After spending some
time with folks from Iskandar Region, Malaysia’s effort to create a booming and
global Southern region through planned city development; my thoughts ruminate
around how exactly one catalyses a parcel of land into a great city. More
importantly, what role does the outsourcer play in realizing this vision?
Rummaging through the
annals of history, city states seem to arrive rather serendipitously, and once
created perpetuates almost indefinitely unless there’s a cataclysmic natural
event which decimates the entire population. Even war couldn’t smite the likes of London
and Paris. So why the allusion to serendipity; primarily because it all began
rather logically but then magically takes a life of its own within a short
course of 20 to 50 years after several hundred years of relative organic growth.
To begin, the
primordial city was chosen due to the wealth of the land. Usually where the
river meets the ocean and massive alluvial lands for farming and domesticating
animals exists or to some extent mining towns. Population grew and they develop
ever refined niches of value throughout the chain of raw materials from production
to consumption; continuously turning natural resources into goods and secondary
supplementary/augmentative activities that allow the producers and consumers to
exist in relative comfort.
If one would zoom out
and see the big picture, we are nothing more but ants attracted to sugar; sugar
being available natural resources for sustenance. I call this the Genesis
period. Life was simple and the dots which connect the value chain of
respective land dwellers are close together. A tanner lives beside an animal
farm and he’s a stone throw away from the market because logistics and
infrastructure were rudimentary.
The second evolution
of the city is the trading ports; a natural extension considering as the city
grows, goods need to be sourced from farther away as local resources and land
slowly depletes, as well as the benefits of comparative advantage mooted by David
Ricardo in 1817. Interestingly, trading ports have a notorious nature of
flourishing as an outcome of black markets and crime; goods were seized
en-route or simply went missing during offloading. So it becomes a natural
order for businesses to setup shops that ply these goods and factories as close
as possible to the ports as black market items sold many fold more expensive
than legalize goods.
Within the 20th
century, we see governments across many nations attempt city building on
steroids; artificially sprouting mushrooms of steel and concrete with words
like “hubs” plied, typically surrounding manufacturing, financial services,
education and entertainment. These “artificial” cities have a certain set
pattern of growth and stagnation. More importantly, it attempts to attract the “ant”
in us with monetary wealth; the sugar of today.
I ask myself, can a city generate wealth without natural resources? So here’s
what I’ve observed from these city building endeavours
a) Manufacturing
The hallmark of the
industrial age and humbly, one of the most crucial pillar of nation building
for any country; is the ability to harness natural resources and refine them
into goods that fulfils needs and desires.
Policies like tax breaks for more advanced foreign companies can
catalyse initial growth, but it does not necessarily create value for the
populace other than salaries and services to support factory workers, managers
and the factory itself. The flow of money is obvious but are mere droplets
compared to the torrents of wealth should one owns the intellectual property of
the product. Primarily because foreign companies repatriates the bulk of
profits back home. Every nation hits a manufacturing ceiling once natural
resources runs out and salaries increased to the point where it is no longer
economical for the manufacturing centre to function.
b) Gambling and
Entertainment
Names like Monaca,
Macau and Las Vegas comes to mind, and recently we could also add Singapore
into the category. A certain level of
romanticism is latched onto these cities, and we all love the back story of how
it came to be. Ultimately though; despite its seedy origins, people arrive time
and again because of the lure of gambling pay outs. With a country like Malaysia, where the image
of an Islamic state is crucial for political survival, it has little choice but
to focus towards the family spectrum with the likes of Legoland and other theme
parks in the works. Quaint, but does it directly tug at your soul’s yearning
for money generating potential – likely not. Would it be the primary wealth
generator for the city – likely not again.
You may be arguing that
Disney generates USD11 billion in their parks globally (2011); but the fact of
the matter is, Malaysia does not own the Disney brand so we’re back at
repatriating profits.
c) Purpose built
Government Centres
Grandiosity comes to
mind, huge swaths of lands and artificial lakes carved out with the hope that
beauty shall make bureaucracy more palatable – I digress. Herein lies the rub
with government centres, they only grow as fast as the country’s ability to
collect taxes. The city will largely be manned by government workers and the
ministries are also fuelled by government budgets so we will not see explosive
growth, but rather half empty government buildings waiting to be “repurposed”
once the budget hits a deficit too large to politicize away.
d) Financial Centres
Financial centres are
strange creatures to me, especially the whole idea of plunking a bunch of
bankers in one location and voila you have a financial centre. Global financial
centres like Amsterdam began as an offshoot of trading. You need bank
guarantees, loans, trading notes and insurance i.e. means to “facilitate”
monetary and business transaction for traders - simple.
