1. Economics
November 3, 2015

How can British cities attract start ups?

By Naomi Clayton

The origins of the “Cambridge Phenomenon” or “Silicon Fen” – the cluster of high-tech businesses based in and around the city – is often traced back to the 1960s, and the establishment of one of the UK’s first technology transfer companies, Cambridge Consultants.

The buildings surrounding the Computer Laboratory at the university bear the names of just some of the entrepreneurs and individuals that played a part in the success of Cambridge’s high-tech cluster since then: Hermann Hauser, Alec Broers, Sir Neville Mott. Today, the city is home to over 1,000 high tech companies competing with the best around the world.

While it might be one of the most famous examples, the rise of these new, highly innovative firms is not something confined to Cambridge alone. Innovation and technological change has meant that cities across the country have seen a shift towards more knowledge-intensive activity over the last three to four decades. As a result, digital, creative and professional services firms are becoming increasingly important drivers of employment and output growth in the UK.

These “new work” firms are now among the largest job creators and the most highly productive businesses in the country. They also appear to drive up demand in local economies, creating opportunities for other businesses more dependent on the domestic market, such as food and retail. Cities with more “new work” small and medium-sized businesses (SMEs) tend to be more productive, more innovative, and have higher wages and lower unemployment. Economically they’re outperforming the rest.

But few cities have seen growth in these types of SMEs in the same way Cambridge has, giving rise to more significant disparities between different places. “New work” SMEs, as we called them in our Small Business Outlook 2015 report, tend to be highly concentrated in a handful of cities. Go to Cambridge, London, Reading or Oxford and half of SMEs operate in these sectors. Travel northwards and just one in five SMEs in Burnley, Doncaster and Grimsby would be categorised as “new work” SMEs.

Proportion of “new work” SMEs, 2014. Image: Centre for Cities.

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The result is an increasingly uneven UK economic map. This is evident in recent economic performance data: cities such as Edinburgh, which saw an increase in “new work” SMEs over the last 10 years, also saw high and increasing productivity and earnings.

If we split cities according to how significant new work has become within their local economies – that is, by the proportion of “new work” SMEs in 2014 – then these trends are evident over the longer term too. Since 1931, private sector jobs more than doubled in cities, such as Oxford and Reading, with the highest proportion of “new work” SMEs. By contrast, cities such as Rochdale and Swansea, with the lowest proportion of “new work” SMEs, saw a fall in private sector jobs.

Cities, “new work” SMEs and private sector jobs growth, 1931 to 2011. Image: Centre for Cities.

So why are some cities more attractive to “new work” SMEs than others? Part of the reason is that these types of firms like to locate in places where there are lots of similar firms. These companies benefit from the network opportunities cities with lots of “new work” SMEs afford – and the exchange of ideas and knowledge these interactions facilitate. Being close to their clients also matters, particularly as many of these small firms offer highly specialised products and services which require a lot of client interaction to develop.

Here’s where proximity to London often comes in. With the market opportunities a global city like London offers, it is no surprise that seven of the top 10 cities with the highest proportion of “new work” SMEs sit within a 50 mile radius of the capital. Add to that the wide pool of high level skills in these cities and strong digital connectivity, and it becomes clearer why these “new work” SMEs are not more evenly distributed.

So how do cities close the gap? There is no formula for replicating the likes of Cambridge’s success. And cities shouldn’t start trying to engineer sector-specific growth strategies. Clusters grow organically and take time to develop and mature.

Instead cities should focus on the broader conditions – skills, connectivity, suitable and affordable business premises – that help to foster growth among small, innovative firms. This all takes time, and requires both national and local government to think carefully about what different cities need.

Naomi Clayton is a senior analyst at the Centre for Cities. This article was originally posted on the think tank’s website

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