AUGUST 21, 2006

Slicker Cities

The real contest is among communities, not nations. Check out these hot spots

America is losing its competitive edge. That premise has been pounded into our heads so often by pundits, and reinforced with each report on the rise of China and India, that it's almost taken as a given. But can a nation that has averaged 3.4% growth for three years and keeps posting sterling productivity gains really have a competitiveness problem? Or is that problem much more local? Here is a quick tale of two cities. In fact, they are two cities in one metropolitan area -- Boston.

Since the tech boom peaked in 2000, greater Boston has lost 120,000 jobs. It has also lost 5% of its population, a trend seen across Massachusetts, as young families, no longer earning enough to afford skyrocketing housing costs, moved out of the city and nearby blue-collar towns like Chelsea and Revere.

But right across the Charles River, Cambridge is booming. Local biotech powers Genzyme (GENZ ) and Biogen Idec (BIIB ) have been expanding their labs, as have pharma giants Pfizer (PFE ), Novartis (NVS ), Bristol-Myers Squibb, Schering-Plough (SGP ), and Wyeth (WYE ). Kendall Square, an old industrial district abutting the Massachusetts Institute of Technology that in the 1970s boasted overgrown lots and dirt-cheap rents, is now jammed with gleaming offices and restaurants like the Blue Room, where venture capitalists cut deals over lunch. The action "is just like Silicon Valley 10 years ago," says Noubar Afeyan, CEO of Cambridge-based Flagship Ventures, which works with more than 15 area startups. With 150 biotech companies, triple what it had just three years ago, Cambridge is perhaps the world's hottest life sciences hub. That's no small feat: Forty U.S. states are targeting biotech as a key industry, as are big-spending Asian and European governments.

The two metro Bostons illustrate the dynamics of 21st century economic competition. The real contest isn't between nations. It's between communities, whether they be neighborhoods, cities, or tight-knit regions. Those with hard-to-replicate strengths are carving out lucrative slices of the global economy. Cambridge's strengths include MIT and Harvard, nearby top teaching hospitals, and vibrant urban environments where talented workers earn enough to support their lifestyles. For biotech companies, says Afeyan, "This is a very easy place to recruit scientists and management."

The same dynamism is on display elsewhere. They don't talk much about declining competitiveness in Portland, Ore., which is enjoying a huge influx of designers, engineers, and entrepreneurs drawn by its funky neighborhoods, miles of bike paths, and recreation options. Nor in fast-growing Orlando, where a cluster of entertainment, aerospace, and software talent has turned it into a world leader in digital media. Montreal, Stockholm, Atlanta, Raleigh-Durham, Edinburgh, Singapore -- all are thriving as magnets of knowledge workers and investment.

LOCATION, LOCATION
Hold on. Wasn't globalization supposed to render location meaningless? Yes -- in theory. A Silicon Valley startup can do its engineering in Bangalore, manufacturing in Shanghai, and accounting in Manila. Why live in pricey Manhattan if a creative director can work remotely from Maine?

But in the end, companies and talent still tend to cluster in areas rich in new tech sources, suppliers, and personal amenities. "The paradox of globalization is that location still matters," says Harvard Business School competitiveness guru Michael E. Porter. "The more barriers disappear, the more that capital and talent become mobile, the more decisive become geographic advantages." Areas most punished by globalization, he notes, are those whose geographic advantages have ebbed, such as Detroit's proximity to the Great Lakes. Factors that lure investment today, like good schools, roads, tax policies, and support industries, are controlled by communities, not national governments.

Farsighted communities everywhere are taking heed and raising their game. Cities up and down China's coast are lavishing perks on multinationals as they vie for new manufacturing. Nations like Romania are promoting their highly educated, multilingual workers in a bid to be a new Bangalore for outsourced software and back-office support.

In North America, though, communities must go beyond tax breaks, cheap land, and convention centers. Successful ones are hiring consultants to map detailed game plans to develop new industry clusters. They are amassing war chests to subsidize training, R&D projects, and even startup capital. Local agencies are breaking down silos among universities, corporations, and cities across entire regions to collaborate on development.

