02What is the geography of the new economy in the UK?

The new economy is urban focused

The geography of new economy businesses suggests that innovation in the UK happens in very specific places. Figure 1 shows new economy density (firms per km²) differs across Britain and indicates the concentration and location of these companies. Central London is by far the most popular place for such activities but beyond the capital there is a great deal of variation, with other large cities clearly visible.

Previous work by Centre for Cities has long shown that the economy generally clusters in cities and large towns. As Figure 2 indicates, they account for 8.7 per cent of the land but accommodate 53.6 per cent of all UK businesses. This is even more acute for the new economy – 58.7 per cent of these businesses are based in cities.

Taking this further and splitting the UK into four broad areas – city centres, suburbs, hinterlands and deep rural areas (see Box 1) – shows how these businesses cluster in city centres, in particular. Around 13 per cent of the UK’s new economy firms are in city centres, which account for 0.1 per cent of land. This is almost twice the share of businesses located in these places overall.

Box 2 looks at the location of the new economy within Manchester to illustrate how this plays out across one city.

The further an area is from a city centre, the less popular it is among this cohort of businesses. Hinterlands – places within an easily commutable distance from cities – accommodate around a third of all new economy businesses, but this falls to 8.6 per cent in deep rural areas. Both have a lower share of new economy businesses than companies overall, suggesting these areas hold even less appeal for firms at the frontier of the economy. For example, deep rural areas cover more than half of the UK’s land but are home to just 11.6 per cent of all businesses and 9.2 per cent of new economy firms.

These location patterns apply to both the services and non-services parts of the new economy

Services companies show an even stronger preference for city locations (Figure 4) – 62 per cent are registered in cities and 16 per cent are in city centres. Non-services activities (mostly manufacturing) are slightly more prevalent in hinterlands, with the share of this type of business in these areas higher than their share of all companies. That said, most firms in both groups prefer an urban location, with more than half of the non-services new economy urban-based.

There is even greater variation when looking at the sectoral breakdown in finer detail. Figure 5 shows that AdTech companies, which provide online platforms and analytics for advertising, have the strongest preference for a city centre location, with almost half based there. Meanwhile, modular construction is least likely to be sited in an urban area, with around half of businesses either in hinterlands (37.9 per cent) or deep rural areas (15.2 per cent).

Most urban new economy activities typically cluster in city centres. Of the five new economy services that are most prevalent in urban locations, four have at least a third of businesses in a city centre. At the other end of the scale, those sectors that are less concentrated in urban areas have fewer than one tenth of their businesses located in city centres (although this is still much higher than the 0.1 per cent of land these centres cover).

Business and technology parks are a popular location in cities, but less so outside of them

Business and technology parks are also popular locations for the new economy but where they are located depends on their popularity. Suburban parks (small clusters of commercial space in mainly residential areas) have proved attractive – they account for 0.5 per cent of all land, 4.4 per cent of UK businesses and 6.2 per cent of all new economy firms. However, this changes the further they are from cities – parks in hinterlands are less attractive than suburban ones, and those in deep rural areas are even less popular (see Figure 6).

These parks are particularly attractive to non-services new economy businesses. For instance, around 15 per cent of all firms specialising in sensors and advanced materials are based in these locations (Figure 7), compared to less than 6.5 per cent of companies in digital creative industries and omics (life sciences that include genomics and metabolomics). Instead, these tend to cluster in city centres (see Figure 5). Within business parks in deep rural areas, energy management firms are the most prevalent new economy sector, yet these places accommodate just 0.7 per cent of the whole sector (overall, 11 per cent are on business parks).

The geography of the new economy is driven by the benefits that places offer

The observed patterns result from the very different roles that distinct parts of the country play because of the inherent benefits they offer to businesses. Cities (and especially their centres) typically offer benefits known as agglomeration.⁹ These are:

1. Matching workers with employers.
2. Sharing inputs like infrastructure and supply chains.
3. Accessing tacit knowledge that requires face-to-face interactions, unlike codified knowledge (eg, written down in books and other sources).

These benefits are felt over varying distances. For example, access to workers will apply over the distance that workers are willing to commute.¹⁰ Meanwhile, access to tacit knowledge plays out over much smaller geographies in dense city centres in particular.¹¹ For instance, ‘knowledge spillovers’ in the advertising sector in Manhattan operate within distances of around 750 metres, while in other sectors the effects are estimated to be seen over a distance of a mile.¹²

This explains why new economy businesses often have a strong preference for urban locations. The data above shows that this is particularly acute for services firms that typically innovate by adapting and improving existing products and processes, which is highly dependent on knowledge spillovers.¹³

Non-services businesses do not have as strong a preference for city centre locations, which suggests face-to-face interaction with other companies is less important for them. This could be a problem for some firms that need to patent their innovations and explains, for example, why pharma is less concentrated in city centres than FinTech. However, the strong clustering of these businesses in and around cities implies that access to workers is an important determinant of where they choose to be based.

The location of innovative new economy businesses suggests they are willing to pay a premium to get the access that an urban location offers them. In the UK, on average, city centres are most expensive in terms of rents and congestion. In contrast, deep rural areas provides access to lots of land at a cheaper cost, but not the access to knowledge and workers that cities can offer. Where firms locate depends on how they balance the trade-off between these factors.¹⁴ This may change over time; as an industry matures and its activities become more routine, evidence suggests that it has less need to access knowledge and so relocates.¹⁵

This is in line with international findings that show more innovative and complex activities are likely to happen in large cities and in very concentrated areas.¹⁶

• Evidence from several developed countries supports the idea that innovation is fostered by agglomeration, especially between different sectors.¹⁷ For instance, research among German firms shows that city districts exhibit higher shares of product innovator firms.¹⁸
• Experience in the USA indicates that firms in the innovation sector have a strong tendency to cluster, in small geographies, by research field.¹⁹
• Analysis of USA patent data filed between 1971 and 2007 found that inventors improved the number and quality of patents produced when they moved to a city with a larger cluster in their respective field (eg, from Raleigh-Durham-Cary to the Boston-Worcester-Manchester area for biology and chemistry inventors).²⁰

The demand for access to these benefits is unlikely to fundamentally change post-Covid

There is a question around how sustainable these benefits will be because of the rise in remote working caused by Covid-19 lockdowns. To date, evidence on this is mixed.²¹ At the time of writing, data suggests that among those who are able to work remotely, hybrid rather than fully remote working is more prevalent. Meanwhile, Transport for London (TfL) statistics on ridership into office-dominated central London locations, such as Bank station, show a strong recovery in journeys, although it is not yet back to pre-Covid levels.²²²³ This would suggest that face-to-face interactions, which the analysis above suggests are particularly crucial for new economy businesses, will remain important even if they do not happen five days a week.