Cities of tomorrow: Where global growth is coming from

By Richard Dobbs, Sven Smit, Jaana Remes, James Manyika, Charles Roxburgh and Alejandra Restrepo

EXECUTIVE SUMMARY

Over the past few decades, rapidly growing developing economies have been the frontier for companies searching for growth opportunities around the world. The BRICs—Brazil, Russia, India, and China—and other emerging economies have captured the imagination of many CEOs. But economy-wide strategies are often not sharp enough for assessing realistic market potential and designing tangible approaches to tapping that potential. Instead, companies should look for growth at a more granular level and look at the world’s cities. Indeed, over the next 15 years, 600 cities are likely to account for more than 60 percent of global GDP growth. Geo-economics has gone granular—so must corporate strategy.

Up to now, a corporate strategy covering developed economies together with emerging market megacities has made sense in many industries. After all, developed economies together with emerging market megacities cover over 70 percent of global GDP today. But this combination won’t be adequate in coming years as this group is expected to generate only an estimated 30 percent of global growth to 2025. Unless companies shift their approach, they risk missing the opportunities in emerging market “middleweight” cities, which we see producing more than 40 percent of global growth from 2007 to 2025 (Exhibit E1).

To shed light on the evolution of the global economy and its cities at a granular—and actionable—level of detail, MGI has built on its extensive body of research on the urbanization of China, India, and Latin America and developed Cityscope, a database that includes more than 2,000 metropolitan areas around the world. Many potentially actionable findings arise:

• The top 600 cities ranked by their contribution to global GDP growth—the City 600—are projected to generate more than 60 percent of global growth to 2025. Their combined GDP is expected to expand by $34 trillion from 2007 to 2025.
• Middleweights—577 fast-growing cities with current populations of less than 10 million—are seen contributing half of global growth to 2025. These cities are projected to gain share from the world’s 23 megacities that are projected to contribute 11 percent of global growth.
• Emerging market cities—about 440 of them in the City 600—are expected to contribute nearly 50 percent of global growth from 2007 to 2025. Across the world, we see around 425 emerging middleweight cities contributing 40 percent of global growth.
• Population in the City 600 will grow an estimated 1.6 times faster than the population of the world as a whole. By 2025, there are likely to be about 9 million new children in these 600 cities. There will be an estimated 7 million additional children in the City 600’s Chinese cities, despite the fact that the number of children in China overall is declining.
• The City 600 will be home to an estimated 320 million more people in the working-age population by 2025—accounting for almost 35 percent of the expansion of the potential global workforce.
• Around the world, the size of households is declining and leading to an increase in the number of households. We expect the number of households in the world’s leading cities to grow at 2.3 times the rate of global population growth. The City 600 alone is likely to see the formation of 250 million new households.
• By 2025, developing region cities of the City 600 will be home to an estimated 235 million households earning more than $20,000 a year at purchasing power parity (PPP). This compares favorably with 195 million such households expected in the cities of developed regions.
• The economic role of large cities varies widely between regions today—so do their future growth patterns. China’s rapid growth is fueled by the continued growth of its megacities and the emergence of new ones. India’s urbanization is at a relatively early stage while Latin America’s largest cities are giving way to fast-expanding middleweights. It is clear that there is no “one size fits all” approach to tapping into the urban markets of emerging economies.
• Choosing the right urban markets requires combining granular market intelligence with company-specific information on the potential of different urban geographies and the cost of reaching them. A strategy based on clusters of cities is an attractive option for many companies, particularly in large countries like China and India that have significant regional differences in their market characteristics.

For companies seeking pockets of growth in the world economy, going beyond the obvious is vital. In this report, we draw insights from more than 2,000 leading cities in the world, looking at demographic trends and shifts in the profile of households and incomes. The aim of this deep analysis is to help companies to identify potential “hot spots” to a sufficient level of detail to calibrate effective, targeted strategy. Companies should turn their sights from economies as a whole to cities within them, and beyond high-profile megacities to the most attractive middleweights, particularly in emerging markets.