and Detroit have both filed for bankruptcy in the last two years – but they do not go out of business in the sense that they cease to exist.

Clearly, there are advantages to thinking of cities as being like businesses. The private sector can offer inspiration to cities and help them to develop operational efficiency, budgetary discipline, new ways of working and engaging with stakeholders. Applying the analogy has the potential to secure better value for citizens, city governments and investors alike. But cities should proceed with caution – they will always be subject to their own specific constraints, and should draw comparisons with their eyes open to avoid the possibility of over-simplification and slip-ups.

 

About the Author

Greg Clark has spent more than two decades putting his passion for cities to good use, by advising and mentoring global cities, firms and institutions. He has worked with over 100 cities around the world and holds senior advisory roles at international bodies including the OECD, Brookings Institution, ULI, and the Future Cities Catapult. A prolific author, Greg has published ten books to date on cities and investment practices, with three more in the pipeline for 2016-17. And as Chairman of The Business of Cities research and intelligence group, Greg leads a small high calibre team that advises and reports on global trends and changes in cities. In his academic life Greg is Hon Prof of City Leadership at UCL and co-chairman of the UCL City Leadership initiative, Visiting Professor at Strathclyde University, and Global Fellow at LSE Cities. He has received international awards for his work from cities as far afield as Barcelona, Brisbane, London, and Toronto and in 2016, Greg was honoured by HM Queen Elizabeth II with a CBE for his services to city and regional economic development. Meanwhile, outside of the day jobs, Greg is an avid tennis player, wine enthusiast, and lifelong follower of Arsenal FC.

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