Do large cities foster innovation?

Introduction

Creativity has traditionally been considered vital for economic growth, and cities as the focal points of creative activity (Jacobs 1961). Cities are viewed as the creative environment that helps firms develop innovative products. Agglomeration in cities also generates multiple spillover effects, breeding learning processes that favour the creation, diffusion, and rapid adoption of new ideas. The strength of the link between cities and creativity is related to the size of the city. Larger cities become specialised in new product design while smaller, more affordable cities focus on production processes (Duranton and Puga 2001). Similarly, cities with strong creative sectors tend to specialise in the production of new ideas. Hence, large cities – with their concentrations of designers, artists, and specialists in both new content production and commercialisation – are regarded as the creative environment for the emergence of innovative firms and the attraction of firms hoping to create new products.

Large, creative cities are, as a consequence, increasingly viewed as motors of economic change (e.g. Chapain et al. 2010, Cohendet et al. 2010). Yet limited quantitative research has directly addressed a) whether firms in these cities are indeed fertile ground for innovation and b) whether the connection of all creative cities with innovation is the same. Larger cities with strong creative economies may be focused on different elements of production than otherwise similar smaller cities (Andersen and Lorenzen 2014).

This column – based on a paper in Industry and Innovation (Lee and Rodríguez-Pose 2014) addresses precisely these questions, dealing, in the process, with two important gaps in the literature on this subject: a) empirical evidence has been dominated by aggregate, macro-analyses, with studies testing the relationship between urban or regional creativity and innovation being developed at an urban or regional level (Kourtit et al. 2011) and b) most research has focused on the link between creativity and growth or productivity, rather than innovation.

Cities, creativity, and innovation

Researchers working on creative industries have over the years built a portrait of the archetypical creative industry. First, the general view is that a creative industry is, by nature, innovative. Creative industries are supposedly based directly on new content production and so should be more likely to introduce new products and processes. Second, creative industries are considered as eminently urban and associated to big cities (Currid-Halkett and Stolarick 2013). The creative industries are generally viewed as dependent on the density of specialised workers, suppliers, and customers offered by cities (Lazzeretti et al. 2008, Chapain and Comunian 2010), and innovative firms will sort into cities in order to take advantage of the spillovers from creative production.

However, whether creative firms are more innovative is subject to contention, as is the extent to which location in different types of city helps. Indeed, little research directly tests the link between creativity at the local level and innovation at the firm level. This relationship is still largely based on case study evidence and assumptions.

New evidence from the UK

In order to cover this gap, we use the British Small Business Survey 2010, a survey of small and medium-sized enterprises (SMEs) employing fewer than 250 people in the UK. Each firm is located in a travel to work area. We match this data to administrative records and use these to match firms to travel to work areas. The final sample contains a total of 1,336 firms.

We define creative industries by slightly modifying the standard UK Department for Culture, Media and Sport (2010) definition of creative industries. Creative cities are those in the top 25% of creative industries employment, containing a share greater than 1.5% of the overall employment in the creative industries. And we consider six types of innovation variables, covering product and process innovations, as well as incremental and radical innovations.

Based on the literature our hypotheses are that:

• H₁: Firms in creative cities are more innovative than those elsewhere;
• H₂: Firms in the creative industries are more innovative in creative cities;
• H₃: Firms in large creative cities are more innovative than those elsewhere.

Model and method

In order to test our hypotheses we resort to a simple innovation production function, where the unit of analysis is each firm, while the dependent variable is whether the firm has introduced a new innovation in the previous year. Our core variables are: whether firms are in the creative industries, whether they are located in a ‘creative city’, and the interaction between the two. We also control for a host of other firm- and city-level characteristics, including age, size, legal structure, and sector. We estimate our model using a simple binary probit.

Are firms in large, creative cities really more innovative?

The results of the analysis challenge, to a large extent, conventional wisdom.

• First, we find no effect of location in a creative city on overall product innovation.

Firms in creative cities in the UK seem to be no more innovative than those located elsewhere. The only areas of innovation where there is a positive and significant return from being located in a creative city are radical – new to the market – product and process innovations. Firms in creative cities are 4% more likely to introduce original innovations than those outside, and 3% more likely to introduce entirely new processes.