So sans the organic
way of supplying services for traders (which must exist first), you’re left
with exchanges that trade financial products and centres with the objective of “generating
capital” for local and foreign businesses as well as profit for investors. For
example, countries with trade surpluses tend to have low cost of funds for
international financing (Although today, it’s more likely monetary policies
that artificially lowers the cost of funds e.g. Japan).
Financial centres
require strong legal systems to solemnize contracts, reduced or zero government
taxation to move money in and out of country as well as a bonus, an exchange to
allow trading of financial products with hopefully low rates and easy means of
transaction. Sadly, the way governments outbid each other in this regard is not
unique; once you get rid of taxes, governments are left with relaxing regulatory
controls as well as allowing for some level of transactional opacity.
This in turn creates room
for “financial innovation”; i.e. financial products that can be illegal in one
country but clearly acceptable at the location of trade. Post Global Depression
2008, it’s an approach that most regulators will cringe at.
Having said that, not
all forms of financial innovation are bad, Malaysia for example has one of the
largest placement of Sukuk or Islamic bonds; and offer services for generating
capital that are permissible through Syariah (Islamic law), appealing to
investors from the Middle East. Alas, the question arises again, is this enough
to catalyse a great city? You tell me. Is there a great Islamic financial
district in existence today?
To summarize and break
down the thought process, a great city is a series of cascading outcomes; you
cannot proverbially place the cart in front of the horse.
1)
A city
lives off consistent sources of massive wealth that not only sustains its
denizens but compounds growth. It is only as strong and vibrant as its largest
income generator.
2)
Once that
is established, people will come, more importantly; entrepreneurs -> business
owners that create and catalyses even more value through the initial source of
wealth must exist.
3)
To assist
no. 2; there needs to be proven and consistent rule of law, easy means of
funding and establishing the business as well as the ability to connect
business owners with customers -> Productivity from Day 0
4)
Abundance
of economically viable “people resources” with the skills to execute the
business
5)
Cheap if
not free telecommunications to rapidly accelerate the flow of business
6)
To a
smaller extent, some might say negligible, a low cost base for establishing the
business foot print -> logistics, electricity and rental costs etc.
Element no. 1 is humbly
the hardest to envision, create and nurture. The same old strategic thinking
cap applies; what’s the differentiator of one city hub versus the next? What’s
the barrier to entry? Etc.
You may be wondering
about the Outsourcer by now, well; outsourcing at its core augments one or more
pieces of a business. Simply, the outsourcer’s value is derived from being
cheaper and better or enhances business value (brings better ROI) compared to
having the entrepreneur build the function from scratch.
We’ve also established
that each city needs to have the means to generate sustained wealth, be it new
or old. So by extension the outsourcer’s best bet at being successful, is the
ability to augment the business that feeds off as well as generate the main
arterial sources of income.
I’d like to think of
it as being the cybernetic implant augmenting the “arm” of the business.
In developing cities
overnight, ala Iskandar Malaysia, Dubai, Pudong in China, the plan often begins
with extensive capital investment on office space and public infrastructure.
That is all well and good but the point that is missing is the secret sauce
-> the miracle making cities great are entrepreneurs!
The individual who saw
the opportunity to open a tannery beside the cattle farm; and the banker who
discovers the populace’s latent innovative potential and unleash it through
venture capitalism.
The entrepreneur
connects the dots of value within the city, the entrepreneur then innovates to
produce products and services that not only make these connections stronger but
uncovers arbitrage to profit from. Every instance where business value is
generated, it gets ploughed back into the city and the city grows!
The outsourcer must become a business cybernetic
scientist that makes the entrepreneur better; hence, the outsourcer’s destiny
is intertwined with that of the entrepreneur.
In order for a plot of land to leap the
chasm of backwater subsistence and transform itself into great city therefore
requires great entrepreneurs and great entrepreneurs require even better
outsourcers.