Local Government Handbook: How to Create an Innovative City

In 2012, Citibank and The Wall Street Journal awarded Medellín, Colombia, the prestigious title of “Innovative City of the Year.” In just a short period of time, Medellín has transformed itself from a violence-ridden, global drug capital to a model cosmopolitan metropolis with an award-winning public transportation system, a growing entrepreneurial ecosystem, and an increasingly attractive environment for foreign investment. How did Medellín, the second-largest city in Colombia, with more than 2.7 million residents, make this quantum leap forward? What factors are necessary to ensure the success of such a large-scale effort? What lessons from Medellín’s example can other emerging cities adopt to execute this type of sustainable change?

Three principal factors are necessary for innovative transformation: inclusive political policies, strong institutions focused on fostering innovation, and access to financial capital.

Action Item #1: Enact Inclusive Political Policies

To execute successful large-scale transformations, city governments need to focus on three critical actions that have been shown to produce inclusive political policies. First, the local government needs to engage the entire city’s community to create consensus and buy-in around the vision of a modern, innovative city.

To accomplish this, in 2004 Sergio Fajardo, the then-mayor of Medellín, established “civic-pact” agreements whereby city administrators and local neighborhoods collaborated to design government projects based on specific local needs. Community leaders and government officials jointly identified important initiatives and then signed agreements detailing the roles and responsibilities that each party would take on. To increase transparency, the mayor organized televised citywide spectacles where the agreements would be signed and shared publicly with the community. In addition, Fajardo involved the general public in the budgeting process by allowing local communities to decide how to allocate and spend small portions of the city’s budget.

Through these initiatives, Medellín’s citizens for the first time had the opportunity to both design and invest money in local projects, empowering them with a sense of shared ownership and responsibility. Most importantly, the community’s active participation created buy-in and consensus, helping to support Medellín’s transformation into an innovative city.

Medellín’s citizens for the first time had the opportunity to both design and invest money in local projects, empowering them with a sense of shared ownership and responsibility.

Second, transforming any city requires the necessary physical infrastructure to unify disparate and diverse classes. In Medellín’s case, Jorge Melguizo, a former Fajardo cabinet member and a longtime insider in city politics, noted that “[Medellín] was a city that had been very fragmented, that was built on inequality and isolation … a city that previously benefited just a few.” To ameliorate this situation, Fajardo began a campaign where he challenged Medellín’s government to take on the goal of “providing rich and poor with the same quality education, transportation and public architecture. In that way, you increase the sense of ownership and equality across the community.” With this objective in mind, Medellín’s government built a state-of-the-art metro station and metro cable-car system to connect the popular classes living in the hillside neighborhoods with the rest of the city in the lower plains. According to “From Fear to Hope in Colombia,” a scholarly publication by Matthew Devlin and Sebastian Chaskel that examines Medellín from 2004 to 2007, these projects drastically reduced commute times, spurred private investment, and enhanced social equity.

In addition to the transportation system, the city established Parque Biblioteca España (Spain Library Park), located in the city’s slums, which offers low-income individuals access to education and after-school programs. According to one community member living next to the library, “The España library changed our perception of ourselves.” This initiative has encouraged innovation with underprivileged youth in the form of book clubs, theater groups, and many other extracurricular activities. Together, these two infrastructure investments have provided the physical platforms for the entire city to engage more actively in work, social, and innovation experiences.

Third, the local government cannot do it alone; the national government must allow the city government enough flexibility and autonomy to craft and execute its transformational plan. Unlike many other Latin American countries that employ centralized power structures wherein the capital city has tight control over each region’s activities, Colombia has adopted a decentralized system under which each region is given considerable latitude and flexibility for managing its own budget and raising additional capital investments. For example, many of Medellín’s local government bodies, such as the Biblioteca Pública Piloto (Public Library), which established the aforementioned library park in Medellín’s slums, have limited oversight from the central government; instead, these organizations are accountable to the mayor of Medellín.

Action Item #2: Build Institutions That Foster Innovation

In addition to inclusive political policies, a large-scale transformation requires important institutions to generate and sustain innovation. Recognizing the emergence of successful technology capitals outside Latin America (e.g., Silicon Valley, Boston, Dresden, Taipei), Medellín set out to create its own innovation park to attract and develop tech talent. With a total investment of approximately COP58 billion (US$30 million), in 2010 Medellín announced the creation of Ruta N, a nonprofit with the mission of strengthening the city’s innovation ecosystem. As an independent institution, Ruta N serves many important purposes. First, its office space is fully equipped to host foreign or domestic companies that want to be based in the city. Through activities such as “Innovation Week,” during which international technologists share their insights on technology trends, it has successfully attracted important outside agencies. This event has resulted in Ruta N developing an important strategic alliance with Hewlett Packard (HP), under which HP agreed to open a new global services center within the Ruta N complex and hire more than 1,000 employees, a huge win for Medellín.

