Medellín's renaissance: how tech investment is transforming Colombia's second city

Scores of young professionals with Latin features, international experience and a knack for the myriad nuances of the digital economy crowd the brick-coloured Ruta N building in Medellín. They all work for one of the dozens of companies hosted by the start-up accelerator launched by the city government in 2010. Six years on, Ruta N is viewed as a key milestone in the development of a technological district that will extent over 172 hectares in the northern Sevilla neighbourhood and embodies the city’s transition towards the knowledge economy.

Its increasing focus on innovation puts Medellín at the forefront of smart urban development in Latin America, and further sharpens the contrast between the city’s lively social and economic landscape and its infamous reputation for drugs and violence tracing back to the 1980s and the 1990s – a reputation it has struggled to shake off, thanks in no small part to internationally acclaimed TV shows such as Narcos.

“When I proposed to my US partners to set up operations in Medellín, they asked me: ‘Are you loco [crazy]?’,” says Juan Felipe Salazar, vice-president for Latin America of business-to-business marketing firm Demand Frontier, one of the companies currently hosted by Ruta N.

On the rise

Many are aware of Medellín’s turbulent past, but few outside Colombia know of the city’s social, institutional and economic renaissance of the past 20 years. Medellín has turned into a bursting business centre at the heart of Colombia, with modern infrastructure, functioning and innovative institutions and a dynamic private sector. Its GDP growth and job creation have been second only to Bogotá and Lima in the whole of Latin American between 2000 and 2014, according to a ranking compiled by Washington, DC-based think tank Brookings Institution.

Local companies such as Bancolombia (banking), Exito (retail) and Argos (cement) have become heavyweights on a national and regional level. Added to the list of success stories is EPM, a rare case of a 100% municipality-owned utility company that has been able to combine the needs of its local, very unequal customers base with those of a thriving, profitable business with operations in six countries across the Latin America.

But if the traditional manufacturing, banking, energy and trade-related sectors have made the city’s recent fortune. Medellín is now betting on the knowledge economy to write a new chapter in the city’s rebirth and close a widespread inequality among its 3 million or so citizens, one issue that continues to limit its development potential.

“We still have traditional manufacturing sectors that make up important clusters, but we are also betting on science, technology and innovation [STI],” says mayor Federico Gutierrez, who won the latest municipal elections held in October 2015 running on an independent platform. “We have a low-skilled labour force that needs to be employed in our traditional clusters. But we also need new STI platforms that can offer better quality employment,” he adds.

Ruta N growth

Ruta N, which provides landing services and office space for start-ups and service providers with a strong focus on innovation, has already generated some 2900 jobs by attracting 73 companies. Among others, global powerhouses such as IBM and cement producer Holcim chose its facilities to open their local shared service centres. However, its development has proved bumpy at times. US Hewlett-Packard opened a $14m local global services operation in 2012, but left only three years later citing an on-going reorganisation at group level. Despite such setbacks, the initiative remains on track and aims to create a total of 9000 jobs by 2018, and thus become a major magnet for skilled workers in an area associated with the worst of the country’s violence only 25 years ago.

“I left Colombia at the height of the wave of violence that hit the country in 1992,” says Mr Salazar. “I was 16 then and I wasn’t the only one. About 57 of 74 classmates in my senior year at high school left the country. Many have come back in the past years. Why? I came back for my family, but also because I know the quantity of human talent I can find here.”

He adds that Demand Frontier’s local team has grown to 44 from only six people when it opened in 2015. The peso depreciation – the Colombian currency has depreciated by about 55% against the US dollar since mid-2014 as falling oil and mining prices took a big toll on the country’s extractive sectors – gave service exporters such as Demand Frontier an additional boost in the past months, according to Mr Salazar.

Smart strategy

Ruta N fits an overall strategy developed by the Medellín government to boost investment into STI activities, which has historically been low across Colombia.

“Investment into STI was 0.77% of the local GDP in 2014; today it is 1.35% and the overall target is to reach over 3% in 2021,” says David Osorio, a member of Ruta N’s knowledge economy team. “Local entrepreneurs don’t trust risky STI investments. At the same time they aren’t very familiar with innovation processes. We try to make it clearer for them that innovation is a very profitable mid-term, long-term process for their businesses.”

The local business community has already proven responsive to the opportunities of innovation. About 400 local private businesses have teamed up with academic and public institutions in Medellín to commit to investing at least 3% of their revenues in STI activities by 2021. This overall commitment was formalised in the Innovation Pact signed in 2014.

“We want to have a bigger focus on innovative technologies that can generate value added and apply these technologies to existing and emerging industrial clusters,” says María Fernanda Galeano Rojo, the head of the city’s economic development department in charge of developing a new 'smart specialisation' strategy for Medellín.

Cluster approach

The city government has developed a clusters approach over the past 10 years focusing on established local industries such as trade services, power, tourism, ICT, fashion, medicine and construction. As a result, these clusters have grown by an annual average of 15% in this time, almost twice as much as the city’s other industries, according to figures from Medellín’s economic development department. Other emerging clusters with the potential for innovation such as food, engineering, advanced manufacturing and aerospace will now be featured in the city’s new smart specialisation strategy, and thus better connected with innovative technologies.

Some of these new clusters have already stirred the interest of local and overseas investors. Foreign visitors are increasingly picking Medellín as a destination for leisure and corporate tourism (the number of foreigners visiting the city grew from 113,000 in 2012 to 212,000 in 2015), which is leading to demands for improvements to be made to the José María Córdova International Airport and its infrastructure. Colombian flagship carrier Avianca decided to open a maintenance centre at the airport, and global names in the aviation sector are also considering setting up operations there.

“Airbus is also interested in setting up a maintenance centre for its planes servicing the whole Latin America,” says Sergio Escobar Solórzano, executive director of the city’s investment promotion agency, ACI. “Other major companies such as Agusta and Bombardier are now looking to cater to the needs of the Latin American market from Medellín, as well as Sikorsky Aircraft.”

With about 50% of GDP generated by trade-related activities, Medellín’s diversified economy is a bright spot in the broader panorama of the Colombian economy, which remains vulnerable to the boom and bust cycles of the commodity market. A growing focus on innovation can now further strengthen the city’s economic fabric, create more education and job opportunities and eventually make its renaissance more equal and inclusive.