HUMAN CAPITAL, FINANCE AND THE ART OF INNOVATIVE CITIES
2017 International Conference on Asia-Pacific Economic and Finance Development
Global Finance and Economics in Post-Globalisation
Changchun, China, 23-25 June 2017
Professor Dean Forbes
Matthew Flinders Distinguished Professor Emeritus
Flinders University
Cities are the frontline of innovation. Enterprises based in London, New York and San Francisco are leaders in expanding global knowledge economies. So where do East Asia’s cities figure?
The global Innovation Cities Index 2016-2017 lists 500 cities in total. Some 65 of these are in East and Southeast Asia. The top 10 rankings start with Tokyo (3); Singapore (7); Seoul (11); Shanghai (32); Hong Kong (35); Osaka (50); Shenzhen (69); Kyoto (70); Taipei (72) and Busan (78).
Overall there are 36 Chinese cities listed led by Shanghai and Hong Kong, followed by Shenzhen (69) and Guangzhou (97). Changchun is ranked down the list at 364th.
By comparison, 11 Southeast Asian cities are listed. Singapore leads (7), followed by Kuala Lumpur (92) and Bangkok (118).
Sustaining economic growth has stimulated an appetite for innovation and that includes in the ways that human capital and finance are viewed.
The digital revolution and parallel innovations, such as the evolving sharing economy, are prime drivers of an expansion and reconfiguration of global knowledge-based economies.
FINANCE AND INNOVATIVE CITIES
Tokyo is the highest ranked Innovation City in East and Southeast Asia. But we can learn more by looking at Fukuoka in Japan, ranked at 156th. Fukuoka is the fastest growing Japanese city outside the Tokyo region (Hohara 2017). It has the highest ratio of new business startups among Japan’s 21 largest cities.
It took the view that young entrepreneurs needed investment, not loans, because loans discourage risk taking (Hohara 2017). Entrepreneurs with a ‘Startup Visa’ receive a six month exemption from the investment and hiring requirements of a standard business visa. The city lobbied successfully to cut income tax for Fukuoka startups, consistent with Mayor Takashima’s view that providing monetary incentives was out-dated.
The city of Sydney ranks 14th on the Innovation Cities Index. Many of the innovative start-up companies, in their early stages at least, have little interest in conventional bank loans. Initial support comes from family, mentors and angel investors.
For those seeking crowd sourced funds more are turning to Kickstarter. Innovators, or Creators, with a product under development that requires funding post on the Brooklyn USA based Kickstarter website. The public – known as Backers – are asked to pledge funding to support the development of the product.
When pledged funds reach the set figure the project goes ahead. Kickstarter retains 5% of the money raised. The Creator retains 100% ownership of the product. The Creator provides an insiders view of the project and rewards the Backer with gifts and information. Kickstarter does not offer equity or solicit loans for projects.
Though not necessarily part of the innovation economy shadow banking in the housing market is increasing. Australia is home to over 520,000 Chinese, with the largest concentration living in Sydney (Morton 2017). China’s government has tightened the transfer of money to Australia, making house purchases more difficult.
It has seen new arrivals connecting with Chinese Australians - usually family or friends - with existing underdrawn lines of credit with Australian banks. They borrow around 70% of the property’s value and pay interest of 9% to the intermediary. The intermediary pays off the bank loan and interest rate of 5% and pockets the balance (Condon and Bennet 2017).
Not all innovation requires sophisticated technology. There were around 196,315 Chinese students studying in Australia in 2016. Up to 80% of these students send Australian goods such as baby formula, milk powder, vitamins and supplements, ugg boots and many other products to buyers, family and friends, in China. Many students buy goods from discount chains such as Chemist Warehouse. It is estimated that goods worth around $A600 million (RMB 3,120 million) are sold each year (Williams and Xu 2017).
The students call themselves purchase agents (daigou) and find the work lucrative, with some claiming annual incomes of $300,000 (RMB 2.56 million) per year. Payments are processed through WeChat. A range of service providers support the trade. Chang Jiang International Express, for instance, sends 400 tons of daigou freight to China each week.
INNOVATION CITIES AND HUMAN CAPITAL
Access to an abundant supply of educated, skilled workers is critical for innovation. Deft management of human capital is a feature of Fukuoka. I have already mentioned the Startup Visa. Unlike many Japanese cities, Fukuoka has grown with an influx of 75,000 people over the five years to 2015 (Hohara 2017). On current trends the population should peak at 1.6 million in 2035. By comparison, many other Japanese cities are shrinking.
Kyushu University has been a significant factor in Fukuoka’s success. It is one of 13 universities in Japan chosen as a gateway for increased numbers of international students. It currently boasts 2,000. Fukuoka is doing extraordinarily well in a country dealing with a disproportionately large aged population and the challenge of maintaining a vibrant and productive society and economy.
As Australia’s largest city, Sydney has many features that attract innovative companies which concentrate in an arc on the south and east of the CBD. Its’ greatest weaknesses are a lack of an affordable city-wide fast internet, crowded roads and need for improved public transport. In addition, internet services need improvement. The National Broadband Network still has limited coverage and provides a mixed quality of service delivery.
