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Damian Walne
Director, Socio-Economic Centre
Damian Walne

Supporting and understanding innovation in our cities

Authors: Damian Walne

27 November 2014


Cities and innovation

“Cities” and “Innovation”: Two words buzzing together in current policy debate. In recent months, we have heard the Chancellor of the Exchequer talking up England’s northern cities as a powerhouse for the UK economy; and we have seen Government initiatives of City Deals and Growth Deals with ambitions to promote “innovation”. The European Commission has put Smart Cities at the core of its regional development funds; and there is a new Future Cities Catapult to promote urban innovation.

It becomes difficult to keep up. But what does it all really mean? Beyond the buzzwords, are we really seeing the types of policies that support innovation in our cities? We must separate what is informed evidence-based economics about the relationships between cities and innovation, from what is, let’s say, a little fluffy. Otherwise, in the pursuit of innovation, national and local policy-makers might prioritise the wrong things.

Here at Lancaster University’s The Work Foundation, we aim to be at the forefront in evidence-based thinking about cities and innovation. Our “Cities 2020” programme of research looked at high growth firms in cities; explored the challenges of the ‘eco-system’ for innovation; the role of anchor institutions such as universities; and the demand for graduate skills. We continue to work with local government, for example with our current work in understanding the creative economy.

We know some of what makes this a tricky topic. And so here we look at some of the challenges in understanding innovation in cities; and consider what the evidence really tells about how policy-makers can support it.

The challenges of understanding innovation

The first challenge: What is “innovation”? The word is well used. But there is ambiguity about its meaning. The language of “innovation” is a positive way of framing discussion of economic change. Like apple pie, it is hard to be against innovation. This contrasts with language of “growth”, “development”, “restructuring”, “disruption”, and so on, each of which imply economic change has some consequences. We look to define innovation as “doing things differently” to create and apply new knowledge. This is not simply growth through doing more of the same. But by combining people, machines, and premises in ways to create new and better goods or services (product innovation) or to do things better (process innovation).

The second challenge: Even if we can define innovation, it is not clear if and how we can measure it. Some obvious things analysts look at are metrics such as the registration of patents for new products, or how much firms spend on research & development. But these may tell us very little. It also misleads us into thinking about innovation in terms of industry and manufactured goods, rather than new services or methods of doing things. Good measures of innovation must also draw from data such as survival rates of enterprises, or surveys of business managers on their new products and processes. But none of these are perfect.

The third challenge: There is no single framework for understanding what drives innovation. There is some agreement around the importance of the “innovation eco-system”. This is the argument that innovation emerges from a web of technologists, scientists, businesses, banks, consumers, universities, workers, and public bodies that interact in multiple different ways. But there is no unified theory. The dominant arguments point to ideas such as -

•Creative destruction with competition between enterprises within and across sectors, as better and newer products and processes out-compete older approaches.

•Learning by doing as the development of people's skills, knowledge, and experience lead to better ways of doing things.

•Dynamic gains from trade as products and processes flow across countries, with ideas exported, copied, adapted, and imported back.

•The rules of the game, highlighting how institutions and systems of governance shape incentives and behaviours.

The challenge of understanding innovation in cities

The interest in cities takes us to questions about how innovation relates to geography. “Place” plays a role in that all innovation happens somewhere. For example, an enterprise that aims to make profits will choose a location with benefits (revenues through proximity to customers, or reduced prices through proximity to suppliers) against the costs (the price of accommodation or the wages of workers). This explains the clustering of activity. It explains the formation of cities.

The advantage of cities in innovation is largely one of economic mass. That is simply the proximity of many able people, jobs, and enterprises within short travel times. This proximity widens considerably the scope for innovative activity. This is people meeting and sharing ideas, buying and selling off one another, and introducing new products to consumers. The challenge is that this relationship between cities and innovation is not straightforward. For example:

•The place may not matter. It is enterprises that innovate, not the cities they are in. An innovative employer may be within a city, but have little relationship with other parts of the local economy. Or local units of a large enterprise may introduce new products or process but this will be driven by interactions within the enterprise, not within the city.

•Where place may matter, the effects are not clear. The most important effect may be workers moving jobs between different firms – and taking ideas with them. Urban labour markets allow workers and their skills to better match with employers.

How to support innovation in cities

So what should local policy makers, across Local Authorities or Local Enterprise Partnerships, do to support innovation in their areas? There are never easy answers. But here are three key arguments:

The first argument: Do not over-state what local policy-makers can do. Local policy must operate in a context of wider patterns of economic growth and trade, and within a policy environment of tight public funding and limited local powers. So this means a reality-check on what is feasible; not everywhere can be hub for favoured industries like biotechnology, ICT, or advanced engineering. It also means better understanding of how the rules, taxes, and spending of national Government may run against objectives to support cities and innovation. Take an obvious example: England’s housing market. If high house prices, especially in growing cities, deter people from moving there, it does not help innovation. National policies on land-use planning and taxation may deter the building of homes that growing innovative cities need.

The second argument: learn what works. That means that whatever interventions local policy makers try, they must invest in building up robust evidence, ideally using experimental controlled trials that we can really learn from. It is somewhat disappointing, that from all the public money over many years that has funded initiatives to support business innovation or local growth, so little effort has gone towards rigorous economic evaluation.

The third argument: see where the evidence we have actually takes us. So where does it take us?

Firstly, that many of those interventions that local economic strategies tend to frame in terms of innovation, are less than compelling. See examples such as Enterprise Zones, cluster development, broadband, and culture-led regeneration. Each are interventions where the evidence contests their effectiveness or value for money.

Secondly, there is mixed evidence on the role of offering support to small and growing enterprises through business advice around management, training, exports and so on; or facilitating access to finance and venture capital. What is less clear is the extent to which this is a role for local policy-makers or is more effective through institutions such as banks, universities, or national business support agencies.

Thirdly, so much innovation in cities is about people. Cities are where people live, work and play. So that should mean local policy-makers prioritising those interventions that enable residents and workers and visitors to succeed in cities. That should include:

•Housing that enables people to move to the cities where job opportunities are;

•Urban public transport that enables people to move around cities and between jobs; and

•Helping people overcome the barriers they face, such as in careers advice, social care, and childcare, that prevent them from going into productive employment.

Interestingly, the case is rarely made for how new housing, public transport, or locally provided services support innovation and local growth. Perhaps that is because housing tenants, bus passengers, young unemployed people, and busy parents, are not so effective at coordinating business cases around how the services they use support innovation. In recent years these services have often been very vulnerable to cuts in public spending.

“Cities” and “innovation” are both great things. If we emphasise that cities are about people, and innovation is about enabling people to do stuff, then perhaps we will achieve a goal of more innovative cities.

Please click here to read this article in Adjacent Government's interactive magazine.