Monday 27 October 2014

Can 'Tech North' take off?

Posted by Dr Max Nathan, SERC and NIESR

Rory Cellan-Jones has a nice article on the BBC website on the prospects for the Government’s ‘Tech North’ initiative, building extensively from my work with Emma Vandore on Tech City in London. Here’s some further thoughts.

Tech North was launched by Nick Clegg last week: it’s one of the products of the DPM’s recent Northern Futures initiative. The idea is to promote tech clusters in Liverpool, Manchester, Sheffield, Leeds and Newcastle: Clegg has put £2m/year on the table to support local firms, and to attract FDI to the area.

Politically this is a no brainer. It meshes with the government’s ‘rebalancing’ rhetoric. And it fits the new mission of TechCity UK, which has expanded its remit from just East London to cover the whole country. TCUK is publishing work next month looking at digital clusters, which will put some new numbers behind the policy.


So will it work? Rory is fairly sceptical in his piece. I’m still unclear what the programme will actually do: so here are five issues policymakers should be thinking about.

1/ Real geographies – Tech North connects five big cities with over 150 miles between them. In the real world, urban tech is in very tight microclusters: neighbourhood scale scenes which allow for lots of face to face contact. In Liverpool, for example, a lot of the action is in Ropewalks or the Baltic Triangle.

In London, Ministers originally hoped to ‘connect’ the Shoreditch cluster to the Olympic Park a few miles away. That hasn’t proved possible, not least because Old Street firms didn’t want to move there and saw no connection between the two.

So the chances of creating a single super hub across the Pennines are slim at best. There are worrying echoes of the Thames Gateway here: a planning concept, not a real place. On the other hand, as we found in London, the area branding might prove a helpful way to raise the profile of these local scenes.

2/ Who’s in and who’s out? The DPM seems to have focused his attention on the five Northern core cities. Fair enough, in that these are the economic powerhouses of their wider regions. But the real geography of tech activity is a little different. But cities like York and Sunderland also have quite a lot of tech firms. So why aren’t they included?

3/ FDI versus growing our own – firms cluster because co-location makes sense: they can tap into new ideas and pools of skilled workers and can share useful inputs (like fast broadband or VC investors). On the other hand, as Henry Overman and I have argued, clusters have tensions built in. As more firms enter, pressures on space build up, so rents rise. And competition rises, for staff and for market share.

Given all this, it’s risky to base cluster development policies on foreign investment. If FDI simply brings in big multinationals, these might displace smaller, younger UK businesses. Even if this raises aggregate productivity, I doubt it's what Government or cities want in this case. Agencies like UKTI typically try and maximise the count and size of foreign investments. A different approach is needed here, which is to focus on the type of foreign inputs.

4/ Infrastructures – specifically FDI programmes should try and enrich the rest of the ecosystem, especially specialist services tech firms need: finance, lawyers, accountants and workspaces. This stuff is only just starting to appear in London at scale, and is likely to be a priority for other UK cities. Certainly, the UK’s VC scene has been pretty weak outside the capital.

Equally, fast internet (and fast connection to it) is a basic need. For me, this is now a public utility, so it’s disappointing that the Superconnected Cities scheme has retreated from rolling out faster systems to everyone, to simply providing vouchers to SMEs. The CORE programme in York, Peterborough and Derby is an interesting exception (thanks to Tom Forth for the link).

5/ Policy architecture (and whether it really matters) – cluster policy advocates like Michael Porter assume that cluster development has to be local, since clusters are local phenomena. But this doesn’t follow.

First, Tech North has little cash on the table: strikingly, its five-city budget is about the same as the original budget for East London.

Second, a lot of the relevant policy levers are held at national level: tax breaks for investors, crowdfunding regulation, immigration and skills. That still leaves some local levers: branding, networking, planning and any local investment pots. But it’s limited stuff.

Arguably some of these national levers should be devolved: that’s started to happen through City Deals and Local Growth Deals. But we’re at the very start of this process, and though the post-Scotland moment may yet shake things up further, what Ministers are handing over in powers they’re largely taking away in cuts.

