Will Smart Cities & SEZs Spur Innovation?

Smart cities and special economic zones (SEZs) are designed, partly to encourage innovation. But, is it true that government can encourage innovation? Is it true that we can predefine zones in which innovation can take place? Some of the world-renowned innovative economies are free-markets. It is not just that, innovative societies are more free-market oriented, too with a long history of being relatively free of government innovation.

The United States, for instance, is incomparably more innovative than Hong Kong, though Hong Kong is a more free market than the US. This is because the US has been a free economy for a longer period. Innovation has more to do with the cultural heritage of a country, and the genetic makeup of its people. Without importing western norms, Hong Kong would not have become so prosperous in such a short period of time, for example. But, this does not mean that innovation has nothing whatsoever to do with the quality of the services governments perform.

So long as the government provides basic infrastructure, the level of innovation in a society would have much to do with the quality of infrastructure. To begin with, when water supply, sanitation and air quality are better, more talented people will be born, and will live till adulthood. If Indian cities are pleasant places to live in, talented people would be less likely to flee India.  No person living in India, so far, has won Nobel Prize in hard sciences of economics, for instance. Moreover, people who live in Indian cities would be able to reach their highest potential if the quality of infrastructure and environment is better.

Many artists would not have lived in Paris in the 19th century and the first half of the 20th century if housing were expensive. This is true of other major cities like New York and London, too. For Indian cities to be the breeding grounds of innovation, housing should be within the reach of young innovators, including artists as well as entrepreneurs. Reports suggest that many startup heroes in Indian Institute of Technology (IIT), Mumbai stay on in the hostel, because housing is so expensive in the city. Real estate rents form a large fraction of the operating costs of new businesses.

By allowing real estate developers and firms to build as much space as possible on a plot by building skyscrapers, the government could make new businesses a less expensive proposition. Under the Startup India scheme, the Narendra Modi-led  government wants to give tax concessions to startups. But, as not many firms break even in the first few years, cutting down their operating costs seem to be more critical. The government could, also, make it much easier for developers and firms to acquire land, get construction permits and other approvals.

Creative people value time more than common people because creative pursuits are more demanding and time consuming. In Indian cities, people sit through traffic for hours, which makes transport expensive, thus, making life difficult for the poor who cannot afford expensive transport. Innovators face a different predicament, because time matters more to them. Few innovators would be willing to live and work in a city where they have to spend many hours travelling.

There is no reason why roads, water and sanitation cannot be provided by private firms. But, as they are not allowed to provide them,  the results could be negative if the government does not make the right investments, based on a cost-benefit analysis.

This is true of norms in smart cities and other areas which governments set aside as hubs of innovation. Firms, which cluster around in SEZs and other areas, certainly need favourable regulatory norms. But, as economist Paul Romer pointed out, there is a good rule of thumb to find out whether regulatory norms in an SEZ is fair or not. If the results would be good and if the same regulatory norms are imposed throughout the country, these norms are fair. This is true of norms that encourage innovation, too.