Second, Ruta N offers various programs to strengthen and revitalize the capabilities of its business leaders. For example, it offers a skill development program, Inngenio, that is designed to support technologists creating prototypes for new products or services. Inngenio provides companies with expert mentors to help them create technical proposals, financial plans, or marketing strategies. Third, Ruta N also serves as an accelerator. The government of Medellín set aside a budget for Ruta N, when it was originally founded, to select and fund innovative companies. These enterprises were offered training and consulting sessions, and the opportunity to present to investors at Ruta N’s Demo Day. Finally, Ruta N serves the important role of creating and managing the official Science, Technology and Innovation Plan (STI) for Medellín, through which it is required to recommend specific initiatives to improve Medellín’s global competitiveness. The nonprofit and its important initiatives have helped transform the city into an internationally recognized hub of knowledge and innovation.

Along with entities that support enterprises, institutions that support early-stage entrepreneurs are critical for stimulating innovation.

Along with entities that support enterprises, institutions that support early-stage entrepreneurs are critical for stimulating innovation. Recognizing the lack of entrepreneurs and the limited diversity of Medellín’s economy, then-mayor Alonso Salazar Jaramillo made it a priority in his 2008-2011 development plan to build an organization that would help drive the demand for diverse products and services.

Cultura E was born through this initiative. Differing from Ruta N, which focuses on larger enterprises, Cultura E is focused on fostering the development of smaller, local businesses. Through partnerships with Banco de las Oportunidades, a government-funded bank, and 14 local micro-finance institutions, it offers small loans with flexible payment plans to high-potential entrepreneurs, many of whom live in some of Medellín’s poorest neighborhoods. Entrepreneurs benefit from having different alternatives available at a single location and are thus able to make better choices regarding their needs for financial and mentoring services. In addition to funding opportunities, Cultura E also provides physical space for entrepreneurs to incubate new ideas and an annual Seed Capital Contest, which invites entrepreneurs to submit business plans and apply for government-funded seed capital. If an entrepreneur lacks the skills needed to complete a viable business plan, Cultura E employees and participating NGOs provide support.

To publicize their successes and engage Medellín’s broader community, Cultura E brings the most outstanding businesses together to display their products during Colombia Moda (the country’s version of Fashion Week). According to journalist Noguera Francisco, in an article entitled “Medellín’s Promising Transformation,” Cultura E has set the example of how local governments can successfully engage private sector institutions to spur entrepreneurship and alleviate poverty. Cultura E is another important government-backed institution that has helped Medellín become innovative.

Action Item #3: Attract Financial Capital to Fuel the Transformation

Beyond implementing inclusive political policies and creating institutions that promote innovation, transforming a city takes many years of significant investment, which requires access to capital. First, finding a long-term sustainable financing source to support the transformation is critical. One of the most unique and powerful financing tools that Medellín has employed throughout its transformation comes via a public utility. Empresas Públicas de Medellín (EPM) is a state-owned company that provides electricity, gas, water, sanitation, and telecommunications services. It is run as a commercial enterprise but managed by the municipality of Medellín.

While many municipalities, particularly in Latin America, privatized their public utilities, Medellín instead converted EPM into a multinational corporation. The company is wholly owned by the city and is closely linked to the mayor’s office. In fact, the mayor serves as the president of the company and appoints all the board members. This unique structure has allowed EPM to play a strong role in the city’s success and transformation, contributing roughly 30% of its net revenue to the city budget. Yet, the company’s commercial position has not been compromised. In fact, EPM believes that community ownership has strengthened its operations because the city’s inhabitants have become proud of “their” company’s contributions to the city’s economic development and culture and, as a result, are more inclined to buy into its projects.

Medellín has been able to form direct ties with international allies such as cities, multilateral bodies, and NGOs.

EPM has funded huge projects throughout the city, including the Planetarium, the Botanical Gardens, the Museum of Water, a children’s interactive museum, libraries, urban parks, and the 16,000-hectare Arví Park just outside the city limits. It also runs the Fondo EPM para la Educación Superior (EPM’s University Education Fund), which benefits more than 3,000 students from Medellín and Antioquia annually. The company also values internal innovation. The CEO, Federico Restrepo Posada, was recently quoted as saying, “We are a company that promotes innovation, development and entrepreneurship — elements which, combined, contribute to the consolidation of an ecosystem of an innovative city.” To illustrate this point, he stated that EPM allocates up to 0.6% of its annual income to be reinvested in innovation and development strategies. As a reference point, this figure for 2012 amounted to more than COP29 billion (approximately US$15 million). EPM has also committed to dedicate 7% of its profits to ensure that Ruta N has adequate resources until 2021.

