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Unlocking the Potential of Emerging-Market Cities

by Richard Dobbs, Jaana Remes, and Fabian Schaer, McKinsey & Company

Most companies still take a national or regional view when allocating resources for global growth. They should shift their focus to fast-growing cities.

A massive wave of urbanization is propelling growth across the emerging world. This urbanization wave is shifting the world’s economic balance toward the east and south at unprecedented speed and scale. It will create an over-four-billion-strong global ‘consumer class’ by 2025, up from around one billion in 1990. And nearly two billion will be in emerging-market cities. These cities will inject nearly $25 trillion into the global economy through a combination of consumption and investment in physical capital. This is a very significant shot in the arm for a global economy that continues to suffer from pockets of acute fragility.

Yet few business leaders focus on the importance of cities when establishing growth priorities. In a recent survey, we found that fewer than one in five executives makes location decisions at the city (rather than country) level. Few executives expected this approach to change over the next five years, and more than 60 percent regarded cities as “an irrelevant unit of strategic planning.” [1] As these new urban-growth zones flourish, there’s a cost to companies that lack a clear view of the emerging landscape—chiefly in the potential for resource misallocation.

Shifting investment away from established markets to more promising areas can be difficult, as our colleagues have shown in separate research.[2] Budgets are often ‘sticky’ because companies lock into current rather than future opportunities. And many middle-tier emerging-market cities, however attractive, may be unfamiliar. Take Foshan, Porto Allegre, and Surat—cities that are unlikely to be high on the priority lists of global executives, though each has more than four million inhabitants, fast growth, and a vibrant base of consumers. Indeed, each of these cities will contribute more to global growth than Madrid, Milan, or Zurich.