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Three lessons for the Chancellor’s remoulded investment zones

Three lessons that should guide the development of the Chancellor’s remoulded investment zones.

Blog post published on 3 January 2023 by Paul Swinney

Investment zones aren’t dead – but they look very different to what they were originally conceived as. In his Autumn Statement the Chancellor announced that they will become a limited number of ‘highest potential knowledge-intensive growth clusters’ around universities in left behind places. So far, there hasn’t been any detail as to what this means, but here are three lessons from Centre for Cities’ most recent research that should guide their development:

1.Don’t be overly specific on sectors – and be place led

Focusing on supporting emerging ‘new economy’ sectors (such as digital or life sciences) where they need it is sensible in principle – it is these industries that will disproportionately create tomorrow’s prosperity. However, attempting to do this is not new, and policy has failed in the past in its belief that it can predict what these specific sectors are going to be (EdTech in Leeds, and AI in Manchester, for example). It’s never clear what exactly the evidence is for this selection and being so specific makes the probability of backing the wrong horse very high.

This approach is symptomatic of policy having the wrong goal. It shouldn’t be overly concerned about which sectors emerge but instead, it should be aiming to create the conditions that would allow a range of new industries to emerge and grow – much like how a hedge fund will back many investments in the hope that some pay off.

The current specific approach ignores the interaction that happens between sectors which spurs new innovations. FinTech is perhaps the most obvious example of this – a new industry that emerged from the coming together of two seemingly separate ones.

The geography of the new economy shows that the sectors within it tend to cluster together. Some of this will be because the firms in them benefit from interacting with one another but it will also be because a place offers the benefits that a range of new economic activities want to access – they are good locations to locate in. For this reason, the policy should start with place rather than sector, as it is place that is both an important factor and something that can be more easily identified and targeted by policy. Which brings us on to lesson two.

2. Focus on city centres in places with the largest potential

Knowledge intensive businesses cluster in city centres because their density facilitates bringing people together to exchange ideas and information. Given this, the zones should be city centre focused.

As the number of zones is likely to be very limited, the choice of them will be very important if the policy is to be successful. They should be placed in cities that have the greatest potential to take advantage of the policy – those that will be able to facilitate the growth of the new economy with some policy support.

In contrast, a city with skills challenges that limit the ability of new economy businesses to recruit the workers they need is unlikely to be well placed. In such places, spending more public R&D money, for example, is unlikely to have much impact because it doesn’t focus on the challenges they face. This doesn’t mean ignoring them, but it does mean that a different approach will be required before spending more public R&D money in them will have the desired effect.

3. Evaluate the impact of extra R&D investment made through universities

The zones will be linked to universities. Literature from the USA suggests that research intensive universities do have an innovation impact on their local economies – so, this is likely to be a good idea. What is much less clear is what the mechanism is between the activities of the university and improvements in the performance of its economy. Given this, the Government should evaluate the activities of the universities in the zone to get a better understanding of how they can facilitate local economic growth.