Trading Places

Why firms locate where they do

Encouraging economic growth “up and down the country” has been put front and centre of Theresa May’s ambitions for her premiership, to be achieved by a renewed emphasis on industrial policy. This paper provides an in-depth picture of the geographical and industrial make-up of the national economy, and argues that supporting growth in urban areas will be pivotal to achieving Theresa May’s objective.

The report suggests that to be successful, local economies need to grow their ‘export base’ – those businesses that sell goods and services outside of their immediate area, be that to regional, national or international markets. The graphic below explains why (click to expand):

Exporters vs Local Services

Because they are not tied to a local market, exporters could, in theory, locate anywhere in Britain. However, this report shows that in practice the most dynamic sectors of the economy are increasingly clustered in dense, vibrant urban areas – with British cities home to 59 per cent of all jobs, despite making up just 9 per cent of land across the country:Trading-Places-web

The report argues that for the Government’s new industrial policy to be successful, it needs to recognise and build upon the existing strengths of the national economy.

Policy Recommendations

1. Industrial policy needs to be place-based

Our research shows that the national economy is not flat, meaning that policy to boost growth needs to start from a place-based perspective. Previous industrial strategies have focused on picking specific sectors, and have been place-blind. Greg Clark has recently made a commitment that the Government’s economic plan will “take advantage of the differences and unique strengths that exist across the country”. If the Government’s new approach is to be more successful than past attempts, putting place at the heart of its industrial strategy will be critical.

2. To do this, policy needs a deeper understanding of the different advantages that different places offer to businesses

Different places offer different benefits to businesses. Cities, and city centres in particular, offer businesses access to knowledge, workers and other businesses, while hinterlands and more rural areas offer premises at a cheaper price. Both industrial and wider economic policy needs to work within this context. This more realistic approach would recognise the limits of policy to encouraging the growth of high-skilled services exporters in every place across the country. It would also recognise and strengthen the inter-relationships between places – for example city centres rely on suburbs and hinterlands for workers and customers, while hinterlands rely on cities for jobs.

3. Policy should not focus on micro-managing the location decisions that businesses make

Policies encouraging business growth have had a tendency in the past to micro-manage the location decisions that individual firms make, either through business support policies or through relocation subsidies. Encouraging growth in the urban context will need to focus on strengthening the benefits of an urban location (through policies to improve skills, planning and transport) and reducing the negatives (by putting policies in place to alleviate congestion, pollution and housing costs).

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