03The new economy is urban but is not evenly distributed between cities

The analysis above treats cities as one group, but there is a great deal of difference between them. This section looks at the nature and scale of that variation.

Cities with the largest new economies are in the Greater South East

While patterns have shown there is an urban preference among new economy companies, there is still enormous variation across cities. As shown in Figure 8, those with the largest new economies tend to be in the Greater South East, with seven of the top 10 located in this part of the country. Cambridge, Milton Keynes, Oxford and London rank the highest with more than 30 new economy businesses per 10,000 working-age residents. Meanwhile, those with the fewest – Sunderland, Barnsley and Wigan – have three times fewer firms per working-age population. Box 3 shows how this pattern is also reflected across hinterland locations.

New economy businesses mostly locate in productive cities

Innovation is strongly associated with high income and productivity levels. According to the IMF, there is a positive relationship between per capita GDP and innovation in both OECD and non-OECD countries.²⁴ Using the new economy as a proxy for innovation, Figure 10 suggests this is seen at the sub-national level too – cities and large towns with greater numbers of new economy businesses have higher productivity levels.

Large cities are underperforming, impacting their productivity

In many western European economies and the USA, the productivity of cities increases as they grow because of agglomeration benefits. But this does not happen in the UK, with large cities (after London) punching well below their weight. Centre for Cities’ research has estimated that the eight largest underperformers accounted for a £47.4 billion productivity gap in 2018 alone.²⁵

Given the link between innovation and productivity, it is not surprising that Figure 11 shows very little relationship between the size of the city and its new economy. In particular, the three largest cities after London – Manchester, Birmingham and Glasgow – have new economy businesses per 10,000 population that are similar to much smaller cities. This implies they are not fully providing the benefits of agglomeration. As new economy businesses are likely to be at the forefront of innovation, this suggests these cities are underperforming on innovation as well as productivity, with the former impacting the latter.

As previously shown in Figure 1, these cities are home to large concentrations of these businesses. However, they should accommodate many more given the agglomeration benefits they should offer to these types of activities.

Strongly performing cities attract both services and non-services new economy firms

Cities either appeal to new economy businesses or they do not. While the analysis above indicates services and non-services activities have slightly different preferences when it comes to location, Figure 12 shows cities like Milton Keynes that are attractive to one type of new economy business, are usually attractive to the other. Those in quadrant D, such as Liverpool, Dundee and Bradford, have low numbers of each, while those in quadrant A, like Milton Keynes and Reading, have many of both.

It is not surprising, therefore, that average productivity in quadrant A cities is much higher than in quadrant D.  What is more surprising is that productivity in the handful of cities in quadrant C, which lack services but do well in terms of non-services, is slightly worse than quadrant D. In contrast, quadrant B cities (those with above average numbers of services but a much smaller non-services sector) perform well.

The implication is that not only do services companies make up a significant chunk of the new economy, they are especially important for productivity in a city.