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Review of Scotland's Cities - The Analysis

3.5 CITIES AND INNOVATION

The previous section emphasised the importance of raising skills in our cities and in using the cities as magnets to attract and retain more skilled workers for Scotland. Labour shortages may raise wages and incomes but they will also erode employment in export sectors unless productivity rises. A modern economy has to innovate to grow real incomes. In essence, the comparative advantage against emerging countries with labour intensive, low skill tradable goods is that the economic base of advanced economy cities will comprise high skill manufacturing and services, along with less skilled non-tradable services. For the tradable sectors, with faster technological change, mobile capital and deregulation, cities wishing to thrive have to encourage both up-skilling and innovation. Places have to be flexible and quick to learn from others and to be creative if they are to be sustained successes. What matters is not what you have today, even less what you had yesterday, but what capacities you have to change by learning and creating. Nothing stands still in the knowledge economy: it is both highly competitive and innovative. Already some of the emerging economies, such as India, are developing language and numeracy skills to compete for back office functions and call centres which our lower wage cities attracted in the 1990's. A great deal of innovative performance is not about creating new sectors and radically new processes of production, though new waves are always welcome, but in improving what is already done, even done well.

Research and development, and the wider indicators of a knowledge oriented economy are associated with better economic performance at national economy levels. But we have to ask two questions of the city level. First, does the same relationship hold at the city level? And, second, is there anything in the existence and nature of cities that actually makes regions and nations more innovative? The first question can be straight-forwardly answered. At the level of individual cities Lever notes that European cities with a stronger knowledge economy are the ones which have a better competitive performance. ²⁰ The second requires a lengthier consideration.

3.5.1 Technological Change

A decade or so ago, as new innovations in electronics increased the capacity of computers and the cost of telecommunications began to fall sharply, a new negative view about cities emerged. As mentioned earlier, it was argued that the emergence of new technologies and low communication costs would reduce the need for face to face communication and that virtual communication would come to replace physical movement and reduce the significance of accessibility and propinquity. The emergence of this 'weightless world' ²¹ would leave firms and workers freer in their choice of locations, not least because more and more of the knowledge economy involves the production of knowledge services rather than manufacturing, and this would begin to pull apart older cities. There are signs, however, that this futuristic vision was unrealistic. Cities have improved their relative performance as new ICT has emerged, it is clear that the vast bulk of email and telephone contacts are very local and reinforce face to face contacts rather than replacing them, and there has been no apparent rush of tele-workers away from the city. The ICT in Cities panel below describes why recent new technologies have been city friendly, partly because infrastructure for cabling is more cost effective in high density localities.

Moreover, there has been also a re-recognition of an older role of cities in the knowledge production and utilisation processes of economic development. It is important to distinguish two different types of knowledge, codified and tacit knowledge. Codified knowledge is 'written down' or 'stated knowledge' usually available through ICT or books. Codified knowledge is not then 'secret', it may have to be paid for but it is widely available. Having this knowledge may raise skills and improve processes but because it is widely available it does not contribute to any lasting competitive advantage; you need it to stay in the game rather than get ahead. It is about good practice rather than the innovative edge. Tacit knowledge is quite different. It is not written down and codified, it is understood, exchanged informally, often face to face, and it may be difficult to govern or exchange by contract and needs trust, but having tacit knowledge gives competitive advantage.

Innovation starts from a creative idea. But the production of new knowledge is characterised by extensive feedbacks, dead ends and abandoned attempts; it is a risky process with much spending producing no useable results. Some major ideas are fashioned in the laboratory, in isolation, but many more emerge in a more recursive process that often requires discussion and contact with trusted colleagues or may simply be driven by the random interaction of those with a similar point of view. Even the science can emerge more easily in networks of contacts. But after the creative idea has begun to take shape it may require contact with financial advisers, firms, potential customers etc. These processes, because they are usually economic interactions with highly uncertain returns for which it is difficult to write fully contingent contracts, require trust and this is fostered by networks of contacts. In a sense business trades in trust as well as currencies and it is the business and informal networks of the city that provide the 'market-place' for such interactions. Because they have rich and diverse networks of creative people and those who have the strategic capacities to go from invention to innovation, cities become centres of new ideas. Of course cities have to compete against each other to capitalise on the existence of these often unrecognised business assets. And it has become clear that other types of settlement structure can replicate creative network features. For instance in the USA both Silicon Valley and Route 121 (Massachusetts) both represent major non-city based creative cores.

