Mega-regions: what the importance of place

Nations have long been considered the fundamental economic units of the world, but that distinction no longer holds true. Today, the natural units - and engines - of the global economy are mega-regions, cities and suburbs in powerful conurbations, at times spanning national borders, forming vast swaths of trade, transport, innovation and talent. The world economy is organised around a few dozen mega-regions - areas like the Boston-New York-Washington corridor, the Shanghai-Nanjing-Hangzhou triangle or the span stretching from London through Leeds, Manchester, Liverpool and into Birmingham - which account for the bulk of the globe's economic activity and innovation.

There is no single, comprehensive source for gauging the economic production of the world's mega-regions, but a rough proxy is available. Tim Gulden, a researcher at the University of Maryland's Centre for International and Security Studies, used satellite images of the world at night to identify contiguous lighted regions. (Night time illumination indicates energy consumption, which corresponds to economic activity.)

He then calibrated the light data against existing estimates of national and regional economic output and was able to derive dollar estimates of annual economic productivity (the total value of goods and services produced) for every mega-region. I call this measure the light-based regional product, or LRP.

Metropolitan region
Gulden argues that a mega-region must meet two criteria: First, it must be a contiguous lighted area that includes at least one major city centre and its metropolitan region. Second, it must have an LRP of more than $100bn. By this definition, there are 40 mega-regions in the world. Home to 1.2 billion people - 18 percent of the global population - these regions combined produce about 66 percent of the world's economic activity and are the source of 86 percent of patented innovations.

Consider just a few of the conclusions we can draw from this analysis: It's misleading to conceive of the United States as a single national economy or even as 50 state economies. In reality, the US economy is powered by roughly a dozen mega-regions, the largest concentrated on the coasts, which stretch into Canada and in some cases Mexico. The Boston-NY-Washington corridor alone, with a population of 54 million people, has an LRP of $2.2trn and is bigger economically than France or the United Kingdom.

The real economies of Europe are contained not in individual countries but rather in six or seven mega-regions. Europe's largest mega-region is the enormous economic composite spanning Amsterdam and Rotterdam in the Netherlands, Ruhr and Cologne in Germany, Brussels and Antwerp in Belgium and Lille in France. With a population of nearly 60 million people and an LRP of $1.5trn, this mega-region's output is bigger than Canada's.

Mega-regions are playing an increasingly significant role in emerging economies around the world. Greater Mexico City is home to more than 45 million people and has an LRP of $290bn, more than half of Mexico's total. The mega-region that stretches from Sao Paulo to Rio de Janeiro produces an LRP of $230bn, over 40 percent of Brazil's LRP and is home to 43 million people.

Surrounding Delhi and Lahore is a mega-region enveloping some 122 million people - making it the world's single largest concentration of population - which generates a $110bn LRP. And an extraordinary amount of economic activity flows from just three mega-regions along China's eastern coast. The largest in terms of population is the Shanghai-Nanjing-Hangzhou triangle, with more than 66 million people and an LRP of $130bn. Indeed, mega-regions are the growth engines of emerging economies, even as the people living outside these regions toil in poverty and pre-industrial conditions.

Economic activity
The rise of mega-regions doesn't mean that globalisation isn't real: The amalgamation of technology and trade leads to the dispersal and decentralisation of economic activity. At the same time, however, the economic benefits of colocation - the concentration of similar kinds of productive and innovative activities in the same area - have spurred a strong countervailing tendency toward clustering.

Writers like Thomas Friedman have overemphasised the centrifugal forces of globalisation, arguing that the world is flat. In so doing, they neglect the equally powerful centripetal forces that trigger economic concentration. As Harvard Business School Professor Michael Porter told BusinessWeek: "The more things are mobile, the more decisive location becomes. This point has tripped up a lot of really smart people." Amen!

The mistake is to see globalisation as an either-or proposition. It's not. The key to finding competitive advantage in this new economic landscape lies in understanding that the world is both flat and spiky: Economic activity is dispersing and concentrating at the same time.

When large numbers of entrepreneurs, financiers, engineers, designers and other smart, creative people are constantly bumping into one another, innovative business ideas are formed, sharpened, executed and expanded. The more smart people there are and the denser and more varied the connections among them, the faster a mega-region and its businesses and markets grow. When managers locate a plant or innovation centre or target a new market, which country they choose will matter less than which mega-region.

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