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From Investment Zones to Innovation Zones? Innovation and Levelling up

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Beyond the changes to tax and spending outlined in the Autumn Statement – which will play out differently in different places – the most substantive announcement around local growth involved a revised approach to Investment Zones focusing on university links. Similarly to infrastructure investment – which I discussed in a recent blog – innovation policy is another area where the economic impacts of shifting government support around the country need thinking through carefully.

As with transport infrastructure, the economic returns to innovation or R&D investment vary a lot across places. The evidence suggests government support for innovation clusters is most likely to have impact by building on existing innovation strengths, rather than trying to create new ‘clusters’ of activity, which is rarely successful. Identifying opportunities for the former is more challenging than for infrastructure investment, where a well-developed, if imperfect, set of impact assessment tools exist. But the strength of UK innovative institutions outside London and the South-East suggests that there are potential investments that could build on existing strengths and help increase the rate of local innovation in other places.

Whether such R&D investments can then deliver significant improvements in local economic performance is harder to assess. The direct local economic impacts of the kind of R&D spend funded by government are often limited – equipment is specialised and sourced from elsewhere, limiting local supply chain impacts, and the number of research jobs created will be small relative to the overall size of many local economies. To deliver large local economic benefits local firms must translate innovation outputs into product or process improvements that increase their productivity. This is why many proposals advocating increased R&D spend to boost local economic performance suggest targeting investments that fit with an area’s comparative advantage in particular industries or activities. This is easier said than done for several reasons. First, identifying local economic strengths is not an exact science. Even if investment could be well targeted, evidence suggests that many of the benefits from innovation will spill out beyond the local economy. Second, while the success of Silicon Valley demonstrates that concentrated innovative investments can underpin a successful, highly specialised local economy, the myriad failed attempts to replicate this success point to the challenges of doing so.

As with infrastructure, R&D investment can generate large income effects in struggling places if it creates a relatively large number of high paying research jobs in a small town. In bigger places these income effects will tend to be small relative to the overall size of the local economy, as discussed above. In either case, given the nature of the labour market in such places, it seems likely that many of these jobs would have to be filled by people moving from elsewhere, meaning that they may do little or nothing for the wages of existing residents on lower incomes.

Moreover, the evidence is clear that innovative activities benefit from significant agglomeration economies, particularly from co-location with other innovative activities. The fact that the Cambridge-London-Oxford ‘golden triangle’ is home to large numbers of high-tech firms and researchers is crucial to its innovative success and its strong economic performance. Redistributing expenditure away from such a hub might benefit the places newly in receipt of investment, but have negative implications for overall innovation rates and, through this, overall economic growth.

At a time when the need to increase national economic growth is, rightly, in the spotlight this means it’s more important than ever that we carefully assess both the local and national impacts of any policy designed to redistribute government spending to support innovation.