Investment in cities' ecommerce ecosystems
Updated: Mar 31, 2022
By Kati Suominen, Founder and CEO, Nextrade Group
Cities around the world are in a race against each other to attract investment in ecommerce-related sectors, such as from large online retailers, logistics companies, and technology firms that can employ tens of thousands of people and create useful knowledge spillovers. This summary, focused on emerging ways in which local governments are promoting investment in their ecommerce and tech ecosystems forms part of a report “How can developing country cities and rural regions promote ecommerce development?”
Local governments around the world are competing for domestic and foreign investment from leading technology companies, including from ecommerce giants. There is a reason for this: empirical work and case studies suggest that investment in countries and cities’ technology sectors provides:
New services for local online sellers and ecommerce ecosystems. Large technology companies bring new capabilities and talent for local ecommerce marketplaces and ecommerce companies.
New linkages between large international technology companies and local technology companies that can help local firms capture new knowledge, technologies, and processes. These gains are particularly strong for technology-intensive and high-growing local firms.
New pipeline of technological talent that can ultimately migrate to local companies or form new start-ups that enrich the local ecommerce ecosystem.
Construction jobs associated with technology companies’ buildout of campuses and facilities, and overall new demand for various types of workers to service their facilities.
Increased opportunities for cities and countries to export digitally deliverable services. Technology companies often sell their services to third markets, enabling the host country to grow its exports of digitally deliverable services. For example, Costa Rica and the Philippines have expanded their digital services exports on the back of foreign investment from leading technology companies.
New business and personal income tax revenues for the cities in which technology companies are based.
Global technology companies can, if deploying in strong numbers, help modernize a city, such as by encouraging the creation of retail and services establishments that tech workers can frequent, and by promoting investment and upgrades in commercial and residential real estate. The presence of technology companies providing world-class IT services can also help cities attract manufacturing companies that look to consume technology-intensive services.
Some cities have been more successful than others in securing domestic and foreign investment in their technology sectors. The flows have been rather concentrated in some of the largest emerging market cities, often the so-called global cities that have digital talent and robust technology ecosystems. In a dataset of 50 U.S, Chinese, and European technology companies’ locations, we identified 10 major developing country cities that have become leading hubs for global technology companies—these include Bangalore, Bangkok, Manila, Mexico City, and São Paolo (figure 1).
Figure 1: 20 leading locations for US, European, and Chinese technology and ecommerce companies, 2021
Source: Nextrade Group
What is behind these cities’ success in attracting technology companies’ investments? Research on this question is quite limited. While there is a long line of empirical work on the drivers of foreign direct investment (FDI) in manufacturing industries, little work has been done to date on the locational drivers of FDI in technology sectors. However, some clear answers are coming into view. For one, technology companies locate to markets with scale and spending power—they are bound to find customers in teeming emerging market cities. But in addition, a few further factors have helped cities draw technology investments: a strong, long-term talent pipeline, enabling policy environment, and access to technology parks and transit centers. For example:
Talent pipeline is essential for attracting technology companies. A major consideration for technology companies is long-term access to highly trained talent. Just about every hub that has attracted investment in the technology sector has focused on creating a local pipeline of technological talent, both through partnerships with universities and the promotion of local start-up ecosystems. An illustrative example was the race among 238 U.S. cities to become the location of the second Amazon headquarters. Arlington, Virginia won largely because it promised Amazon a talent pipeline for the next 20 years, such as $250 million to fund a new Virginia Tech campus in Alexandria near the proposed HQ2 site with the aim of grooming talent in engineering and computer science. Arlington also benefited from support from the state of Virginia, which provided more than $1 billion to build a pipeline of technical workers and improve transportation systems. Virginia offered Amazon $550 million in job-creation grants, which will be made available and invested in Virginia’s schools only after the company creates 25,000 jobs. Additional subsidies will be made available if the company creates 37,850 jobs. Virginia did not reportedly win with purely tax and fiscal incentives. In fact, its fiscal offer was relatively small and constrained by state policy of limited general fiscal incentives for investors.
Amenities and tech hubs also attract technology firms. Many cities have also created technology hubs or districts where technology companies can set up their offices and mingle with each other, identify talent, and where staff finds retail amenities and services. One study focusing on Barcelona’s famous @22 district found that real estate, amenities, and agglomeration economics are indeed the key determinants for the locational decisions of firms’ R&D investments. Among cities that have built tech hubs and drawn in investment include Buenos Aires’s Technology District, which was modeled after Barcelona’s @22 district and was once a warehouse district. San José, Costa Rica, is building a Tech City to host multinational tech companies and especially their R&D arms, a university campus focused on technology majors, and retail facilities, as a means to bring in new investments. The Tech City is part of a Special Zone for Economic Development (ZEDE) project that aims to attract FDI to some 39 neighborhoods.
