Innovation, creativity and governance: social dynamics of economic performance in city-regions.

INTRODUCTION

The pressure towards a globalizing, knowledge-based economy raises questions about the underlying determinants of economic performance in city regions. The creation and diffusion of new knowledge drives innovation in knowledge-intensive production and service activities, which in turn, drives economic performance and growth. Although these processes are strongly shaped by national institutions and global knowledge flows, recent analyses of innovation and creativity emphasize the continuing relevance of regions in general and urban regions in particular as critical sites for determining economic performance. Many aspects of contemporary economic changes make cities more, not less, important as principal sites for innovation, creativity and the production of knowledge-intensive goods and services.

This work also suggests that the underlying social dynamics of urban regions are particularly significant in shaping economic outcomes. The interactive and social nature of innovation makes city-regions the ideal space in which social learning processes can unfold. Knowledge transfer between highly skilled people happens more easily in cities because the sheer density and concentration of economic players in large cities offer multiple opportunities for contact, interaction and knowledge circulation (Orlando & Verba 2005). From this perspective, the foundations of economic success in an increasingly competitive world are the social qualities and properties of urban places. Decisions that shape the social character of cities also have a direct impact on our economic well-being.

A number of pressing questions remain. First, while there is an emerging consensus around the role that city-regions play in facilitating the circulation of knowledge that underlies innovation, a debate remains over precisely how knowledge circulates within cities. Some analysts view the most important dynamics arising from the inter-firm, labour market and knowledge externalities that occur within individual sectors or clusters (Porter 2000), while others emphasize the learning opportunities that arise from knowledge circulating across sectoral and cluster boundaries within the city-region (Audretsch 2002). In this view, ideas that are commonplace within one particular sector may have novelty value in another and the possibility of inter-sectoral (or cross-cluster) knowledge exchange and spillovers arising from this economic variety enhances the learning potential for local economic actors. This dichotomy is usually framed in terms of the diversity vs. specialization--or Jacobs vs. Marshall-Arrow-Romer (MAR) debate (Glaeser et al. 1992). The issue of industrial concentration versus diversification also has key implications for the ability of city regions to cope with the changing competitive dynamics flowing from the rapid globalization of industries, including knowledge-based ones. Second, while there is substantial agreement on the advantages that accrue to the largest city-regions as centres of innovative activity, there is less consensus on the prospects for mid-size and smaller urban regions in this regard (Orlando & Verba 2005; Duranton & Puga 2005). Small and medium cities often operate from a narrower and more specialized industrial base that benefits from the MAR externalities, but their economic future may be closely tied to the specific industries in which they have historically specialized. An alternative perspective suggests that specialization vs. diversity may be less important than what sectors a city-region is specialized in.

Finally, global shifts in knowledge-intensive production and service activities are associated with a complex set of challenges to the social well-being of cities. There is growing evidence that urban size may be related to significant diseconomies of scale and negative externalities. Population size tends to be positively associated with higher income per capita, but only up to a certain point; beyond that, statistical analysis by the OECD indicates that the size--income relationship turns negative due to significant diseconomies associated with greater transportation congestion, the cost of logistics and transportation, higher rents and environmental degradation. (2006: 51). Another body of work suggests that quality of place is also a significant factor underlying the social dynamics of city regions and, in turn, influences their economic performance (Florida, Mellander & Stolarick 2007; Gertler et al. 2002; Florida 2002). From this perspective, urban regions that are successful in developing tolerant and welcoming attitudes towards tolerance and social diversity are likely to succeed in attracting and retaining highly educated workers. Yet a growing body of evidence in Canada and elsewhere concludes the reverse is occurring, especially in large urban centres; while some benefit from highly-skilled jobs in creative industries, many others remain trapped in low wage, contingent jobs, resulting in increasing social polarization in urban centres.

This paper explores some of these issues in a more systematic fashion and links the conceptual issues outlined above to the rapidly growing body of empirical research on the economic performance of city regions. This is undertaken in the context of an analysis of the social dynamics of economic performance in city regions across Canada.

