Dozens of cities across the world are implementing programs to attract startups. These programs entail all sorts of government-sponsored job training, subsidies, and infrastructure programs. But do these programs actually succeed in attracting startups?
We decided to do our homework and answer this question.
A few weeks ago, my research team published the Startup Cities Map—a map of “startup cities” around the world. The map was built by our research firm, the Adrianople Group. We gather data about the ease of doing business in emerging markets. The data on our map is open source and available through Creative Commons licensing so that other researchers can use and disseminate it.
We made the map for Balaji Srinivassan, a tech investor and the former CTO of Coinbase. Srinivassan has three definitions of a startup city:
1. A city that attracts startups, like San Francisco, California or Austin, Texas
2. A city that (tries) to act like a startup, like Miami or Singapore
3. A city that literally is a startup like Gurgaon, in India, or Prospera, in Honduras
Unsurprisingly, economic freedom correlates strongly with cities that actually succeed in attracting startups. Ivette Cano, who led the research team which made the map, explained to me how our map data correlates with economic freedom:
“Seventy-five percent of the most innovative and startup-friendly cities are located in countries that fall within the ‘Free’ and ‘Mostly Free’ Category of the 2022 Index of Economic Freedom. This is a strong indicator that the respect of rule of law, small government size, regulatory efficiency and open markets is the best route to follow to attract startups and foster entrepreneurial innovation.”
What we discovered is that thousands of cities have very pro-business rhetoric, but in reality do not foster environments which are startup-friendly. For example, Paris, France created a government program that gave startups a five-year long tax break. Although the tax rates were low, the process of applying for the tax break was time consuming, difficult, and required expensive lawyers and accountants.
The adoption of technology requires a streamlined regulatory system which favors, rather than punishes, innovation.
“We found that dozens of cities, mostly in emerging markets like India, China, and the United Arab Emirates, are run by private corporations,” Cano explains. “Cities need to think of new technologies as the spearhead that will lead them towards the future instead of something that needs to be tamed. More often than not, cities over-regulate new technologies, with a restrictive approach that frustrates innovation.”
These cities do not have mayors—they have CEOs and shareholders.
Many are Special Economic Zones, which means that they enjoy a degree of regulatory autonomy. They often have private infrastructure such as private police, private fire departments, off-grid electrical systems, and private waste management systems.
These private startup cities are run by real estate companies, who turn a profit by renting land to companies. While there are only a few dozen private startup cities—cities that literally are startups—they play a disproportionately important role in fostering the global startup ecosystem.
Gurgaon is a private city outside of New Delhi, India. It was built in the early 1980s by the real estate firm DLF. It is home to the Indian headquarters of the largest tech companies in the world such as Google, Oracle, and Microsoft. It now has the second highest income per capita in India. Companies relocated there because the city fully privatized all municipal services; as a result, they work well. Elsewhere in India, local governments struggle to supply basic services such as clean water, electricity, and fire services.
Masdar City, located outside of Abu Dhabi in the United Arab Emirates, was built by the Mubadala Development Company in 2006. The real estate developers who built the city managed to negotiate a special deal with the government, which exempted it from various taxes, labor laws, VISA rules, and restrictions on foreign ownership. As a result, it has attracted hundreds of tech companies, both large and small. For example, many satellite companies which provide internet, GPS, and cell services in the Middle East have their headquarters there. The city was built using completely renewable energy, and has one of the lowest carbon footprints in the world.
Finally, Forest City is a private city in Malaysia built right across the border from Singapore. Forest City is still under construction, but has managed to secure more than $100 billion from private investors. It hopes to create a free-market oriented business hub for companies that want to do significant business with Singapore, but cannot afford Singapore’s sky-high real estate costs. It covers an area of 30-square km, and will be completely off grid, using privately funded renewable energy. If it succeeds, it will be the largest startup city project to date.
All cities have the potential to attract startups—but few do. Cities do far too much. Most startups are not interested in subsidies, tax incentives, or “smart” infrastructure hubs—they just need to be left alone so that they can focus on innovation and creating value for customers.
“If cities want to attract startups, doing nothing is often better than doing something,” Cano says. “If cities really feel the need to do anything, then they should limit themselves to cutting red tape. If there is one key takeaway from our research, it is that government micromanagement does more harm than good. Facilitate, don’t restrict.”