3.5.2 Are Scottish Cities Smart?

Major cities have a capacity to be major innovative cores but this outcome is by no means assured. None of our cities has a cross-sectoral initiative to raise creativity in research, design, culture, policy or planning and there is no prescription or panacea to raise city creativity. This is an important issue for Scotland - if we are to be a world class innovation source, as 'A Smart, Successful Scotland' aims for, then we have to be sure that we have in place or can fashion the tissue of complex social-economic relationships which make places innovative and raise productivity. We can learn from history. For close to a century, from 1740 to 1840, Scotland was, arguably, the leading global centre for new ideas and a key feature of that 'enlightenment' was the considerable network of sociability and interactions (between business, the universities, the law, politics and the church) which underpinned it. Do our cities now constitute an adequate innovative 'milieu' and does it matter?

There has been a number of recent UK and European studies which have addressed the question as to why the bulk of innovation takes place in city-regions, but not all city-regions. Both Hilpert ²³ and Simmie ²⁴ have identified around 10 major European 'islands of innovation'. It is important to note that the majority of these major innovative zones are not whole regions but consist usually of at least two closely-linked cities, for instance Milan/Turin; Rotterdam/Amsterdam and Lyon/Grenoble and it is only the manifestly global cities, such as London and Paris, that can be major innovation systems without such close collaboration. Glasgow/Edinburgh does not feature in these lists.

Hilpert's study of a decade ago concluded that innovation centres were characterised by having:

• Significant presence of at least three major techno-scientific fields and significant scale
• A concentration of at least 20% of national R&D expenditure with strong research institutions and enterprise, directly connected to the key nodes in the European linkage systems

Simmie has recently revisited these issues and drawn similar but more detailed conclusions. He argues that to have an inventive local capacity, to have a supply of potential innovations, it is essential to have high knowledge spillovers between businesses and between business and other institutions. The system has to operate on a sufficient scale to allow innovators to pick and mix different types of knowledge needed and this includes business services specialising in knowledge transfer, such as management consultants and lawyers. It is vital to have the right innovative sectors in an institutionally rich environment. These interactions are primarily about technical issues, supply linkages between firms and finance. Research also suggests a capital city effect, in that close political linkages or access can facilitate the resolution of legislative or public funding issues that may foster or alternatively hamper innovation.

However, he also adds that an effective capacity to potentially supply new ideas is not enough. It is also essential to have the right environment of local, national and international contacts, which allow for spillovers of knowledge about international market conditions, demand and opportunities. It is critical not to overlook the importance of uncertainties about clients, customers and international distributors, particularly in relation to potential demand and price. A successful innovation city-region provides not just a recurrent supply of ideas and prospects but is also connected to information about opportunities. Both are required to succeed. This analysis provides an underpinning for Buursink's earlier observation that all of Europe's major innovation clusters or places have an airport with significant international connectivity, and frequent and fast connections to other European capitals. Simmie's provides the rationale why. High accessibility facilitates access to trade events, fairs etc., but also means easier informal face to face contact to reduce demand and information uncertainties that cannot be dealt with on the phone. Innovative cities need an international presence, not just overseas offices of development agencies but sustained numbers of Scottish business leaders and entrepreneurs having regular interaction with overseas collaborators.

3.5.3 Improving Innovation

The importance of innovation is now recognised at the core of Scottish Enterprise strategy. Approaches well beyond the previous, and successful, initiatives to promote city science parks are emerging, from New Technology Institutes to emphasising the high level research components in inward investment. However we are still a long way from city-region foresight and creativity strategies. It is important to establish how Scottish cities, though they do not currently appear as a major innovation concentration, perform on the different success criteria identified by Simmie and others and to identify possibilities and bottlenecks.

At present there are two major drawbacks. None of our cities could be described as well connected to major European cities, nor even other UK cities. The UK has a markedly low rate of corporate R&D, and Scotland lies below the UK rate with no Scottish city/city-region identified as a major European innovation region.

