Will the Chancellor’s pivot of investment zones towards innovation make them any more likely to work?

A focus on innovation in big cities is welcome, but a requirement to arbitrarily pick sectors is not.

Blog post published on 20 September 2023 by Paul Swinney

One of the first things the current Chancellor did when he took on the job almost a year ago was to pivot the previous leadership’s investment zone policy away from a scatter gun approach focused on deregulation to a much more focused number of zones designed to encourage innovation clusters. While the original incarnation of the policy was widely regarded as a bad idea, will this pivot make it any more effective?

The original proposal was dubious because these policies have a very poor track record of bringing about economic change in the UK. Previous Centre for Cities’ work has shown that enterprise zones, an earlier iteration of investment zones, underwhelmed in the number of jobs they created, these jobs tended to be low skilled and at least one-third of them were displaced from elsewhere.

But the Chancellor’s pivot to focusing them on innovation around universities in big cities is an interesting change. Centre for Cities’ latest report on innovation hotspots reveals the characteristics of these hotspots of innovative businesses across the UK, and provides some insight into whether this pivot, consisting of three headline changes, will improve the chance of success this time round.

The focus on big cities

Part of the pivot in the policy was to move away from the at least 40 zones proposed in 2022 to eight zones focused in the biggest cities in England. This is a welcome move. Innovation hotspots are overwhelmingly urban, with 87 per cent of firms in a hotspot based in a city or large town. This is because of the benefits cities offer, making them the natural home for this type of activity.

The problem is that large cities in the UK are underperforming on this front. Places like Birmingham and Sheffield have far less hotspot activity than their size should naturally facilitate, so focusing policy on addressing this underperformance is sensible.

Within these cities, honing in on the city centre would maximise the chance of success. Over half of the UK’s firms that are in hotspots are in city centres, most likely because of the particular benefits that city centres provide to innovative firms. The policy must work with the geographical grain, understanding which locations work best for such activity. If they are to encourage clustering, and national and local government should take heed of this as the specifics of the zones are thrashed out.

Verdict: good move.

The link to research-intensive universities

A second pivot was to require them to be linked to a research-intensive university. Here the findings are more mixed. Requiring the universities to be research intensive is likely to improve chances of impact. Literature from the USA shows that it is these universities that tend to have an impact on their surrounding economies, while our research also found that this group had an impact on hotspot locations in the UK. 

However, this impact was on the location – rather than the quantity – of hotspots. While neighbourhoods close to research-intensive universities are more likely to have a hotspot, neighbourhoods further away from said institutions were less likely to have a hotspot in travel to work areas that had a research-intensive university than those that didn’t.

The data wasn’t able to show whether this greater proximity increased the performance of the hotspot. It is plausible that the firms grow more quickly as a result of their academic neighbour, but there isn’t any way currently to say if this actually happens.

Verdict: the jury’s out.

Requirement to be sector specific

A final change was for the zones to focus on one of five, somewhat arbitrary, ‘priority sectors’ such as life sciences and green technologies. 

Our research suggests that this is not advisable. The idea is that a clustering of firms is dominated by one sector; in reality, hotspots are melting pots of different activities. If policy is able to limit its impact to one sector – and in most cases it’s not clear how it would actually do this – then it would limit the impact of any policy by shutting out other innovative businesses and any interaction they might have with the target sector.

Given this, to make the most of the investment zone policy the Government should not continue to insist that the places that have been given a zone must target a specific sector. And, more broadly, it should acknowledge that it is place, and the benefits that a place offers, that are the organising factor in the economy, rather than sectors.

Verdict: bad move.