Post written by Saul Estrin, Emeritus Professor of Managerial Economics and Strategy, and Christine Cote, Senior Lecturer in Practice at LSE’s Department of Management.
Firms must adjust their diplomatic and corporate networks to the city level.
In October 2017, Google affiliate Sidewalk Labs announced plans for Quayside, a sustainable and affordable community resulting from innovations in technology and urban design, to be built on the Toronto waterfront. Canadian Prime Minister Justin Trudeau described it as a city that would be built “from the internet up” as Sidewalk Labs proposed a future-ready neighborhood with the latest smart city technologies, including a smart power grid utilizing thermal energy, highly efficient stormwater and waste management systems, and a freight management system using underground tunnels, among others.
However, in May 2020, Sidewalk Labs announced that they will no longer be going ahead with the development on the Toronto waterfront, despite having spent years and millions of dollars already.
Since the announcement back in 2017, Canada’s most prominent businesspeople, local civic leaders and Toronto residents voiced their resistance and concerns with the new smart city, with fears of intrusive surveillance and criticism of a multi-billion dollar American corporation building on land that could have been developed by local Canadian enterprises.
A smart city development like this could have been a huge success. But what went wrong? To answer this, we must look at how businesses expand internationally, the impact of trade in services, and the growing role cities now play.
It is common to state that a key political factor behind businesses expanding their trade and foreign direct investment (FDI) has been economic diplomacy – bilateral and multilateral trade and investment agreements such as the EU’s Single Market and the Trans-Pacific Partnership agreement (CPTPP), as well as government trade and investment promotion initiatives.
However, even before Trump’s economic nationalism, Brexit, and the Covid-19 pandemic changed the picture, traditional economic diplomacy was rapidly becoming outdated, as the growth of trade in services and the growing role of cities as the center-point for international business activities forced significant change.
Trade in services has been growing faster than both trade in goods and FDI, more than doubling since 1970 and accounting for around 25% of global exports today. This is predicted to rise by a further 33% by 2040. Of course, some firms sell services only; think of airlines, insurance companies and lawyers. But services trade is often indirect and embedded in the export of final goods; for example, aero-engine producers providing maintenance or car producers selling finance. Perhaps the most important area for growth of trade in services concerns information-based digital activities, especially business, financial, communication, and insurance services. And these activities tend to be located, disproportionately, in large cities.
It is not random that cities play an increasingly pivotal role here. They provide access to a wide variety of complementary services, large pools of specialized labor and a sophisticated transportation and communications infrastructure. These clusters of resources and skills then generate a spill-over effect between businesses as they learn from each other, encouraged by physical proximity. This is known as the agglomeration effect.
As a result, we see more and more advanced multinational business service providers and innovation in these cities, leading to them being labelled ‘global’, with capacity to host innovation clusters, and combine local resources with global linkages and networks. This is not a phenomenon limited to developed Western economies. We can see agglomeration effects in Lagos, Bangalore, and Shenzhen, as well as New York, London, and Toronto.
In light of this, how should economic diplomacy be conducted to meet the needs of business going forward and provide lessons for international firms seeking to operate successfully in foreign markets?
Traditional economic diplomacy has proved problematic in the case of services, largely because the breadth of activities covered creates regulatory and administrative complexity. As a result, trade in services faces a variety of obstacles that are difficult to overcome using national-level policy. At the same time, cities have become essential components of knowledge creation and diffusion across borders. For example, cities are nodes in a global network of knowledge-based investments in R&D and design. 40% of both inbound and outbound cross-border R&D projects are directed towards 57 global cities.
Though cities play a critical role in facilitating trade and investment in services, they are very rarely part of the policy conversation. But they often have an international strategy and participate in various international networks and interact with other cities, nation-states and corporations through their own specific diplomacy.
So, how should trade policy be changed to take global cities into account?
International trade policy should be developed explicitly to encompass diplomacy at the city as well as the national level. Such changes should motivate international firms to adjust their diplomatic and corporate networks to the city level. Sidewalk Labs and their failed attempt to build a smart city on the Toronto waterfront is a case in point. While the company had strong support from the Canadian Federal Government for a project which at one point encompassed a possible 350 acres and $1.3billion in investment, their inability to overcome opposition at the local city level ultimately led to the failure of their project and withdrawal from the market. This demonstrates how, if future projects similar to the Toronto waterfront project are to succeed, diplomacy at the city level needs to be considered.