However the major components of a potentially major city innovation system are in place. Around a third of Scottish R&D is concentrated into the Edinburgh city-region, and if Glasgow and Edinburgh are considered as a possible pairing, this proportion rises to well over half; so there is at least the basis for a concentration (and that concentration could easily expand to encompass Stirling and Dundee). Additionally:

• we do have 'capital city powers' in Edinburgh
• we do have significant clusters in law, accountancy, advertising, business services and finance (including venture capital) which could facilitate knowledge transfer; ICT requires improvement
• we score strongly on indicators of the quality and productivity of our University science base; Scotland is in the global top three of science papers published per head of population; and Glasgow and Edinburgh, taken together, are the third largest regional concentration of University based research in the UK and in the European top 20.

We are, in effect, a globally significant centre of invention but as producers, and sometimes sellers of codified knowledge. Scotland's Universities, now key organisations within our cities, largely invent for the world because the rest of the process which connects invention to innovation in our city-regions is either missing or disconnected. But the presence of that huge, effective science base makes it worthwhile to aim for something better. These actions have to be largely city-region focused because they are issues about local and international networks and contacts.

It is obvious that a rise in corporate R&D within the UK generally would help and that improving Scottish-European connectivity is an urgent priority (and not just in relation to innovation performance). A number of other actions could facilitate change and SHEFC and Scottish Enterprise have produced a joint report setting out important proposals to strengthen the links between Universities and the Enterprise sector. This would, they argue, involve:

• Encouraging innovation and best practice in all firms, inter-firm collaboration and quality circles
• Focusing business start-up policy on innovative and knowledge sectors
• Increasing research and spin-outs from HE
• Encouraging the use of ICT in local firms

Aiming inward investment attractions at the innovative and knowledge base sectors, Scottish Enterprise have also indicated that they intend to fund a number of applied science innovation centres to create a new science/enterprise interface in Scotland. The Executive has supported this idea in the Consultation Paper on Higher Education. Some consideration should be given to the location of these centres and how they could, collectively, add to our overall city-region innovation system rather than merely add to inventive capacity. Further, related actions might include:

• Making the business service/knowledge transfer sectors a key cluster
• Assessing how the global connections strategy of Scottish Enterprise facilitates innovation in Scotland, as opposed to inward investment
• Considering whether enough has been done to foster effective networks between business, science and government in Scotland at operational and city levels; certainly our business schools do not seem to play the networking roles that major US and European business schools play within their regional and city economies as a terrain to meet
• Developing a Vision exercise for each of our city-regions, and for a Central Scotland Foresight with a focus on innovation potential; this process should be designed to foster dialogue between business, government and the knowledge sector
• Ensuring that SHEFC has some sense of 'city' or 'city-region' vision and potential in shaping its support programmes and also ensuring that the knowledge sector is adequately represented on city partnership and enterprise boards; knowledge strategies for our city-regions seem absent or poor by best international standards

For the potential of our city-regions to be realised the science to invention to innovation process has to be better engineered. It is also important that some of the more traditional locational factors for economic development are not ignored. Small science starts often require very particular, customised kinds of property. And it helps if property has some campus interaction features and, usually, appropriate high quality net connections. The necessity for high quality, skilled science and business staff is also apparent. There is growing evidence that highly mobile skilled science staff put a great deal of emphasis on quality of life for themselves and their families in migration choices. We return to this set of issues in 'Cities as places to live', but this is not a major inhibitor for our city-regions.

For Scotland's cities to constitute a major European innovation region, to be clusters capable of creativity and flexibility, we need to make significant changes to the local innovation system. The successes from being smart will be limited if we continue to be clever at invention, but less effective in innovation. It is unlikely that all of our cities could make this transition quickly but there is a major case for
re-examining the prospect of an innovation region for Central Scotland, a triangle between Glasgow, Stirling and Edinburgh. In all our cities, there will be benefits from reshaping the nature of the links between the science, finance and business communities. But facilitating the requisite international connectivity may require a more geographically prioritised approach. We need to be innovative about our innovation system.

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