There is even less evidence that firms in the creative industries are more innovative than other firms. Creative industries firms appear less likely than firms in other sectors to adopt innovations that have already been introduced elsewhere. This suggests that hypothesis 1 – that firms in creative cities would be more innovative – is only partially true. The results suggest that creative cities provide an advantage in the production of entirely new products and processes, but not for innovation in general.

• Second, the influence of creative firms in creative cities is rather limited.

Although creative industries firms in creative cities tend to introduce more entirely new product and process innovations, overall these firms are not more innovative than those in other cities, meaning that there is no evidence to support hypothesis 2. Creative industries firms in creative cities are not particularly innovative.

• Finally, city size is not univocally correlated to innovation in creative industries.

Our results show that medium-sized creative cities are particularly important for product innovation, but process innovation mainly takes place in both large and medium-sized cities. There is therefore limited evidence that the clustering of creative industries in large cities yields significant effects in terms of innovation. Overall, firms in medium-sized cities in the creative industries are as innovative as – if not more than – those established in large agglomerations.

Conclusions

Our analysis of the innovative capacity of British firms in the creative industries has cast serious doubts about the often-assumed connection of creativity to innovation and, in particular, on the role of large cities in this process. We have found that a) there is little evidence that firms in creative cities are more innovative than those elsewhere; b) that firms in the creative industries are more innovative in creative cities; and that c) firms in large creative cities are more innovative than those in smaller cities. While cities may indeed be a hotbed for creativity and knowledge spillovers, our results show that it is important not to overstate the role they play in firm-level innovation in the creative industries, at least in the UK. The key determinants of firm-level innovation remain basic firm characteristics and activities, rather than the environment where this activity takes place. Location is, at best, secondary as a factor for innovation (Maré et al. 2013).

References

Andersen, K V and M Lorenzen (2014), “Different creative cities: exploring Danish data to adapt the creative class argument to small welfare economies”, in C Mellander, R Florida, B T Asheim, and M Gertler (eds.), The Creative Class Goes Global, Abingdon: Routledge: 117–137.

Chapain, C and R Comunian (2010), “Enabling and Inhibiting the Creative Economy: The Role of the Local and Regional Dimensions in England”, Regional Studies 44(6): 717–734.

Chapain, C, P Cooke, L De Propris, S MacNeill, and J Mateos-Garcia (2010), Creative clusters and innovation: Putting creativity on the map, London: National Endowment for Science, Technology and the Arts.

Cohendet, P, D Grandadam, and L Simon (2010), “The Anatomy of the Creative City”, Industry and Innovation 17(1): 91–111.

Currid-Halkett, E and K Stolarick (2013), “Baptism by fire: did the creative class generate economic growth during the crisis?”, Cambridge Journal of Regions, Economy and Society 6(1): 55–69.

Duranton, G and D Puga (2001), “Nursery Cities: Urban Diversity, Process Innovation, and the Life Cycle of Products”, American Economic Review 91(5): 1454–1477.

Jacobs, J (1961), The Death and Life of Great American Cities, New York: Random House.

Kourtit, K, P Nijkamp, S Lowik, F Van Vught, and P Vulto (2011), “From islands of innovation to creative hotspots”, Regional Science Policy & Practice 3(3):145–161.

Lazzeretti, L, R Boix, and F Capone (2008), “Do Creative Industries Cluster? Mapping Creative Local Production Systems in Italy and Spain”, Industry & Innovation 15(5): 549–567.

Lee, N and A Rodríguez-Pose (2014), “Innovation in Creative Cities: Evidence from British Small Firms”, Industry & Innovation 21(6): 494–512.

Maré, D C, R Fabling, and S Stillman (2014), “Innovation and the local workforce”, Papers in Regional Science 93(1): 183–201.

This article is published in collaboration with VoxEU. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Neil Lee is a Lecturer in Economic Geography, London School of Economics. Andrés Rodríguez-Pose is a Professor of Economic Geography, London School of Economics and a Research Fellow at the CEPR.