But perhaps that’s too pessimistic. As Emma and I found in the East London research, the Old St scene grew quietly for years without policymakers really noticing. That could well be the likely trajectory for the many clusters under the Tech North umbrella.

Originally posted on the squareglasses blog.

Friday 3 October 2014

Agglomeration Economies

[Posted by Prof Henry G. Overman]

I've been reading some of the recent material from the Foresight project on cities. In particular, I've been looking at the interesting piece by Ron Martin, Ben Gardiner and Peter Tyler on the long run economic growth performance of UK cities.

While there's much of interest in this paper, there are also a few things that puzzle me - and this blog is about one of them. Specifically, I'm puzzled by the suggestion that ("the New Neoclassical") Urban Economics predicts a positive link between size and economic growth. Or, as the paper puts it: "It is often argued that larger cities confer greater economies of agglomeration and increasing returns effects, and that, holding other things constant, these effects make for faster growth: in other words, that city size, agglomeration and growth form a process of circular and cumulative causation."

To my mind, this 'prediction' is muddling growth and levels. There is a large body of theoretical and empirical literature that suggests that, everything else equal, productivity will be higher in larger cities. It's also true that this literature supports the idea that initial shocks might be magnified by cumulative causation as the urban system adjusts to the shock. So, for example, a city experiencing a positive productivity shock might see a long run effect that is larger than the initial shock (as it attracts more workers and firms). This cumulative causation would, however, run its course once the city had adjusted. In the real world, this could show up as faster 'growth' over a number of years for a city experiencing a positive (productivity) shock.

However, when we switch to long run growth - i.e. to truly dynamic processes that may take place over decades - the link to size is much weaker both theoretically and empirically. Indeed, while some theoretical papers suggest a positive link, there's a growing empirical literature that suggests there may be no relationship. In particular, starting with a paper by Xavier Gabaix in the Quarterly Journal of Economics there's been considerable interest in whether Gibrat's law - which says that there is no link between city size and growth - explains the tendency of city systems to follow Zipf's law (a power law that links the relative size of cities). In an early empirical contribution to this literature, myself and Yannis Ioannides provided evidence to suggest that cities in the US system do indeed follow Gibrat's law. More recently, I've done work with Sabine D'Costa which suggests that for the UK there is very little evidence of any link from city size to wage growth (even thought there is a strong link for wage levels).

In short, the idea that there is no link between city growth and city size is a fairly mainstream 'neoclassical' position - and one that would reflect my own reading of the empirical literature (and indeed some of my own empirical work). So it's surprising to see the lack of a link between size and long run growth presented as somehow presenting a challenge to urban economists like myself.

Part of the muddle here, I suspect, comes in the translation to policy discussions where there has been a tendency to conflate growth and levels effects. I've personally tried to avoid doing this in my policy orientated writings. For example, our work for the Manchester Independent Economic Review was concerned with the productivity advantage that Manchester had relative to the wider region - but this was a statement about levels not growth rates. But it's an easy slip to make when discussing complex issues but trying to use non-technical language.

All of this also raises the much more important question of the implications for urban policy. At any point in time, the urban system is likely to have some large cities that are doing well and some that are doing badly (both in terms of growth and levels). The same is true for small and medium size cities. This reminds us that basing policy on size, per-se, isn't very sensible unless size correlates with some other important considerations - e.g. governance. This is why, for example, some of us pushed very hard to have the second round of English city deals focus on some of the smaller cities that were fast growing rather than just focusing on the (next ten) biggest cities.

But neither does the lack of a link suggest that we should completely ignore the issue of size. If, for example, the government wants to have a northern city to act as a counterbalance to London then it may make sense to focus investment in a place (e.g. Manchester) that is relatively large and has relatively high productivity. The hope would then be that agglomeration economies might generate a cumulative causation process that helped further the positive impact of that investment. Whether this would happen in practice depends on the extent to which policy can generate productivity increases, whether congestion costs increase quickly or slowly, etc. If it was successful, the effects would show up as faster growth for Manchester in the short to medium run, but (as the data make clear) not necessarily in the long run.

So the link between size, productivity and growth does matter for policy, even if - as seems likely - there is not a strong link between city size and long run growth.