Communities also are putting much heavier emphasis on attracting college grads aged 24 to 34. "They are the dream demographic of a fast-growing economy," says Joseph Cortright of Impresa, a Portland economic consulting firm that works with cities across the U.S. These young adults grew up with computers, have up-to-date training, and are tomorrow's entrepreneurs. Research by economists such as Harvard University's Edward L. Glaeser shows that communities with high concentrations of college grads also have the strongest economies. Trouble is, young talent is scarcer as America ages. Two-thirds of U.S. metro areas have fewer 25- to 34-year-olds than a decade ago, Cortright notes.

To draw them, more cities are listening to George Mason University public policy professor Richard Florida, author of the 2002 best-seller The Rise of the Creative Class. Many cities and states produce plenty of college grads, but they don't stay. To thrive, Florida argues, communities need urban areas attractive to bohemians: "Competitive advantage is shifting to places that are very open to allowing people to express themselves."

A case in point is Portland, at the forefront of the so-called new urbanism. The area's ranks of college grads aged 25 to 34 swelled by 50% from 1990 to 2000. Despite layoffs by Intel (INTC ) and others, its economy has averaged 5.5% growth for four years, thanks largely to the swelling population and services like design. Once-seedy areas like the Pearl District boast dozens of art galleries and some of Portland's fanciest restaurants. Old warehouses now house companies like Ziba Design, whose clients include Apple Computer, (AAPL ) and ad agency Wieden + Kennedy.

Ziba founder Sohrab Vossoughi says a stimulating city center is key to his ability to hire 20 designers a year. "The values of this generation are in line with the DNA of this city," he says. One recruit is Vermont native Meral Middleton, 26. She likes that she can snowboard at Mt. Hood and hang out at chic restaurants. Her boyfriend, an Adidas designer, is one of 10,000 locals who bike to work. "Design is as much a lifestyle as it is a job," she says. "The time away from the desk may be when you find that epiphany."

But it takes more than fun urban centers and strong universities to thrive in most creative industries. It's no accident that cities like Orlando, Edinburgh, Montreal, and Los Angeles lead in burgeoning industries like digital media, for example. Each has lots of artists, film producers, and computer whizzes. They also compete hard for investment. Take Edinburgh and nearby Dundee, the capitals of Scotland's $5.2 billion digital media and creative sector and home to gaming pioneers Real Time Worlds and Rockstar Games, creator of Grand Theft Auto. The University of Abertay Dundee offered the world's first computer gaming degree, and the cities host top industry conferences and contests. Local banks and even Scotland's government offer startup capital. "For many companies just on the cusp of success, a little help can really be important," says Real Time Worlds studio manager Colin Macdonald.

CANADIAN SUNRISE
Montreal offers one of North America's highest concentrations of tech graduates, liveliest arts scenes, and lowest-cost operating environments. And in recent years, it has become a mecca for animation and 3D digital imaging companies such as Digital Dimensions, InSpeck, Softimage, and Toon Boom Animation. Montreal also offers some of the juiciest financial incentives around. The province of Québec rebates up to 37.5% of labor used in developing a game. That helped entice Electronic Arts (ERTS ) to open a major Montreal studio.

The growing willingness of local governments to pump subsidies into key sectors is perhaps the hardest challenge for U.S. communities to confront. Singapore plans to invest $1.7 billion over five years to be a biotech power, while India allocated $2.3 billion for biotech initiatives last year.

North Carolina's Research Triangle illustrates the way communities are trying to meet the challenge. After enjoying explosive growth in the '90s, the region's electronics industry was hit hard by the 2001 recession and rising competition from China. And while the Triangle boasted 500 life sciences companies and $2 billion in public and private R&D, an analysis by Harvard's Porter concluded that the region relied too much on manufacturing while it lagged in producing new companies, products, and jobs. "He basically said we don't have a clue where we are going," says Charles A Hayes, CEO of investment promotion group Research Triangle Regional Partnership.

So state and local agencies in 2003 drew up a master plan. It includes spending $60 million to train 3,000 life sciences engineers, a new biotech manufacturing and education center, and collaborative efforts among universities, companies, and government agencies in 13 counties: Five years ago, each county had its own development plan. "We used to think we were competing with each other," Hayes says. "We've realized our competition is now global."

By Pete Engardio, with William C. Symonds in Boston and Olga Kharif in Portland, Ore.