In March 2012, the company launched a COP96 billion (US$50 million) private equity fund to leverage business developments in innovation, science, and technology. In Colombia, this is the first fund with a focus on businesses in their growth stage — particularly important given that access to capital is one of the greatest challenges facing Latin American entrepreneurs. The fund’s objective is to finance programs, projects, and activities with significant science and technology content aimed at strengthening the capacities for innovation in the city’s strategic clusters and emerging sectors. This fund will serve as yet another mechanism to effectively and efficiently raise the municipality of Medellín’s investment in science and technology to achieve the goals set out in the mayor’s development plan.

Second, it is critical to create a local business environment that attracts foreign investors to support and diversify existing domestic funding sources. Medellín’s GDP per capita has doubled over the last decade, from COP11.2 million (US$5,826) in 2000 to COP19 million (US$10,350) in 2012. This success is predicated largely on the municipality’s ability to attract investment that funds growth and innovation.

In 2002, the Mayor’s Office of Medellín established the first decentralized international cooperation agency (DIC) in Colombia, with the intention of creating direct ties between the city and the world that would improve the city’s share in the global flow of capital, products, services, and knowledge. Agenda de Cooperación e Inversión (ACI) focuses specifically on internationalizing the Antioquia region and repositioning Medellín in order to increase the investment and international cooperation that support the city’s development plans.

Since the agency was created, Medellín has been able to form direct ties with international allies such as cities, multilateral bodies, and NGOs. The mayor’s office’s main website contains an entire section dedicated to educating foreign investors about why they should invest in Medellín. In particular, the government has focused on creating tax incentives that help attract investment to the city. With the aim of encouraging innovative activities, the City Council signed Agreement 67 of 2010, which grants abatements on industry, trade, and property taxes. These benefits are provided exclusively to companies that carry out innovative operations that fall within the predetermined strategic segments of focus set by the government.

Third, a large part of attracting investment includes making the city a more desirable place to start a business. According to the Latin Business Chronicle, Colombia ranks as having the fifth-lowest number of procedural requirements for starting a business in Latin America, with nine total. It also has the third-lowest cost to start a business in the region and the fourth-shortest time required. This makes the country a desirable place for an entrepreneur to start a business. In addition, Medellín’s Chamber of Commerce is working to further simplify the process of creating a business. Through its website, entrepreneurs can perform different administrative procedures directly on the virtual platform. Legal changes in the country, that only the government can implement, have encouraged business development and helped to make Medellín one of the most innovative and entrepreneur-friendly cities in Latin America.

To recapitulate, enacting inclusive political policies, building institutions that foster innovation, and attracting the necessary financial capital to drive change are essential for urban transformation. Medellín stands tall as an example of how to overhaul perceptions and realities in record time. The Urban Land Institute, a Washington, D.C.-based nonprofit that researches land use and real-estate development around the world, summarizes Medellín’s success well, stating that “Few cities have transformed the way that Medellín has in the past 20 years…. [The] change in the institutional fabric of the city may be as important as the tangible infrastructure projects…. Medellín’s challenges are still many…. However, through innovation and leadership, Medellín has sowed the seeds of transformation, leading to its recognition as a city with potential for long-lasting success.”

This article was written by Caroline Merin, Alex Nikolov, and Andrea Vidler, members of the Lauder Class of 2015.

Citing Knowledge@Wharton

Close


For Personal use:

Please use the following citations to quote for personal use:

MLA

"Local Government Handbook: How to Create an Innovative City." Knowledge@Wharton. The Wharton School, University of Pennsylvania, 20 December, 2013. Web. 22 November, 2014 <http://knowledge.wharton.upenn.edu/article/local-government-handbook-create-innovative-city/>

APA

Local Government Handbook: How to Create an Innovative City. Knowledge@Wharton (2013, December 20). Retrieved from http://knowledge.wharton.upenn.edu/article/local-government-handbook-create-innovative-city/

Chicago

"Local Government Handbook: How to Create an Innovative City" Knowledge@Wharton, December 20, 2013,
accessed November 22, 2014. http://knowledge.wharton.upenn.edu/article/local-government-handbook-create-innovative-city/


For Educational/Business use:

Please contact us for repurposing articles, podcasts, or videos using our content licensing contact form.

 

Join The Discussion

No Comments So Far