04What are the drivers of the geography of the UK’s new economy?
While agglomeration drives broad location patterns, the wide variation in performance between urban areas points to cities not always providing the benefits of agglomeration that both theory and practice suggest they should. This section looks at the extent to which cities and large towns offer access to workers and knowledge, and how this is likely to affect the number of new economy businesses located within them.
Agglomeration factors: New economy businesses need access to high-skilled workers
Skills appear to be a significant factor in the location decisions of new economy businesses, both within cities and outside of them. Cities and non-urban areas in the Greater South East, where the proportion of new economy firms is comparatively high, typically have large shares of high-skilled residents. As shown in Figure 13, a city like Cambridge, or non-urban areas such as Windsor and Maidenhead, have a highly skilled population and a large number of new economy businesses. Meanwhile, cities like Hull and Burnley are at the opposite end of the spectrum.
Because of their non-urban nature, the hinterlands of the Greater South East are unlikely to offer access to knowledge as a key locational benefit. Given this, access to skilled workers is likely to be the main reason why they perform more strongly than those elsewhere.26
Figure 13: Highly innovative places also have large share of high-skilled residents
Providing access to skilled workers is not just dependent on the workers themselves, it requires sufficient transport connections to link them to employment opportunities. Previous Centre for Cities’ research shows that poor transport connectivity in the UK is a particular issue in many large cities, but less of a problem elsewhere.27 For large cities, the combination of a limited transport network and low density suburbs makes it more difficult to get potential workers into the centres in a reasonable time, so reducing their ‘effective size’. For example, while 2.5 million people live in Manchester, only 20 per cent can commute into the city centre within 30 minutes by public transport.28 This means these places offer ‘matching’ benefit of agglomeration benefits similar to those of a much smaller city. Addressing both transport and housing density in tandem will be required to help increase the size of the worker pool that innovative companies have access to in these large cities.
Agglomeration factors: Being located close to other knowledge-based activities appears to be important for the new economy
Knowledge spillovers should be higher in city centres with more jobs, as this increases the potential for people to exchange knowledge.29 Figure 14 supports this idea by showing a strong relationship between knowledge-intensive job density in city centres and the presence of new economy firms.30 The centres of Manchester,31 Bristol and Brighton appear to be enabling knowledge spillovers to a far greater extent than the centres of Derby and Barnsley.
Figure 14: The size of the new economy in city centres increases with density of jobs and rents are higher
Figure 14 also shows that city centres with the most new economy firms tend to have more expensive rents. Once again, this shows that, on average, new economy businesses are willing to pay a premium to get access to the benefits that successful city centres offer. Being a low-cost location is not an advantage when it comes to attracting these companies.
Other factors: Strengths in general manufacturing do not translate into strengths in cutting-edge manufacturing
Frequently, calls to promote sectors like advanced manufacturing are based on the premise that manufacturing mostly takes place in the North and Midlands and that places should build on their existing strengths.32 However, as Figure 15 shows, there is no relationship between share of employment in manufacturing as a whole and the amount of non-services new economy businesses in a city. A number of cities with small manufacturing sectors overall (and no strong manufacturing legacy), such as Milton Keynes, Cambridge, and Aldershot, have large non-services new economy sectors.
Figure 15: Cities with high levels of manufacturing employment tend to have low levels of non-service new economy firms
This is likely to be because lower and higher-skilled manufacturing are looking for different things. Higher-skilled activities require access to high-skilled workers (as shown above). Lower-skilled activities still need access to lots of workers (which is why manufacturing in general tends to locate in or around cities), and also looks for lower-cost land (see Figure 16) – there is no point in paying a premium to be near high-skilled workers or knowledge if a firm has little need for these.33 As a result, cities and large towns with cheaper land, such as Barnsley and Burnley, have proved attractive to this type of manufacturing, but less so to more innovative parts of the sector.
Figure 16: Non-services new economy firms pay a premium to access skills and knowledge, while more routine manufacturing does the opposite
Other factors: It is unclear whether access to finance is an issue
According to the British Business Bank, there is very little difference in the supply of most types of finance across the country. However, this is clearly not the case for equity financing – since 2011, 58 per cent of equity deals have taken place in 20 local authorities. While these authorities were mostly in London, the list also includes Manchester, Bristol, Newcastle, Leeds, Cardiff and Glasgow.34 Meanwhile, 61 per cent of the equity deals have been done between investors and investees that are located within one hour of each other.35
This is potentially an issue for new economy businesses in particular because equity finance is more likely to fund innovation and growth.36 What is not clear is whether the issue is a lack of supply or lack of demand. Analysis for the Department for Business, Energy and Industrial Strategy found there was an equity gap in every part of the country. But when factoring in firm characteristics, in absolute terms this gap was the highest in London (£1.9 billion to £3.6 billion), followed by the South East (£1 billion to £1.8 billion). In Northern Ireland it was £0.06 billion to £0.16 billion. Added together, the equity gap in the Greater South East was larger than the rest of the UK combined.37
This analysis suggests that greater access to equity finance would be helpful for encouraging growth of the new economy across the country, and taking steps to address this by changing the tax system so it does not preference debt over equity would be welcome.38 But it does not appear to be driving the geography of the new economy.
Other factors: Research suggests that universities have a local innovation impact, but the mechanisms to make this happen are unclear
There are a number of research papers using international evidence that suggest universities have a local innovation impact.39 Many of these find that the impact tends to play out in sectors that are related to the university’s specialisms, and is more evident where they are research-intensive institutions and in higher-skilled areas. The principal purpose of universities – to educate students – clearly has a central role too, with the size of the local impact dependent on how many graduates are retained or attracted from elsewhere.
What is less clear is what the mechanism is to make this happen and what the impact of universities is on wider innovation, because most studies use patent rates as their measure of innovation. This causes a problem for policy because it is not apparent what the prescription should be. An evidence base is needed and, to build this, the Government should evaluate the impact of the proposed increase in public R&D spending outside of the Greater South East to get a better understanding of what works.