Businesses drive local prosperity — and they don’t always have to be large
I have little doubt that some of the academic literature, which emphasises the importance of “anchor institutiones”, is correct over long periods of time. Certainly, there is strong evidence (from memory) from the US that the presence (and funding) of universities make a big difference to local economies. But the more recent data on the UK seems to suggest that it is businesses — “any businesses” — that drive dynamism, and that presence of academic institutions, or indeed very large businesses, is somewhat less important.
There are enormous caveats that need to go with that statement. We cannot observe the counterfactual — what would have happened to university towns without these institutions? What would have happened to non-university towns, had they had one? There are dozens of other factors that will have had an impact on economic outcomes, all correlated with each other in tricky-to-untangle ways. But, I’m going to claim that it is still interesting the look at the data!
The chart above uses the same classification I’ve used before (and that I also used in this Bennett Institute anthology on levelling up), bucketing UK local authorities into four groups: those that are prosperous and have grown fast (“Charging ahead”), those that are prosperous but haven’t grown fast (“Prosperous but stagnant”), those that are not very prosperous but have been growing fast (“Catching up”) and those that are not prosperous and have not been growing fast (“Lagging behind”). Because London local authorities are such outliers, I’ve filtered them out of the data; and because easy-to-access data on universities is only available for England and Wales, the chart also leaves out Scotland and Northern Ireland.
The second column suggests a clear correlation between “prosperity” (defined in this way) and the number of businesses per head in the local population (also dubbed “business density”). Having previously looked at whether sector mix — and especially the public vs. private sector shares — might explain some of the regional income inequalities, this is consistent with higher private sector employment being associated with higher prosperity. [That is no surprise: almost by definition, you would expect a less prosperous place to have a relatively speaking larger public sector, the latter being either not correlated with prosperity or negatively correlated with it.]
Having large companies, for example those with turnover over £50 million per year, is also associated with higher levels of prosperity (third column). But digging deeper into the data, it doesn’t seem that there necessarily needs to be a “disproportionate” number of them in an area to boost incomes; just that there is a high business density in general with and a suitably proportionate share of very large businesses, too (fourth column). Another way of putting this is that the share of very large to all other businesses is fairly similar across all the area categories shown. [Yes, I know, I’m over-simplifying…]
The final two columns look at whether, on the face of it, places with universities or other higher education establishments tend to have higher incomes. The answer is a resounding “no”. At least, based on the Office for Students numbers, there are just as many universities or higher education institutions in the “Lagging behind” places as there are in the top two categories. [One could probably tell a fanciful story about how, for the “Catching up” places, the lack of a university meant that the vacuum was filled by businesses. I don’t believe that for one second, but this is to illustrate how easy it is to tell stories with data. A powerful, and dangerous, skill.]
The last column is just to check that it’s not the type of higher education provision that matters, rather than the pure presence of the institutions. At least on this measure, there is little difference in the level of degree awarding powers held by institutions in the “Lagging behind” places as compared to anywhere else. This doesn’t really surprise me, given that a lot of the “Lagging behind” places are some of the larger cities in the UK; and that cities tend to have universities with programmes going all the way up to doctorates.
So what policy conclusions might one draw from this? Of course, we should be very cautious about drawing any conclusions based on such simple analysis. However, intuitively, it suggests that the good old “horizontal factors” that make it easy to do business in any particular locality are at least one important ingredient in local prosperity. But, if one wanted to be more controversial, one might also ask this: what could all those higher education institutions be doing in the more “Left behind” places to further boost prosperity? For example, are there enterprise-enhancing courses and initiatives that could contribute that might be less about “high science” and more about practical business skills and innovation?
