1. Economics
September 19, 2016

Why do some businesses prefer cities, while others flock to suburbia?

By Ilona Serwicka

Britain is home to 2.5m private sector businesses and 21m private sector jobs. These businesses and jobs aren’t spread evenly throughout the country – they are located in very specific places.

But why, when they could locate anywhere, do they cluster? Our new report Trading places: Why firms locate where they do answers that question. And the answer has big implications for the government as it crafts its new industrial strategy.

In the report we carve the country up into four areas – city centres, suburbs, hinterlands and rural – and look at the amount and type of businesses and jobs in each.

City centres see the most acute clustering of economic activity: 8 per cent of private sector businesses and 14 per cent of private sector jobs cluster on just 0.08 per cent of the landmass of Britain.

The opposite is the case for the rural economy. Rural areas make up more than 50 per cent of Britain’s landmass, but only 13 per cent of businesses and only 10 per cent of jobs are located there.

Figure 1: Distribution of businesses and jobs across the four geographies, 2015. Click to expand. Source: ONS (2016), Business Structure Database 2015; ONS (2016), Census 2011, origin-destination data (WU02UK); Centre for Cities’ own calculations.

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As well as seeing a difference in scale, there is also a difference in the types of businesses that are attracted to different areas. This is especially the case for “exporting” businesses: those firms that export their goods or services either to some other part of Britain or abroad.

Britain’s service exporters tend to locate in cities, while goods exporters are more inclined to locate in the hinterlands (see Figure 2). These patterns are particularly acute for higher-skilled exporting businesses: we estimate that 32 per cent of Britain’s high-skilled jobs in service exports are located in city centres.­

Figure 2: Where businesses in different sectors choose to locate, 2015. Click to expand. Source: ONS (2016), Business Structure Database.

Recent years have also seen a change in the make-up of the export base (see Figure 3). Across all four areas, the goods-exporting sector has declined, while the service-exporting sector has grown – and this growth has been strongest in the suburbs.

The shift in the make-up of the export base of Britain observed since 1998 means that we are likely to see an increasing concentration of economic activity in cities.

Figure 3: Percentage change in the number of businesses and jobs by industry across four geographies, 1998-2015. Click to expand. Source: ONS (2016), Business Structure Database.

This very distinct geography of businesses and jobs plays out because of the benefits of agglomeration. Cities – and city centres in particular – offer access to knowledge, infrastructure and deep pools of workers, and so are particularly attractive to service-exporting businesses.

But they also have higher costs – costs of office space and congestion. Lower-skilled, more routinised businesses – such as call centres and more traditional manufacturers – tend to prefer cheaper premises over access to knowledge. And so they tend to prefer a suburban or hinterland location.

The geography of Britain’s jobs and firms means that supporting growth in our cities will become increasingly important for improving the performance of the national economy. This means that the new industrial strategy being prepared by Theresa May’s government should look to make the most of the benefits and reduce the costs of doing business in cities, as well as better linking cities with their surrounding hinterlands so that more people have better access to the job opportunities that are being created in cities.

Of course, there is great variation between cities too – particularly in their ability to attract and retain high value service jobs. The second report in this project, to be published later in the year, will explore the variation 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 provide high quality jobs.

Ilona Serwicka is a reseracher at the Centre for Cities, on whose blog this article was originally published.

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