Encouraging economic growth right across the country has been put front and centre of Theresa May’s ambitions in the first weeks of her premiership. The new prime minister has called for a “plan to drive growth up and down the country – from rural areas to our great cities”.1 And it appears that a new approach to industrial policy will form the central plank of approaches to achieve this.
If areas up and down the country are to make a greater contribution to the national economy then they will need to grow their ‘export base’ – that is those businesses that sell goods and services outside of their immediate area, be that to regional, national or international markets. These businesses are important for three reasons. Firstly, they bring money into the local economy from elsewhere through the goods and services they sell. Secondly, their ability to innovate drives up productivity and wages at the local level. And thirdly, because their productivity growth puts money in the pockets of workers, their success drives growth in wages, jobs and businesses in local services too.
Because they are not tied to a local market, these exporters could, in theory, locate anywhere in Britain. But this report shows that these businesses have clear preferences for where they locate. And these preferences differ between goods and services exporters.
Services exporters show a very clear preference for an urban location. Cities cover 9 per cent of Britain, but are home to 61 per cent of the country’s businesses in this sector. This clustering is particularly acute in city centres. Despite accounting for just 0.08 per cent of land, they are home to 11 per cent of Britain’s service exporters. This is especially the case for foreign-owned service exporting businesses, of which 30 per cent were based in city centres in 2015.
Goods exporters show a greater preference for non-urban locations – 69 per cent are based outside of cities. The hinterlands around cities are the most popular choice for this sector, with 44 per cent of Britain’s goods exporters being based there. But it is the rural economy that is most dependent on goods exporters, with almost one-in-four private sector businesses being in agriculture, mining or manufacturing (compared to 14 per cent in hinterlands, 7 per cent in suburbs and 4 per cent in city centres).
These patterns occur because of the inherent benefits that each of these areas offer to businesses. Cities offer access: access to knowledge, access to infrastructure (such as roads and railways), and access to deep pools of workers. But they also tend to have higher costs – such as the costs of space and congestion. Where businesses locate depends on the trade-offs that they are prepared to make, with higher-skilled services firms preferring the density of economic activity in a city centre and manufacturing firms preferring the cheaper premises and greater space that hinterlands offer.
Place matters not only because of the important role exporters play in the economy, but also because globalisation is altering the balance between goods and services in the export base. All areas – from city centres through to the rural economy – have seen a decline in their number of goods-exporting businesses. This has meant that areas have become increasingly reliant on the growth of services exporters to drive growth in their economies.
Because of the inherent advantages that cities offer, they have been able to respond better to the decline of goods exporters than more rural locations. Because cities offer both access to ideas and information and large pools of workers, they have been more successful at growing their number of service exporters – particularly high-skilled ones – to offset the losses seen elsewhere.
To improve the performance of the national economy, policy will need to make the most of the strengths of different areas that make up the national economy. But given that the UK is likely to continue to specialise in high-skilled services, the inherent advantages that cities offer mean that the performance of the national economy in the future will be increasingly driven by the ability of its cities to continue to attract investment in this area. This has three key implications for policy:
1. Industrial policy needs to be place-based
Our research shows that the national economy is not flat, meaning that policy to boost growth needs to start from a place-based perspective. Previous industrial strategies have focused on picking specific sectors, and have been place-blind. Greg Clark has recently made a commitment that the Government’s economic plan will “take advantage of the differences and unique strengths that exist across the country”.2 If the Government’s new approach is to be more successful than past attempts, putting place at the heart of its industrial strategy will be critical.
2. To do this, policy needs a deeper understanding of the different advantages that different places offer to businesses
Different places offer different benefits to businesses. Cities, and city centres in particular, offer businesses access to knowledge, workers and other businesses, while hinterlands and more rural areas offer premises at a cheaper price. Both industrial and wider economic policy needs to work within this context. This more realistic approach would recognise the limits of policy to encouraging the growth of high-skilled services exporters in every place across the country. It would also recognise and strengthen the inter-relationships between places – for example city centres rely on suburbs and hinterlands for workers and customers, while hinterlands rely on cities for jobs.
3. Policy should not focus on micro-managing the location decisions that businesses make
Policies encouraging business growth have had a tendency in the past to micro-manage the location decisions that individual firms make, either through business support policies or through relocation subsidies. Encouraging growth in the urban context will need to focus on strengthening the benefits of an urban location (through policies to improve skills, planning and transport) and reducing the negatives (by putting policies in place to alleviate congestion, pollution and housing costs).
This paper is the first of two research papers in the series. The second paper, to be published later in 2016, will look at the variation we see in the export base of different cities, and how their ability to attract investment from services exporters has had a big impact on their ability to grow and contribute to the national economy.