REFRAMING THE DEBATE: INDUSTRIAL EVOLUTION AND THE LIFE CYCLE OF CITY-REGIONS

A number of theories have been advanced to account for the relative pace of growth and industrial transformation in city regions. This section reviews some of the key issues in these debates and relates them to the broader trends outlined above. Questions about the factors that affect the economic performance of city regions have been framed largely in terms of the relative degree of specialization or diversity that characterizes their economic structure. However, recent research suggests that a number of other underlying factors may exert a determining influence over their respective economic performance. These factors include the size of the individual city, its point of insertion into an evolving global hierarchy of urban nodes, as well as the point of evolution of the industrial structure towards more knowledge-intensive activities that have been labeled the 'cognitive cultural economy' (Scott 2007). The following discussion surveys the way in which this range of factors exerts an important influence over the economic performance of city regions.

Two alternative approaches deal with the impact of knowledge spillovers on industrial innovation and each generate competing explanations for how technological advances contribute to growth and economic performance in city regions. The Marshall-Arrow-Romer externality (MAR) argues that knowledge spillovers in specialized, geographically concentrated industries make the most significant contribution to growth. These localization economies are external to individual firms, but internal to an industrial sector, and draw upon a common labour pool, skill base, specialized suppliers, educational institutions, and other industry-specific complementary assets that contribute to firm-based growth. Transfer mechanisms for spillovers of tacit knowledge and 'learning-by-doing' include the intrasectoral mobility of specialized labour and serial entrepreneurs, as well as the 'learning-by- observing' effects of densely concentrated industries (Glaeser et al. 1992). In contrast, Jacobs (1969) maintains that the most important knowledge transfers originate outside the firm's specific sector and that the diversity of geographically proximate industries, rather than specialization per se, promotes innovation and growth. Knowledge flows between firms in different industries, where new ideas form by combining older ideas or by applying knowledge that is routine in one sector to emerging problems in another sector, drive innovation and growth. Large urban economies, with their mix of different industries and occupations, increase the potential for knowledge flows between industries and therefore, exhibit faster growth and higher levels of innovative dynamism.

Subsequent empirical research has generated considerable support for both arguments, providing substantial fuel for the ongoing debate. Some results suggested that diversity across complementary industries sharing a common knowledge base stimulates economic and employment growth. In an early study to test the hypothesis, Glaeser et al. measured employment growth in a cross-section of manufacturing industries using data on 170 U.S. cities between 1956 and 1987 and found that, at the city-industry level, 'specialization hurts, competition helps, and city diversity helps employment growth' (1992: 1150). A subsequent study of U.S. knowledge-based industries by Feldman and Audretsch (1998) found that diversity across complementary industries sharing a common science base stimulates innovation and that the degree of competition for new ideas within a city is more conducive to innovation than local monopoly. Audretsch further argues that the greater the competition for new ideas within a city, the more conducive the urban environment is to innovative activity: 'Perhaps the most important conclusion from these ... studies, however, is that more than simply an endowment of knowledge inputs is required to generate economic activity. The underlying economic and institutional structure matters, as do the microeconomic linkages across agents and firms', (2002:172-73, emphasis added).

Conversely, however, a well documented study by Henderson (2003) found strong evidence of MAR externalities for single plant firms that benefited from the scale of their own past industry activity but no evidence that these firms benefited from the diversity of activity in the local economy outside their own industry and limited evidence of Jacobs type externalities from the overall scale of local economic activity. He argues that industrial specialization generates MAR benefits through the realization of scale economies, while also conserving on local rent and congestion costs. Many smaller metropolitan areas tend to be specialized in more standardized manufacturing activities, such as textiles, food processing, autos, steel and wood products. However, he concedes that large cities tend to specialize in knowledge-intensive services, such as finance, real estate, insurance and new industries like electronic components and instruments (Henderson 2003).

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