00Executive Summary

The Government’s new industrial strategy – its flagship domestic policy – aims to improve living standards and economic growth by increasing productivity and driving growth across the national economy.

While industrial policy traditionally focuses on sectors, it is the skills profile of the business base that has a more important bearing on city and therefore national economic performance.

Some types of business will have a much bigger role to play in this than others. Specifically, policy needs to focus on supporting ‘exporting’ businesses – those firms that sell their products to regional, national and international markets. This is because these firms, particularly high-knowledge exporters, drive both productivity growth and jobs in local services such as shops and restaurants.

The first report in this research programme showed that these exporters – and especially the high-knowledge element of them – prefer a city location over a more rural one. 54 per cent of Britain’s exporters and 65 per cent of Britain’s high-knowledge exporters are located in British cities. This is because of the inherent advantages that successful cities offer, namely greater access to knowledge and ideas, deep pools of workers, and markets and suppliers (a process known as agglomeration).

But not all cities offer these advantages to the same extent. This research paper – the second in the series – looks at the varying success of English and Welsh cities to grow their export base, and the implications this has had for the performance of their economies. By looking at the export base of their city centres and their suburbs, it identifies four groups of cities:

• High-knowledge city centres and suburbs – there are 19 cities in this group, predominantly in the South. These cities tend to be the most productive – average GVA per worker is 23 per cent higher than the national average.
• High-knowledge city centres and low-knowledge suburbs – there are 10 cities with these traits, including six of the biggest cities.
• Low-knowledge city centres and and high-knowledge suburbs – there are five cities – Basildon, Blackpool, Derby, Portsmouth and Warrington – in this group.
• Low-knowledge city centres and low-knowledge suburbs – there are 24 cities in this group, predominantly in the North, Midlands and Wales.  These cities tend to be the least productive (average GVA per worker is 85 per cent lower than the national average).

Looking at the characteristics of these cities in more detail helps to explain why these patterns emerge. Firstly, skills are important – those cities that have been able to attract high-skilled exporters, be that in the city centres or suburbs, tend to have a large number of high-skilled workers living in or around their cities. Secondly, density is important for city centres – the greater the number of jobs located in a city centre, the higher skilled the jobs tend to be. Thirdly, proximity to London appears to play a role, with cities closer to the capital doing better than those further away. And finally cost doesn’t appear to be a main factor – those cities that have the largest high-knowledge export base also tend to be more expensive.

Cities with low-knowledge export bases do still attract investment, but for very different reasons. Firstly, they provide access to lots of workers, but these workers tend to be lower skilled. Secondly they provide lower cost commercial space. While these factors are relatively unimportant for high-skilled exporters, they are important to lower-skilled export businesses (explaining their industrial structure). The implication of this is that jobs available in these cities tend to be lower skilled and their economies tend to be less productive.

These findings highlight the different challenges and opportunities that cities across the country face. Despite this variation there are a number of broad implications for the Government’s industrial strategy if it wants to encourage growth up and down the country.

1. The industrial strategy must work with the grain of the UK’s economic geography and make the most its cities

Industrial policy needs to take a place-based perspective, building on the strengths of different places and addressing the factors that hold places back. The benefits that cities offer, which by their nature cannot be replicated in every part of the country, are likely to become increasingly important as the UK economy continues to shift towards a more knowledge-intensive service-based economy. Industrial policy will be most effective if it reflects the importance of agglomeration rather than trying to spread economic activity evenly across the country.

2. Making the most of cities requires the integration and co-ordination of many policy areas and related institutions. This is best done at the city scale

An industrial strategy that recognises place will require decisions to be taken locally and tailored to address the specific challenges and opportunities present in different cities. The powers that cities already have, as well as the on-going process of devolution will allow cities to deliver elements of this themselves.

However, some policies, such as research and development spending and high education should remain at the national level. But these policies should be organised and delivered at the city scale, with the aim to encourage the expansion of the export bases of cities. The success of any industrial policy will depend on how policy makers can bring together nationally and locally administered policies to improve the economies of the country’s cities.

3. For cities with high-knowledge export bases, policies need to focus on managing the costs of growth

Economic success brings challenges as well as opportunities. Demand for space pushes up the cost of housing and commercial property, and it increases congestion on roads. To support the on-going success of successful cities, policy needs to focus on limiting the impact of these costs through facilitating the increase in housing and commercial space and, where appropriate, considering road pricing in conjunction with improvements to public transport.

4. For cities with low-knowledge export bases, policies need to focus on strengthening the benefits that they can offer

To attract investment from high-skilled exporters, cities need to increase the benefits they can offer to such businesses. Most importantly, they need to increase the number of skilled workers that businesses can recruit from. Given that these businesses increasingly show a preference for a city-centre location, investing in their city centres to make them more attractive places to be located will also be important as they look to increase productivity, wages and career progression opportunities in their economies.