02A strategy to level up regional economic growth
To ‘level up’, economically weaker performing cities need to become clusters of high-value activities
As outlined in the previous section, government policies that have explicitly attempted to reduce the North-South divide, which can be traced back to the 1930s, have not been effective. We have had 90 years of policies attempting to boost growth in the regions, but the gap in performance has widened over this period.
A better strategy to reduce regional inequalities across the country consists in supporting places to develop clusters of high-value activity. Clusters have been described by Michael Porter of the Harvard Business School as ‘geographic concentrations of interconnected companies, specialised suppliers, service providers, firms in related industries, and associated institutions (for example, universities, standard agencies, and trade associations) in particular fields that compete but also co-operate’. They are important because they enable firms in the cluster to gain competitive advantage.8
These clusters tend to be predominantly urban in nature, and there are good economic reasons for it. Urban areas offer three economic benefits known as ‘agglomeration benefits’ that enhance their performance as clusters. These are ‘thick’ labour markets, the presence of specialised service providers, and knowledge spillovers.9 The more vibrant their labour market is – the ‘thicker’ it is – the more likely they are to attract high-value, knowledge-intensive businesses that drive economic growth, with benefits for the wider region too.
The UK’s industrial history has many examples of the existence of clusters enhancing the growth rates of city regions: cotton textiles in Manchester, steel and cutlery in Sheffield and pottery in Stoke-on-Trent.
Clusters also play a significant role in the UK’s economy today. According to research by McKinsey and Centre for Cities there are 31 clusters across the country, including the ‘Golden Triangle’ – the pharmaceutical and biotechnology cluster with its hubs in Cambridge, Oxford and London, the financial services cluster in London and the aerospace clusters in the North West and South West. It also includes lesser-known clusters such as ‘Motorsport Valley’, the area surrounding the Silverstone circuit in Northamptonshire. Home to a concentration of Formula 1 motor racing teams and thousands of specialist motorsport suppliers, in 2012 it generated revenue of £9 billion and employed 41,000 people, including much high-performance engineering talent.
Overall, these 31 clusters contain 8 per cent of the UK’s businesses, employ four million people, one in seven of the working population, generate 20 per cent of the UK’s output (gross value-added) and offer average salaries that are typically higher than those in the surrounding region.10
There need to be the right conditions locally for clusters to be successful
By identifying current strengths and weaknesses of UK’s clusters, the McKinsey and Centre for Cities research outlines three sets of recommendations that can help places maximise the economic potential of their existing and emerging clusters:
- Better integration between high-value businesses and other innovation-generating activity at the local level. Currently, many of the UK’s cities are not fulfilling the potential of their clusters to foster innovation, and have been less successful than some of their global peers in tapping into local sources of innovation, whether it is with other firms or universities. To maximise their potential, universities need to strengthen their contribution to their local businesses, and additional actions should be taken at a cluster level to promote idea sharing, especially by increasing interaction between businesses and academia, and by providing specialist facilities to support the interactive refinement of innovations.
- For clusters to be successful, businesses must be able to access the skills they need. Education and skills systems are not producing the concentration of specialist skills that clusters need, and education and skills providers should work directly with cluster employers to offer courses that equip the right number of people with the skills in demand.
- Clusters need to be supported by the right infrastructure. Every cluster examined in detail by Centre for Cities and McKinsey had specific infrastructure challenges holding back growth, whether they were transport (road, rail or air links), or broadband, housing or energy. Addressing these infrastructure challenges would boost economic activity in the clusters.
While clusters are generated by market forces, international evidence suggests national governments can play a role in enhancing their growth
A key question for policy-makers is, of course, why clusters emerge in specific areas. The answer is that clusters emerge in a specific area because of a capability/market opportunity dynamic. Innovative clusters take off in a particular place because a market opportunity is created by a technology becoming available to fulfil a latent or well-known demand, and firms exist or are created that have the capability to take advantage of it.
This explanation of clusters in the making is valid for Silicon Valley in the 1950s and 1960s but also for other more recent, well-established clusters in the United States, such as North Carolina, San Diego and Seattle, as well as those in places outside the US, such as Cambridge (England), Taiwan and Israel.
In the case of all these clusters, they took advantage of a market opportunity created by new technology. In the Silicon Valley of the 1960s, in the other United States innovation clusters, and in Cambridge, it was the integrated circuit industry; in Israel it was the internet and network-security markets; while in Scandinavia and Taiwan it was the hardware and equipment opportunities in new kinds of devices, such as cell phones and personal digital assistants.
This is an important point for policy-makers to understand because clusters emerge when entrepreneurs see that an opportunity exists and create firms that have the capability to take advantage of it. There is very little that governments can or should do to assist this process because governments do not have the detailed knowledge of market opportunities or firm capabilities to make such judgements.
But once the growth of a cluster is underway, policy-makers can help by allocating and co-ordinating R&D, education and training, and infrastructure resources to support it.
