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Larger Cities Lead the Shift to a Digital Economy

The unfolding of the technological revolution is pushing a massive shift to a digital economy and with it, a change in how cities position themselves as commerce centers.

A 2014 report from the United Nations Department of Economic and Social Affairs projected that up to 66% of the world’s population will live in urban areas. As Gallup CEO Jim Clifton pointed out in a blog post, cities need to focus their efforts on bolstering entrepreneurship.

Boston has edged out the San Francisco Bay area as the city best positioned to lead the evolution of the digital economy, with its cohesive business and tech community and attractive quality of life among the key factors in its favor.

The two metropolitan areas were among 25 U.S. cities ranked in a new study by the U.S. Chamber of Commerce Foundation, global incubator 1776 and Free Enterprise, a U.S. Chamber initiative. The intent of “Innovation That Matters” is to examine and rank the cities’ readiness to capitalize on this new environment and ways their leaders can learn from critical trends shaping their “digital competitiveness.”

Denver, Raleigh-Durham and San Diego rounded out the top five metropolitan areas that were evaluated on available workforce, financial resources, industry specialization, community density, connections with startups and entrepreneurial culture.

As the top metropolitan area, Boston propelled ahead of San Francisco for its relationships with universities, institutions and citizens, as well as an affordable cost of living. San Francisco ranked highly in terms of startup activity. But the study found concerns such as the startup community’s lack of integration with universities, institutions and residents, coupled with San Francisco’s rising cost of living (a potential cause of a declining quality of life).

Third-ranked Denver has an abundance of educated young people, a vibrant cultural foundation, great quality of life and a well-connected startup ecosystem. However, it is weak on developing firms in other industries such as education technology, health tech and Smart City tech. And it needs to bring additional investment into the community.

Raleigh-Durham (No. 4 in the study) has a well-connected ecosystem, dense startup activity, a strong cultural foundation and a deep talent pool. An openness to new ideas, a strong quality of life and a favorable regulatory environment make the area quite attractive to entrepreneurs. The flies in the ointment: A decline in the number of educated young people and an inability to capitalize on the potential in the ed tech and energy sectors.

San Diego, which ranked fifth, received high marks for talent, capital (startup investment) and population density. Researchers also visited other key cities to identify activities and trends of significance locally that may have implications for others’ efforts. Among them:

  • Atlanta, which ranked 21st in the study, benefits from a strong network of universities, investors and civic organizations involved in the area’s startup community. Yet, startup activity has not carried over to the energy, construction, transportation and logistics sectors.
  • Kansas City’s greatest asset as it builds its startup community may be its strong corporate and institutional support, as well as community partners. A positive local regulatory environment and quality of life also boosted its ranking (No. 24). Over time it can build on its strengths in construction, transportation and logistics. But it lacks openness to new ideas.
  • Seventh-ranked Los Angeles is competitive on both startups and funding, but very weak on talent, ranking low on its ability to attract people to the area, particularly those with education and/or tech skills. The city’s regulatory environment also received low scores from entrepreneurs.

Shifting successfully to the digital economy will take a playbook focusing on four key elements, according to the study.

  • Communities must first understand the inevitable trajectory of the digital economy.
  • They must consider their history as an important cornerstone for the new future.
  • It’s not just startups that are important. It’s putting in place the lines of collaboration that drive results.
  • Understand that a proactive government framework is essential for realizing technological possibilities.
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