Are cities the best place to be an entrepreneur?

In particular, knowledge exchange suggests that cities are not only a focus of economic activity but also for innovation. Anecdotal evidence supports this idea; for instance, Tokyo, the largest city in our sample, in 2008 had 27 per cent of Japan’s population, but 32.3 per cent of GDP, and 34.3 per cent of the number of patents.

In our research we wanted to test the theory in the 21st century, and identify what kinds of factors were most important. We used data from the OECD Metropolitan Database, which contains data for metro areas with a population of 500,000 or more across OECD countries. There are a total of 275 cities from 28 OECD countries. Patent data is available for 218 metro areas from 16 countries from 2000 to 2008, and represents a count of the number of patent applications by the city of the inventor. The dataset also includes other information, such as population, geographical and administrative information, labour markets, and GDP. Most major OECD countries are represented, with the notable exceptions being Canada, Korea, Spain and the United Kingdom, for which patent data are not available.

Although in general the cities with the most patents also have the most population and the highest GDP, there are some anomalies. For instance, San Francisco is associated with Silicon Valley, and has a larger number of patents than would be predicted by its population or GDP. Similarly, Boston is associated with biotechnology and the IT cluster of Route 128, while San Diego is a centre for biotechnology and communications technology. 

Comparing between 2008 and 2000 shows that populations are persistent over time, whereas GDP and patents are less so. Cities in the US dominate the ranking of cities with the most patents. Looking at the relationship between patenting, population and GDP, population has no significant effect on patents, while GDP has a positive and significant effect. This suggests that economic activity is more strongly associated with innovative activity than the mere presence of a larger population.

Digging deeper into the determinants of patents, we also looked at the number of local governments per 100,000 inhabitants of the metropolitan area (capturing the fragmentation of local government), the nature of the metro area in terms of the number of individual centres there are within the wider city or ‘polycentricity’, the share of the total metropolitan population living in the core areas of the city, the population density, and an indicator for whether there is a top-100 university in the city. 

The degree of local government fragmentation and population density appear to have a significant relationship with patenting activity. The first result may suggest that competition among a variety of local government bodies may spur them to implement innovation-friendly policies to attract firms. The second result suggests knowledge spillovers occur through greater population densities. The other three potential factors, the share of metropolitan population living in the core and the presence of a top-100 university, do not have statistically significant effects on patenting, although there is a suggestion that polycentricity has a negative effect on levels of patenting.

Competition among firms drives innovation, and as urbanisation proceeds and economic activity becomes increasingly concentrated in cities, so too does innovative activity. But what we’ve found, most importantly, is that innovation doesn’t just happen – even in the relatively short time period in our sample, cities can become much more (or less) innovative. This gives policymakers hope that government policy can influence how innovative a city is, and support for the principle of funding initiatives that can make the most the potential, the fundamental benefits that come from a city environment.

Written by Dr Kwok Tong Soo, Department of Economics, Lancaster University Management School.

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