If we look at the history of many US technology hubs, for example, it is clear that the Federal Government played an important, if not decisive, role in providing them with the resources to become innovation stars. For example, in the period before the Second World War many people believed that Boston would go the same way as the rest of New England, with the city’s traditional manufacturing of textiles, shoes and machines migrating to the low-cost South and decline setting in.
But Boston became one of the leading innovation hubs in the US as the Second World War brought substantial amounts of federal funds into the city, especially for the development of military electronics. This support was dramatically increased at the start of the Cold War with, for example, the MIT Lincoln Laboratory, a Defense Department research and development centre, being established in 1951, and becoming a hub for electronics research nationally.
The development of Silicon Valley also benefited from federal funding, with the establishment of the Lawrence Berkeley National Laboratory in 1931, and what became NASA’s Ames Research Center being set up in 1939. Stanford University and the University of California, Berkeley received significant funding in the post-war era, and massive amounts of defence funding for R&D and prime contractors followed into firms in the area.
Similarly, while Austin in Texas was home to many technology companies before the arrival of Sematech, the decision of Sematech, a consortium of semiconductor firms in part funded by the Defense Advanced Research Projects Agency, to locate their headquarters there in 1998 helped cement the city’s technological leadership position.
And this is not unique to the US experience. Across the world, in other successful economies, governments have also taken action, though in different ways, to support the growth of clusters in cities (see Appendix 1 for more details on some of these examples, such as the Hsinchu Science Park in Taiwan, Canada’s Innovation Superclusters, Biopolis in Singapore, and China’s science parks).
As a result of the accumulating evidence of the impact that high-tech clusters can have on the growth and prosperity of cities and regions, policies are increasingly being put forward for governments to support the growth of clusters in their regions.
In a recent report, the Brookings Institution and the Information Technology and Innovation Foundation emphasised the importance of strong metro areas as catalysts for economic growth. To counter regional economic divergence, it called for the US Government to designate eight to 10 ‘Growth Centers’ outside established innovation hubs across the heartland of the country but in metro areas with substantial innovative capacity. They called for the Federal Government to focus transformative investment on these places in order to catalyse their economic take-off.
The report argued that the high level of regional inequality in the US today is a grave national problem. In economic terms, the costs of excessive innovation concentration are creating serious negative externalities. These range from spiralling home prices and traffic gridlock in the superstar hubs to the undesirable ‘sorting’ of workers, with college-educated workers clustering in these few superstar cities, leaving other metro areas to depend on thinner talent reservoirs. As a result, whole areas of the nation are now falling into ‘traps’ of underdevelopment.11
A similar situation can be observed in the UK with a concentration of R&D spending and innovation in the Greater South East. Places like Oxford, Cambridge and London are also facing the costs of excessive concentration of innovation and economic activity with challenges around affordable housing, traffic congestion and air pollution.
Conducting a similar analysis on the UK, Centre for Cities identified those metro areas outside the Greater South East which have the potential to become growth centres and to foster regional growth. These include, for example, cities such as Coventry, Newcastle and Leeds.12
Moreover, in Jump-starting America, published in 2019, two American academics at MIT, Jonathan Gruber, the Ford Professor of Economics and Simon Johnson, the Ronald A Kurtz Professor of Entrepreneurship, proposed that the US Government should devote an additional half of one percentage point of GDP to research funding – roughly $100 billion per year. They proposed the money should be spent on creating new technology hubs away from the current superstar cities, and that the cities should be chosen by a ‘catalyst competition’.13
To capture the benefits of agglomeration they also argued that the dollars must not be spread too thinly. Places must create a compelling case for skilled workers, researchers and investors to locate there. This means picking winners and not simply succumbing to political pressure to give money to any qualified city.
It would appear that their argument has been well received, and a bipartisan, bicameral ‘Endless Frontier Act’ has been proposed in the US. The Endless Frontier Act proposes an expansion of the National Science Foundation – to be renamed the National Science and Technology Foundation (NTSF) – and the establishment of a Technology Directorate within NTSF to advance technology in 10 critical focus areas.
The newly-established Technology Directorate would receive $100 billion over five years to lead investment and research in artificial intelligence and machine learning, high-performance computing, robotics, automation, and advanced manufacturing. But perhaps most interestingly of all, an additional $10 billion would be authorised to designate at least 10 regional technology hubs, awarding funds for comprehensive investment initiatives that position regions across the country to be global centres for the research, development and manufacturing of key technologies.
The evidence from around the world suggests that supporting high-tech, high value-added clusters in poorer regions is the best way to reduce regional inequalities, and an effective way to improve the growth rate of the country. But to do so in the UK will not be easy, and will require the achievement of two objectives:
- It will be necessary to develop robust institutions to which powers can be devolved that will enable the devolved authorities to assist (a) their current companies to upgrade and (b) new high value-added per capita ones to be created. Neither of these tasks are ones that can be orchestrated by politicians and civil servants in Whitehall.
- It will be necessary for the Government to allocate resources in areas such as R&D, skills and transport, to the devolved authorities to enable them to co-ordinate them in such a way as to provide locally the environment that supports the growth of high value-added per capita firms and jobs.