Townske is a web-based provider of travel information, skewed towards a young upmarket clientele. Launched in mid 2015 it has grown substantially. Despite an inner city Sydney location it has struggled to sustain and build its workforce. It moved to outsource much of the routine office work to the Philippines with an immediate increase in quality and efficiency at a much lower cost. While the creative content can be sourced from Sydney, offshore routine services are much more cost-effective.
A flow of talented digital-savvy labour into and out of Australia is essential to the vitality of the digital economy. The Australian Government is to end the 457 Visa Sub-class that enabled workers in defined skilled areas with labour shortages to enter Australia for fixed terms. 457 Visa workers currently number a little over 95,000, about 1% of the national workforce. Workers from India account for 24.6% of the total 457 Visa holders, followed by the UK (19.5%) and China (5.8%).
A new two-year visa will provide work experience with no permanent residence possibilities at the end. The four-year visas will require a higher level of English. With 216 fewer eligible occupations, overall there is likely to be fewer workers on the new visa.
Changing the visa arrangements will have no direct impact on international students in Australia. The current student post-study work rights have not been changed. International students and former international students have boosted Australia’s innovation capacity.
However the loss of the 457 visa is an irritation to entrepreneurs in Australia’s emerging knowledge economy, undermining the attraction of Australian businesses, especially in highly competitive digital fields. It is no surprise that Atlassian, a young highly successful Sydney based company has expressed concerns, pointing out that around 25% of Atlassian’s Sydney workforce are on 457 Visas.
There are already enough obstacles for Australian knowledge based companies. The government cannot afford to dilute its capacity to attract high quality knowledge workers to Australia.
THE ART OF INNOVATIVE CITIES
The internet and the digital economy has catapulted countries into a Third Industrial Revolution. The art of innovative cities will be to ensure that the Third Revolution digital economy benefits are spread across the whole community. Not surprisingly, there is a downside and it is causing concern.
The knowledge economy is growing in parallel with a decline and reconfiguration of significant segments of manufacturing and environmentally problematic resources industries. In wealthy countries such as the USA many in the labour force are being left behind. They are the residents of declining towns that have lost their major industries. Firms that have closed and moved overseas in search of less expensive labour or lower rates of company taxation. Political opportunists exploit those who have been left behind, promising to rebuild old industries and create jobs for the unemployed. We see it most clearly in the USA and west Europe.
Even cities supporting highly successful digital industries are concerned. Residents can show that the wealth is not spreading across the whole urban population but is being confined to a few wealthy suburbs. Numerous studies document this problem in the USA, UK and Australia (see Alexander 2017; Guest 2016; Evans and Tilley 2017; Dunlop 2017).
With globalisation both governments and corporations encouraged more flexible labour relations with the result that workers ended up in less secure forms of labour. Guy Standing (2011) calls this segment of the workforce the precariat. He argues that ‘as inequalities grew, and as the world moved towards a flexible open labour market, class did not disappear. Rather, a more fragmented global class structure emerged (p 7).
There are many more who are drifting into the precariat. It includes young people searching for paid work in the arts or the environment, or in coffee shops and restaurants, where jobs come and go, and the wages are low. The precariat increasingly absorbs those on the margins of, or discarded by, the digital economy, unable to keep up with the pace of work and the long hours required.
There is a strong international dimension. The precariat includes highly mobile people from Europe, or North America and Asia who travel to Thailand, or the coastal towns north of Sydney, to work in low cost regions where the internet is good and the beach is close. This younger demographic within the precariat provide great potential to enliven towns and cities. They also need a decent income.
The art of innovative cities will be to connect and balance two powerful forces. On the one hand the sometimes erratic and self-centred but talented, knowledgeable and skilled upwardly mobile entrepreneurs and workers. On the other hand, the vocal demands and desperate needs of the displaced industrial workers and the peripheral or alienated knowledge workers who form a major component of the precariat.
Innovative cities have high expectations about creating economic growth, employment and a better lifestyle. But change is seldom linear: there is always unevenness in the distribution of success and often a backlash. To be sustainable they must embrace both the leading firms and their workforces and the precariat and the unemployed. The prospect of providing a universal basic income, once considered as highly unlikely, is again the focus of serious discussion.
The USA is withdrawing from the Trans Pacific Partnership and focusing on its domestic economy. This has boosted China’s Belt and Road initiative. Its plans for massive development of land and sea transport and infrastructure, will lead to further integrating of east and west Eurasia, along with eastern Africa and Oceania. While this is at an early stage of development, if successful it may well create further opportunities and incentives for cities across Eurasia to boost innovation.
Finally, some say we are on the cusp of a Fourth Industrial revolution where governments shrink or even collapse and individuals and communities, empowered by the digital economy, take responsibility for many services previously in the control of government (Lyle 2017). This may be a premature conclusion. But we can be certain that the impact of the internet and the digital economy is going to have many more long-term consequences than we currently can comprehend.
APPENDIX I
Any measurement and ranking of innovation is crude. The Innovation Cities Index 2016-2017 was based on 162 measures lumped into three categories.
•Human infrastructure, embracing an airport, broadband, banking and finance, card acceptance, foreign exchange, and growth in business funding. University breadth and commercialization and the student population fit in here.
•Networked markets which including population, tourists, social media and foreign direct investment.
•Cultural assets, including galleries, climate and weather, and web censorship.
REFERENCES
2thinknow 2017 Innovation Cities Index 2016-2017
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