Tax incentives have a mixed record to attract investment. Many cities have worked in tandem with national governments to provide fiscal incentives to attract technology companies. For example, in January 2021, the City of Buenos Aires launched a Regime of Promotion of Information Technologies and Communications, which defers or exempts businesses in the Technological District from gross receipt taxes. Amazon reportedly located its data center in the southwest of Buenos Aires province in order to benefit from tax breaks in the free-trade zone. In India, the state of Karnataka has an IT policy for 2020–2025 that includes the creation of six million jobs and seeks to contribute $300 billion toward India’s goal of becoming a trillion-dollar digital economy.
Among other things, the policy includes special incentives for an Electronics System Design and Manufacturing cluster, such as a 25 percent investment subsidy, reimbursement on costs like stamp duty, and full exemption from electricity costs. The government has also created a Server IT Special Economic Zone where companies are eligible for corporate tax holidays. Tel Aviv and the government of Israel have also created the Innovation Box: a set of intellectual property incentives to retain this in Israel.
Like cities, countries have offered tax incentives for the technology sector: in a recent mapping, about one-half of 107 developing countries have granted tax incentives for IT services sectors. However, empirical work suggests that tax incentives alone are not an adequate means to attract companies—for example because state, local, and property taxes can be relatively limited compared to the cost and need for labor. Tax incentives alone will also be a hard sell politically, especially if the local community does not gain new jobs and sees a rise in housing costs. One study on the U.S. Bay Area housing market found that housing prices in the immediate vicinity of a tech company’s campus increase by an additional seven percent within two years of the company’s arrival. In addition, if cities engage in bidding wars to attract technology companies, they may create a suboptimal outcome for the winner – if incentives offered outweigh the gains in local employment and revenues.
Rule of law and sustainable practices will likely become more relevant in attracting technology companies. Cities have also improved their odds of receiving investments with good policy environments and a commitment to sustainability. For example:
Bangalore has put a plan in place to enable a remote, distributed labor force working beyond the state and to bolster cyber security for companies in the city.
In Yucatán, Mexico, the state government has bolstered commitments to rule of law to attract a major Walmart Mexico distribution center that serves stores and online customers.
Amazon is working with Abu Dhabi to build a major fulfillment center that uses renewable energy and helps the company attain its goal of net-zero carbon emissions by 2040.
Facebook invested $800 million in a new data center in Gallatin, Tennessee, facilitated by a commitment by the Tennessee Valley Authority to bring 220 megawatts of new solar energy to the Tennessee Valley to support the company’s operations in the region.
Sustainability will be an increasingly important locational driver for technology companies, most of which have some net-zero objectives for their own facilities, service providers, and supply chain partners. For example, the Net Zero Initiative recently found that 622 of the 2,000 largest publicly traded companies in the world by revenue have in some fashion committed to net-zero goals.
Digitized and simplified processes facilitate investors. Cities can also do what national governments like to do—facilitate companies’ entry with e-government services and a single window for investors. Some cities such as Portland and Calgary have created interactive maps of where foreign investors are located.
Cities such as Bangalore, San José, Costa Rica, and Buenos Aires have incentivized inbound FDI in the technology sector with combinations of these strategies, often in tandem with national policies that are conducive to technology investments (table 1).
Indeed, cities that have attracted investment in technology sectors have typically benefited from national policies to promote inbound investment in the technology sector. For example, in Israel, the national government has provided visa-free entry for tech workers that helped drive investors into the robust technology ecosystem of Tel Aviv. In 2019, the government further eased immigration rules and provided incentives for foreign start-up companies.
In India, Bangalore has benefited from the national government’s Startup India initiative launched in 2016. Buenos Aires has similarly benefited from significant laws and investments by the national government to support the tech sector. In 2019, Argentina extended a 2004 software industry promotion law to attract investment in the tech sector. In 2020, Congress approved the Knowledge Economy Law, which provides tax incentives such as a reduction in Argentina’s income tax rate from 35 percent to 15 percent for start-ups and multinationals that train and hire workers. In addition, in 2021, the government announced that it would be investing $288 million in science, technology, and innovation over the next five years.
These experiences provide a rich set of ideas for city governments, to create new technology jobs, cultivate technological talent, and bolster their value proposition as global tech hubs. Major global technology companies have established a presence in recent years in cities such as Buenos Aires, Bogota, Bangalore, Bangkok, Manila, Mexico City, and San José. These cities are succeeding largely because of their commitment to supplying companies with a pipeline of world-class technological talent, including through university partnerships and tech campuses that focus on grooming and aggregating talent across technology sectors. Many have also deployed fiscal incentives. Commitment to sustainability and such strategies as the provision of solar energy will likely going forward be important for cities to cater to technology companies that have net-zero emissions targets.
Table 1: Types of strategies used by cities to attract technology and ecommerce companies