Industry Comment

Stephen Nicol / Managing Director, Regeneris Consulting

August 2006

 

Yes, cities do matter for economic development. But their role has been over-hyped of late and there is danger of ignoring other drivers of spatial competitiveness.

The literature on cities assumes firms gain large benefits from being able to cooperate and collaborate locally. True – in part and in some sectors.

There is evidence that many knowledge-based industries like to be located near but not in cities – especially for larger corporate R&D functions. The co-operation and collaboration is global, not local. What matters is the quality of the environment for staff and ability to attract the best.

The importance of semi-rural, high quality environments around cities – not just for commuters, but also for key knowledge-based industries – is an uncomfortable fact for policy makers who have swallowed the importance of cities hook, line and sinker.

The tyranny of fashion is as much an issue in economic development as elsewhere. Clusters became the latest economic development buzzword around 2000, but their star is now on the wane.

The latest received wisdom is that cities are back: they are and will be major future drivers of regional and national economic performance. This importance was highlighted in an interesting and little-noticed report by the Treasury published with the Budget in 2006 (click here to view).

As someone interested in the fusion of economics and geography, I am pleased to see at last that place is being given its due importance by government as an important economic factor. Unlike regions, whose boundaries are in many respects artificial, city regions are at least recognisable areas that function as labour markets and business entities.

The Treasury report highlights the special roles cities can play in an economy. These benefits are sometimes rather inelegantly called the ‘economies of agglomeration’.

In plain English, these are the benefits to business that accrue from having a geographic concentration of people and economic activity as opposed to spreading it thinly. What are these benefits? The literature suggests they are primarily threefold:

• First, improving access to markets and to supply chain – in other words buying and selling economies. This links back to one of the very core reasons for the development of cities – their mercantile function.

• Second, by concentrating people they facilitate the knowledge sharing and networking across firms which is so important in many sectors (e.g. professional services and cultural activities).

• Third, the creation of large and concentrated labour markets makes the matching of demand and supply work better (a point which many rural businesses I have met will agree on when trying to recruit specialist skills).

Finally, we should not forget that cities are for people. They enable a critical mass of provision of important cultural and other facilities that make them attractive locations.

 

 

 

 

 

 

 

 

 

 

 

 

 

Well, that’s the theory – but are there any limits to the economic power of cities? As ever, the world is much more complex than a simple theory. There are at least four factors which temper the economic power of cities:

• First, as well as the economies of agglomeration, there are also significant costs (‘diseconomies’ in economics jargon) that arise as cities grow. The most obvious ones are congestion, pollution and higher real estate prices and labour costs. Prime office rents in the centre of Manchester at nearly £30 per square foot are at least 50% higher than more suburban locations. Not everybody wants to pay such a premium for access to staff and networks.

• Second, concentration works best in sectors where there is the need for cross firm networking and day-to-day collaboration. The importance and approach differs across the knowledge economy – for example, in the healthcare technologies, biotechnology, pharmaceuticals and IT sectors, there are far fewer benefits from being in cities from the company point of view, perhaps with the exception of staff recruitment. Indeed, in some cases firms positively want fewer distractions for staff at their place of work! The main R&D centres of leading UK pharmaceuticals firms are decidedly not in main cities - although they are in striking distances of major cities and international airports e.g. AstraZeneca near Macclesfield; Novartis R&D centre in Horsham, Surrey; or GlaxoSmithKline in Stevenage.

• Third, the reality is that the benefits of scale – access to markets and labour markets – can work equally well outside compact cities if travel to work and labour market behaviour allows it. The labour market catchments of centres located around major cities can be considerable and attractive, especially for higher paid workers – for instance Chester, York, Warwick and Warrington all benefit from accessibility to large cities but without some of their disadvantages.

• Fourth, there is the small matter of the internet and the globalisation of business. Both these factors reduce the need for proximity to collaborators.

 

Many of these benefits can be achieved outside, but adjacent to cities. The evidence quoted in the Treasury report is that the benefits of a larger population and labour pool work best up to a 40-minute travel time and then decline to an outer limit of around 80 minutes. These benefits can therefore occur across economic spaces other than just cities.

Three of the most successful business locations in the 1990s and early 2000s are not centred on cities: the Thames Valley/M4 Corridor; the Silicon Fen around Cambridge; and the daddy of them all, Silicon Valley in California.

The latter area is not centred on a city: it has links to San Francisco, but is quite distinct and is an area of medium to large towns around the Bay.

But have cities always outperformed other areas recently? The received wisdom is that they have, but this is not always fully borne out by statistics.

Recent research carried out in the West Midlands has pointed to the importance of the “E3I belt” an area wrapped 20-40 kms around the West Midlands conurbation where there is a concentration of economic, enterprise and innovation dynamism and good quality environment.

These dynamic locations have lead to the phenomenon of the travel to work 'counter flow', with cities seeing out-commuters travelling to often better paid jobs in surrounding suburban/rural areas.

A little knowledge is a dangerous thing. In the discussion about the future of cities and city regions there has been a dangerous tendency to either define city regions so broadly that all economic activity in a region is included in city regions; or to assume that all future economic growth should take place in the traditional view of a city as the main built-up urban area.

The debate has been grossly oversimplified – cities operate in complex economic spaces. In my experience in the UK, as elsewhere, so-called city “hinterlands” can be major economic drivers in their own right, especially where there are important concentrations of knowledge-based industries and assets (such as universities and research institutes), and where there is a critical mass of skilled labour within easy access.

The city region debate is in danger of ignoring the economic role of areas such as north and east Cheshire, Warrington and the Coventry/Solihull/Warwick area in the West Midlands – these areas can be powerful economic motors in their own right.

So what are the future policy implications? My first point is that undoubtedly city regions have their place in understanding the future performance of regional and national economies. However, they are not the only important geographies and there is a real danger that they become straightjackets to thinking.

My second point is that we should not lose sight of the other successful economic spaces that do exist and look at ways of better binding them into cities and getting mutual benefits. Much of this boils down to the transport links between them.

Finally, I believe the fundamental competitive advantage of cities in the future will depend critically on the cost of travel by private car compared to the availability and costs of alternative modes.

Cities have the advantage of being able to depend on mass transit systems and offer employers and employees the prospect of tapping into a large labour or jobs pool using public transport.

 

Stephen Nicol

 

To have your say on these issues, contact comment@regeneris.co.uk. You can contact Stephen on 0161 926 9214 or s.nicol@regeneris.co.uk.