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Investment Zones and Innovation

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Tall buildings

In Wednesday’s budget, the chancellor announced a newly revamped Investment Zones (IZs) programme as part of the UK’s push for growth. This is a significantly scaled back version of the programme outlined by the previous chancellor that planned for at least 38 zones across the country. Now there will be only 12, aimed at creating ‘clusters’ in five innovation-related sectors around universities or research centres.

Despite the changes, many of the points that we raised at the time of the last announcement in a series of blogs from our Director, and a blog from myself, are still relevant.

The stated goal of this new programme is to boost productivity by providing more ‘high-priority’ jobs, drive innovation and contribute to levelling up. Let’s consider these one by one.

Delivering high-priority jobs

These new IZs can increase jobs in the local areas in one of three ways. Either existing businesses expand and hire more workers, new businesses are set up, or existing businesses move from somewhere else, bringing jobs.

The third of these, often known as ‘displacement’, implies that additional jobs inside the zone will come at the cost of jobs outside of it – usually from the areas directly outside of it. This might not be the end of the world if the relocated businesses then have more space to expand or can benefit from being close to others in the same sector, but ideally we would want to see quite a lot of genuinely new activity as part of the mix.

Unfortunately, the evidence we reviewed in 2016 on enterprise zones suggested that a lot of the jobs created by these kind of policies do come from displacement, though this is very hard to measure accurately.

The success of these zones in creating genuinely new activity will come down to ensuring the incentives offered address the development challenges particular to that area. The government want these zones to be like the Canary Wharf regeneration site, but Canary Wharf unlocked development that was curtailed by a specific set of land use barriers; for example, building height restrictions in the City of London at the time. The site – with less planning restrictions and not in danger of blocking views of St Pauls – provided a way for the built-up demand for taller, bigger trading floors close to the City to be met. As plans are developed for IZs the crucial question will be whether they do something similar to address the key barriers that local businesses face.

Driving innovation

The big hypothetical benefit of these zones comes from the ‘knowledge spillover’ benefits of packing innovative businesses close together next to a university or research centre. Proximity allows sharing of ideas, techniques, and resources, and the potential for collaboration on solving different problems.

Our toolkit on researcher co-location summarises some of the evidence on this, and broadly speaking it suggests that putting researchers, entrepreneurs and businesses closer together can indeed increase research and innovation output.

Studies on university researchers show that being close together can have a positive effect on the probability of research collaboration and quality, and co-location of businesses in science parks is associated with higher firm-level patenting (a measure of innovation). The biggest benefits came from those working in the same fields being close together – which suggests the new IZ programme’s focus on clusters of specific priority sectors could work.

Businesses being involved with universities may be a positive too – our toolkit on university spinoffs found some evidence that industry-university partnerships can increase the number of spinoff startups, and that these new startups being close to the university increases innovation.

Our co-location toolkit also found that the benefits of being close together fall away quite quickly as distance increases, even on the same site. Walking distance between collaborators seems particularly important. This may have implications for the way in which IZs are laid out – for example, to maximise the walkability between businesses, and to build in some common spaces in their centres that can increase the chances of individuals bumping into each other, sparking off new ideas or collaboration.

Unfortunately, these IZs will face much bigger challenges than those around physical layout. And once again, the key question is whether they will address barriers to more innovation in these areas. Incentives will need to address shortages of high skilled workers, and the effective subsidies to R&D will need to be large enough to generate substantial effects. And will the combined effect be big enough to offset the advantages offered by existing clusters in the UK and abroad? If not, then the new zones will still be relatively less attractive for some businesses than established areas.

Levelling Up

Whether all this can deliver on levelling up is also an open question. If levelling up means providing more opportunities for high-paid jobs and innovative businesses outside of the South East, and IZs provide effective support as just discussed, then they may make a difference.  

Whether any of this will benefit local residents who work in less innovative sectors is unclear. Providing apprenticeships for their surrounding areas, or partnering with local schools or colleges, might help more people access the opportunities generated. But the path from local innovation to adoption of new technologies and local job generation is complex.

Summary A more targeted approach to IZs represents an improvement. There is good evidence that having innovative businesses near to one another – and to universities – can help innovation. The challenge will be in identifying the local barriers to innovation and tailoring the available incentives to address these. And local areas will need to think carefully how innovation in these zones benefits surrounding areas if they want them to deliver longer-term development of their regions.