What Detroit Can Learn From Bangalore

A booming city's lessons for a town in decline

Shikha Dalmia from the June 2006 issue

(Page 3 of 5)

All this improved the business climate dramatically. Karnataka went even further than the rest of the country to liberate private industry, especially the I.T. sector, from the remaining government shackles.

A 2001 report prepared for the U.S.-based chipmaker Intel by Feedback Consulting, one of the most respected consulting companies in South India, recommended Bangalore over other cities for the company’s India headquarters because along with perfect weather—a huge advantage in attracting talent—Karnataka had the most industry-friendly state government in the country. One of the most important moves Karnataka made to acquire this reputation (surpassed in recent years by other states) was that it signed up for the central government’s Software Technology Parks of India (STPI) initiative ahead of other states. The importance of this initiative in making Bangalore the Silicon Valley of India cannot be exaggerated.

STPI gave I.T. companies in Karnataka a nearly complete exemption from central government taxes. In addition, it enabled Karnataka to release its businesses from the government’s telecommunications monopoly by opening Internet access to competing private providers. This meant better, cheaper, and more reliable lines of communication with overseas clients, something Indian companies sorely needed to deliver projects in an efficient and timely manner.

Aside from prying open the government’s telecom chokehold, the most liberating feature of STPI was that it established a special liaison between I.T. companies and the central government for all the statutory approvals—project approval, import approval, bonding and export certification—they needed to proceed with their projects. “This single-window clearance meant that industry no longer had to go from department to department to obtain licenses,” explains B.V. Naidu, STPI director in Bangalore.

What’s more, unlike other states that limited STPI certification to companies located on special campuses, Karnataka extended it to any company anywhere in the city. “This made all of Bangalore a potential business area,” notes V. Ravichandar, Feedback Consulting’s founder and CEO.

Combined with the state’s lax enforcement of zoning laws against mixed uses, broad STPI certification empowered any geek with a computer and e-mail to write and deliver software to anyone in the world right from his home. So while Bangalore has its share of corporations in downtown high-rises and on sprawling I.T. campuses, it is also home to multimillion-dollar companies operating out of modest bungalows in residential neighborhoods.

One such company is Dhruva Interactive, which designs video games. It is sandwiched between the walls of two houses on a street so narrow that two cars have difficulty scraping past each other. Dhruva’s neighbors have been complaining about the odd hours it keeps—a result of the time difference with its overseas clients—so it plans to move to another location after 10 years in its current space, says Rajesh Rao, 35, the company’s sweetly exuberant and immensely tech-savvy founder. But there are other streets nearby where people have sold to commercial developers the homes in which they had long planned to retire.

Bangalore is in the midst of a huge reshuffling of real estate, as property, unencumbered by rigid, U.S.-style land use rules, freely changes hands from less to more valued uses. This is making a lot of people very rich very quickly. And it is creating the sort of densely packed, mixed use neighborhoods celebrated by the urban theorist Jane Jacobs, as doctors’ clinics, home accessory boutiques, and roadside cafés—not to mention the proverbial corner grocery stores—crop up like mushrooms in areas that once were almost exclusively residential.

If Bangalore has made giant strides to release its entrepreneurs (at least its I.T. entrepreneurs) from stifling government regulations, Detroit has taken a few baby steps at most. Some of its leaders, such as former Mayor Dennis Archer, began talking about creating a one-stop shop akin to STPI’s single-window clearance for prospective businesses back in 1992. But Archer’s hip hop–loving, earring-sporting successor, Kwame Kilpatrick, is preoccupied with attracting big, glamorous Aswan Dam–type development projects and has little time for mundane process improvements.

In Detroit the city does not even know what property it holds, as a steady stream of abandoned buildings keeps reverting to its ownership. Prospective developers trying to acquire land are left languishing in limbo for months as the city council—a dysfunctional entity that has to approve the sale of all city-held property—tries to clear up title and lien issues. For developers, time is money, and more often than not they simply give up in disgust.

The city’s bureaucracy and red tape thwart not only outside developers seeking to do business in Detroit but an even more critical source of urban vitality: entrepreneurship by city residents themselves. In the name of protecting public health and safety, the city imposes a plethora of licensing requirements and fees on 265 occupations (60 more than the state government licenses), from street vendors to day care centers. A home-based business needs 70 or so building or equipment permits to get started. Hair braiders have to spend thousands of dollars and 1,500 hours in mandatory training for a cosmetology license.

The taxi industry is virtually nonexistent in Detroit, as any visitor who has tried to hail a cab can testify. The city has restricted the number of taxi licenses so tightly that new entrants simply can’t get one, even if they can somehow arrange the $10,000 or so that a license costs on the open market. As if this were not enough, Detroit revised an existing ordinance in 1996 to further regulate and restrict the number of limousines and vans, so they have been squeezed out of the city as well. If my Bangalore driver Nanjappa had moved to Detroit rather than Bangalore, he probably would have been crushed by the city bureaucracy and wound up on welfare.

Lesson Two: Remove Destructive Taxes

Bangalore has benefited not just from the central government’s efforts to reduce onerous bureaucracy and red tape but from its radical reform of the federal tax system, once among the most punitive and complicated in the free world. Now Indian states also have started to simplify their tax schemes, something neither Michigan nor Detroit has found the will to do.

At its peak in the 1970s, India’s top marginal corporate income tax rate was 93.5 percent. This, combined with an 8 percent tax on wealth, meant those who played by the rules could count on effectively handing over their entire profits to the government at the end of the year.