What kinds of urban environments, where, should we be planning for businesses?

Changing location and urban environment needs

Understanding restructuring is key to understanding what kinds of economic activities we should be planning for. But in addition to the effects of restructuring, the region's economic landscape is also shaped by firms' locational preferences and the specific mix of characteristics they seek from their urban environment to support day-to-day production and long-term competitiveness. These factors are also changing as firms face new and competitive challenges from emerging technologies or changing trade conditions.

The key to anticipating the evolving locational preferences of firms, and their demands of their urban environments, is an understanding of the role the urban environment plays in firms' operations and competitiveness. In short, urban environments confer special and specific advantages to businesses.

Cities support production by providing access to a labour pool that is both wide and deep, including workers with specialized skills. This is one of the key competitive benefits of large cities and urban regions. As the economy continues its transition toward knowledge-intensive activities, this factor will grow in importance. Large urban regions like the GGH support specialized businesses, providing intermediate business-to-business inputs and services. The high levels of specialization afforded by a large labour market like that of the GGH represent an important source of competitiveness for regional firms, and of productivity and wealth creation for the province.

Of course, urban regions like the GGH also provide excellent access to final business and consumer markets for goods and services of all kinds.

Urban environments also support innovation. In addition to providing access to the highly skilled labour that drives innovation, urban environments offer access to leading technologies, to formal and informal knowledge networks, and to specialized resources, such as laboratories, machinery and equipment, and research capabilities at universities and colleges.

These competitive benefits afforded by cities can be grouped under the heading "agglomeration economies." Agglomeration economies have been succinctly described by Gilles Duranton and Diego Puga[1] and others as the benefits to firms derived from sharing, matching, and learning. In complex industries and uncertain times, agglomeration economies support interactions, coordination, and certainty.

Sharing: e.g., of specialized local suppliers in the production chain.

Matching: e.g., of specialized workers to jobs.
Learning: localized knowledge "spillovers" and opportunities for knowledge transfer.

Agglomeration economies are not new. They have long been acknowledged as a steady driver of urbanization as early as the 19th century by Alfred Marshall.[2] What is new is the specific form that they take in the constantly and rapidly evolving knowledge-based economy in which we find ourselves today.

As the transition to a knowledge-based economy unfolds and many routine types of work are under threat from automation, it is clear that innovation and knowledge production are increasingly driving economic growth. Urban locations and environments have important roles to play in supporting innovation.

Specific characteristics of urban environments have been associated with supporting innovation. It has become commonplace to note that denser, more mixed-use urban environments with flexible buildings that can be used in many different ways support innovation processes - an idea proposed by Jane Jacobs in the 1960s.[3] While this fundamental insight remains true, more recent research sheds additional light on the relationship between innovation and the characteristics of urban environments.

Gregory Spencer compared the business, locational, and urban environment characteristics of arts-related businesses with those of science-based businesses in Vancouver, Toronto, and Montreal. Arts-related businesses were more likely to be located on the edge of the downtown, in higher-density, mixed-use environments. Science-based firms were more likely to be found in suburban, low- or medium-density, single-land-use, auto-dependent environments.

What most explained these different locational and urban preferences was the degree to which businesses were inwardly oriented, meaning that relationships within the firm were most important, or externally oriented, meaning that relationships with other firms were most important. This characteristic is tied to the firm's business structure and the nature of the industry itself.

Science-based firms tended to be larger, corporate or multinational, focused on the development of proprietary products, all of which meant that they were more self-contained and inwardly focused. Their location in suburban, single-use employment zones reflects this orientation. Arts-related firms tended to be small, and relied more on forming relationships with other firms and entities. In these industries it is common to form and reform production networks on a project-by-project basis, for example, in the film industry. Denser, mixed-use environments offer ample opportunities for formal and informal meetings and knowledge exchange outside the firm.

This distinction between urban and suburban settings is echoed by research on the geography of innovation, as represented by patents. Suburban areas were found to be associated with innovation (a high number of patents).

However, cities, especially denser urban areas, produce a higher number of "unconventional innovations" - patents resulting from the cross-fertilization of ideas from different fields.[4]

So the story about how cities and urban environments promote innovation is perhaps more nuanced than our common narrative. Firms in different industries have different innovation processes which make different demands of their urban - or suburban - environments.

Understanding firms' needs with respect to competitive pressures, production, and innovation processes and the roles that urban environments play in serving these needs will help municipalities better plan for the right kinds of land uses in the right places.

[1] Gilles Duranton and Diego Puga, "Micro-foundations of urban agglomeration economies," in J. V. Henderson and J. F. Thisse (eds.), Handbook of Regional and Urban Economics, Elsevier, 2004, edition 1, volume 4, chapter 48, pages 2063-2117.

[2] As noted in OECD, The Metropolitan Century, 2015, p. 47

[3] Jane Jacobs, The Economy of Cities, New York: Vintage, 1969.

[4] Enrico Berkes and Rubin Gaetani, "The Geography of Unconventional Innovation," conference paper published online, 2015.