On the Growth of Cities: Human Capital and Portfolio Rebalancing

Abstract

This research aims to present a conceptual framework relating a city’s industry mix to the population growth and its human capital stock. The author argues that when an industry matures or shows signs of decline, a better-managed city can quickly identify other potential industries to sustain its growth. The city has a greater likelihood of upgrading its workforce and improving the quality of its human capital. Better quality human capital in turn helps to advance the city’s industry planning and sustain its economic position. The suggestive evidence from a sample of eight manufacturing-belt cities and a case study on the city of Detroit follows the conjecture of the framework. When a city exercises a meaningful industry strategy and rebalancing, the educational attainment/human capital of its adult population improves. In turn, the better-quality human capital improves a city’s industry mix and reinforces its economic position. While the city of Detroit’s financial insolvency has been examined by researchers from various fields and several factors are considered attributable to the event, the author believes the center of all issues is merely the city’s lack of a diversification strategy. While the auto industry did deliver Detroit a period of prosperity, this over-reliance on one industry inevitably brought financial difficulties on the city, as the industry matures along with increased competition. This unfortunate outcome derived from a non-diversifying strategy is well predicted by the Portfolio theory. Thus, the author believes that with an appropriate strategy of diversification, the city of Detroit could largely avoid its financial insolvency. This study suggests at least two avenues that warrant future research. First, although it is well recognized that a city’s growth and decline is highly related to the life cycle of its industries, there is very little scholarly effort to systematically analyze this issue in the context of the Portfolio Theory. The current effort could stimulate research attention toward this direction. Second, a systematic analysis on the factors that contribute to a city’s economic development is much needed.