Asia’s tier 2 cities are emerging as core pillars of the Asian economy’s growth. With a unique blend of untapped potential, rising consumer markets, and improving infrastructure, these cities are redefining development opportunities for businesses and investors alike.
In fact, Richard Dobbs and Jaana Remes write in a Business Asia column for The Wall Street Journal that the key to tapping urban wealth in Asia will be to look beyond first-tier megacities to the second tier of “middleweights” with populations of less than 10 million.
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The Rising Role of Second-Tier Cities
Second-tier cities have growing middle-class populations with rising disposable incomes. Moreover, these cities have less market saturation than megacities, offering room for new entrants. For instance, cities such as Chongqing, with fewer populations, have transformed into industrial and logistics hubs. Moreover, according to Statista, the growth rate of the Chongqing GDP in 2023 was around 6.1%, higher than the metropolitan cities of China like Bejing.
These cities typically enjoy a strategic advantage due to lower living and operating costs compared to first-tier cities. This affordability attracts industries, talents, and investments, creating a virtuous growth cycle. Additionally, second-tier cities are at the forefront of domestic consumption booms. For example, as per the Invesco website, in China, lower-tier cities accounted for 84.3% of all e-payments by 2018, underscoring their role in driving the consumer market.
Moreover, Livmint’s report mentioned that internet penetration in Tier 2 cities has caused a significant shift in India’s consumer behaviour. It further stated that, currently, 50% of online shoppers reside in small cities, and this figure is expected to grow to 60% by 2030.
Infrastructure and Policy Support
Infrastructure development is a key growth enabler for second-tier cities. Extensive investments in transport networks, such as high-speed rail in China and urban mobility solutions in Indian cities, enhance connectivity and accessibility. Moreover, Policy initiatives play a pivotal role in empowering these cities. According to Construction Week, the Indian government has already held multiple discussions over the “Viksit Bharat 2047” program, a roadmap for making India a $30 trillion company. Further, the report mentioned that the Indian government spent around INR 10,000 crore to develop 459 Tier 2 cities and 580 Tier 3 cities.
Similarly, in more developed nations like China, programs like the Greater Bay Area project in China, which integrates second-tier cities into regional clusters, exemplify coordinated efforts to harness their economic potential.
The Appeal to Businesses
Businesses targeting second-tier cities gain access to a growing middle-class consumer base. In India, for instance, cities like Pune and Chandigarh boast some of the highest growth rates in disposable incomes, making them attractive markets for goods and services. Furthermore, second-tier cities are less saturated with competitors, allowing new entrants to establish strong market positions with reduced costs. According to Construction Week, there are 115,000 startups registered in India; interestingly, about 50% of them have their base in a Tier 2 or Tier 3 city.
The tier-2 cities in Asia are fuelled by reverse migration because of the COVID-19 pandemic and have developed into vibrant hubs for global and domestic companies. Further, improved education facilities coupled with affordable living standards make second-tier cities ideal for establishing innovation centres and research facilities.
Challenges and the Way Forward
Despite their potential, second-tier cities face challenges, including inadequate infrastructure in some regions, regulatory hurdles, and limited access to financing. Rapid urbanisation often outpaces planning, leading to strains on resources. However, technological advancements, such as big data and AI, can help address these gaps. For instance, smart city technologies can optimise urban planning and resource allocation, ensuring sustainable growth.
Global businesses must adopt localised strategies to succeed in these markets. This includes understanding regional languages, cultural nuances, and consumer preferences. Leveraging local partnerships and conducting in-depth market research is essential to mitigate risks and tap into the full potential of these emerging hubs.
The Future Of These Economic Powerhouses
As tier 2 cities continue to evolve, these cities will complement and challenge their first-tier counterparts in driving the continent’s economic future. For policymakers, businesses, and investors, recognising and leveraging these cities’ unique strengths will be key to unlocking Asia’s next wave of growth. Their rise signals a shift in the regional economic paradigm, emphasising inclusivity and distributed development over traditional centralisation.
By capitalising on these opportunities, second-tier cities can become transformative catalysts, fostering sustainable and equitable growth for Asia and beyond.
