Of all the responses being considered to help rebalance the economy and address the UK’s sluggish productivity growth, the development of clusters in cutting-edge industries gives the greatest consideration to geography. Both parties are committed to supporting clustering across the country, with the Government and the Metro Mayors currently preparing Investment Zone proposals centred on that aim.
Drawing lessons from research into agglomeration and ‘knowledge spillover’ effects, this report examines the clustering of innovative ‘new economy’ firms over very short distances in the UK. Emphasising the importance of proximity and place, the report identifies ‘hotspots’ of promising cutting-edge activity across the country. Unlike many traditional cluster analyses, which draw links between firms over larger – often regional – scales, the approach taken by this report permits analysis of what determines the formation of hotspots within, as well as between, urban areas.
This report identifies 344 hotspots across the UK. 115 of these are in London, and 105 are found across the rest of the Greater South East. Although they are found in every region, most of the remaining hotspots are in the North West, West Midlands, and South West of England. The report further finds that:
- While they account for a small share of the overall economy, firms in hotspots punch above their weight. Together, clustered new economy businesses are worth around 1 per cent of national output and 200,000 jobs, despite accounting for 0.6 per cent of businesses and 0.1 per cent of land. The places in which hotspots are located are generally more productive and have grown faster since the financial crisis than those without them.
- Nearly 90 per cent of clustered new economy firms are in urban areas. The largest hotspots are in city centres, with central London alone containing nearly 40 per cent of all the clustered new economy firms in the country. This trend results from the inherent advantages cities offer in relation to labour markets, connectivity, and the potential for knowledge spillovers. That said, most major cities outside London – such as Birmingham, Glasgow, Manchester, Liverpool, and Sheffield – are presently falling short of their potential.
- Contrary to prevailing ideas about clusters being centred around one industry, clustering over the distances used in this report is rarely specialised. Instead, hotspots are almost always melting pots of different sectors. This suggests that place and the benefits that places offer to businesses provide a more useful lens for policy than sector.
Regression analyses show how the benefits of agglomeration – namely access to a deep pool of skilled workers and a network of knowledge-based businesses – affect the formation of hotspots. Labour market areas with large, highly-skilled workforces have proportionally more clustered new economy activity than smaller places. Within cities and towns, neighbourhoods with good transport links are more likely to have hotspots than elsewhere, and dense city centres are the most likely place to find the UK’s clustered new economy businesses.
The regressions also assess the role of universities and large high-technology employers. Universities have little positive impact on the size of the new economy in their labour market areas, but they do play a role in organising innovative companies into hotspots in their vicinities. These effects decrease significantly with distance, and leading research-intensive institutions have a much larger impact than other universities. Large, high-technology employers similarly organise new economy firms into hotspots and appear to perform this anchoring role more effectively than universities.
If government policy is to pursue the support of local clustering, then the best approach is to support and grow existing hotspots, rather than devoting significant resources in attempts to create new hotspots. Policy should concentrate on three main areas:
- Ensuring that land use policy is aligned with the needs of innovative businesses matters across the country, but the situation is much more urgent in the Greater South East. Improving the provision of office space near existing hotspots and other well-connected locations will allow the clustered new economy to grow.
- Outside the Greater South East, the most significant potential for growth lies in the major cities. Policy should:
- Prioritise addressing the major cities’ connectivity problems. This is especially the case in their city centres, which host most of their clustered new economy businesses.
- Metro Mayors should formulate Investment Zone proposals which double down in their cities’ existing advantages and resist the urge to spread their resources too thinly.
- The diversity of the clustered new economy also means that Metro Mayors and other stakeholders should treat interventions structured around specific industries with caution. Supporting clustering at small scales depends far more on offices and connectivity, amenities which are applicable to a wide variety of businesses rather than specialised manufacturing sites.
- Where hotspots do not appear to be operating under specific constraints, such as in business and science parks in non-urban parts of the country, stakeholders should look to hotspots as anchors for other interventions, such as transport investment and regeneration schemes, and support existing activity as required. National interventions to promote levelling up should similarly consider places with hotspots as locations within cities, towns, or regions as among the best potential destinations within their areas to capitalise on new investment.