#2 Stimulating innovation 

Innovation can help cities to solve challenges, such as reducing air pollution and capitalise on the economic benefits of new technology or products. Drawing inward investment is often seen as paramount to stimulating innovation in cities and it is of course beneficial to attract specific firms or industries to build expertise and strengthen networks.

Building new work on old

New ideas can spring from existing skills and products. Urban manufacturing generates tacit skills and knowledge, termed the industrial commons, which can seed and support innovation. The industrial commons held by one city can lead to developments which wouldn’t arise from another city’s knowledge, often morphing across sectors in a way which is difficult to predict. Cities should therefore encourage locally-rooted innovation to develop business ecosystems from within the city. 

Coventry’s automotive industry can trace its history back through its bicycle industry, to origins in the local watchmaking and ribbon-weaving industries in the late 19th century.18 Brussels’ chocolate industry emerged from confectionary developed in a local pharmacist’s shop in the 1870’s.19 Bologna’s hi-tech packaging and automotive cluster emerged from its heritage in processing silk during the middle ages.20 Such developments could not have been predicted, but had existing manufacturing bases not been nurtured (along with skills and tacit knowledge) the potential to innovate would have been unlikely. 

Taking advantage of diversity

In 1890, at a mature period in the UK’s industrial revolution, the economist Alfred Marshall observed in his foundational tome Principles of Economics, that agglomeration, density and diversity of businesses were key ingredients for a vibrant economy.21 Seventy years later, Jane Jacobs revisited these ideas in the twilight of New York’s industrial age.22 She gave Marshall’s observations an urban scale and showed how the evolution of ideas was heavily connected to layers of history and culture while stimulated by particular urban conditions. Jacobs reflected on what built local economies in places like New York and the factors that had led cities like Detroit and Birmingham to economic decline, pointing particularly to the loss of small businesses. They were more inclined to take risks and innovate than the larger ones. She considered manufacturing and other ‘making’ activities a vital foundation for a vibrant economy. Around the same time on the other side of the Atlantic, French sociologist Henri Lefèbvre was developing ideas on space production23 and began to draw links between the materiality of the city and the social relations which are vital in generating ideas and meaning. 

“Nothing disappears completely … In space, what came earlier continues to underpin what follows … Pre-existing space underpins not only durable spatial arrangements, but also representational spaces and their attendant imagery and mythic narratives.”

– Henri Lefèbvre [1991:228] 

Over a century after Marshall and half a century since Jacobs and Lefèbvre, economist Edward Glaeser observed that there is a notable return of larger (service oriented) businesses that had left during the 1960’s and 1970’s. Glaeser notes that these businesses are increasingly conscious of the importance of agglomeration, density and diversity of the local economy.24 Ironically diversity is under threat due to severe congestion, rising land values and real estate driven development (see Chapter 1), destabilising the very substance that makes such areas attractive. Planning could play a role in moderating the business relationships in most large cities. For cities looking for measures to protect diversity, Alfred Marshall pointed to three particular ingredients: sharing, learning mechanisms and matching.25


Manufacturing benefits from sharing technology, infrastructure and facilities. Many forms of manufacturing have traditionally co-located with other similar businesses, located in the same street, block or city. Decades ago, anecdotally one could walk along London’s Old Kent Road with a piece of wood and walk out with a chair. Co-location is particularly useful for businesses within the same sector, performing similar tasks and bearing complementary skills as shown in the analogy of the chair where business can specialise in woodturning, painting or upholstery. Co-location may have emerged out of practicality but through sharing, a sense of community and interdependence is created which can help manufacturers to be more dynamic, innovative and collaborative. Such knowledge is ‘sticky’ and can be bound to specific places.26 Manchester remains innovating in textile technology years after the decline of their cloth industry while Bologna continues as a leader in precision machinery centuries after the decline of their specialised in manufacturing silk. Cities have much to gain through creating conditions (buildings and infrastructure) that foster sharing, whereby businesses with similar activities are physically clustered. 

Learning mechanisms

The economy depends on learning mechanisms for sharing knowledge and experience to result in new ideas or skills. Coffee shops were said to have spurred the ideas by giving strangers the space for exchange, leading to the English enlightenment period27 and consequently the industrial revolution. The 17th century coffee shop has evolved into university agoras, local business forums, technology communities and knowledge hubs. Education and training has largely institutionalised and by virtue of the high cost of buildings and infrastructure, they are often connected to larger urban centres. Cities have the capacity to offer students a wide range of options for education, from hands-on trades paths to more theoretical university courses. Urban centres harbour extensive amounts of living knowledge and experiences upon which new ideas and products can be created. They should ensure that knowledge and training institutions are well embedded in society and are public facing. This can stimulate learning and show how businesses and researchers are relevant to the local community.


Cities allow matching of supply and demand of labour. By having knowledge institutions, training centres and an ample supply of work, they allow businesses to have a choice of workers, but likewise encourage competition for talent. While living costs and wages can be higher in cities, the choice of workers and skills to fit the needs and character of a business can easily justify the extra costs. Furthermore, labour is believed to be more productive in agglomerations. Cities can help brokering the supply and demand of labour, particularly through future looking investment in education and training that is relevant to the evolving needs of business.

The antithesis of diversity is stagnation and homogeneity. Since deregulation and free-market capitalism in the 1980s, trends such as the financialisation of the economy, property led development and a focus on services jobs (see chapter 1) has resulted in a level of homogeneity in cities. This has led to market failures, notably two. Firstly real estate in the city is being produced primarily for profit driven motives, driving up land values to draw in the highest payers while making it inaccessible to young risk-taking businesses and many foundational manufacturers that provide valuable products (such as food and construction). Secondly, the private sector is very good at commercialising proven technology but struggles to stimulate foundational research and development needed to push along the economy. 

The public sector has a significant role to play in correcting markets and stimulating innovation particularly under the framework of a mission oriented vision, as noted above.28 The risks of not intervening and allowing the free-market to evolve naturally are neatly summed up in the claim that ‘cities are eating themselves’ by allowing monocultures to proliferate, from carbon copy retail districts to luxury real estate developments.29 Brussels, for example, has been shown to have a low intensity of research and development, attributed to its lack of industrial activity, which has knock-on effects elsewhere in the economy.30 Cities need to be careful to cultivate, rather than reduce diversity. 

Nurturing complex networks

Cities are complex dynamic systems which are difficult to understand or manage. How can the local economy be positively stimulated without damaging it? This involves working at an awkward scale between macroeconomics (charting larger trends such as employment and inflation) and microeconomics (focused more at the scale of the individual or firm). The meso scale remains vague due to a lack of suitable granular data and the lengths required to study how the local economy works, let alone foresee the effects of one action on the larger system.27 In 1909, the German economic geographer Alfred Webber31, published observations on why businesses select specific locations. Webber’s ideas, which are ever so prescient today, noted that there are cost savings and benefits afforded to cities due to efficiencies in travel times, access to resources and talent. This is referred to as agglomeration economies.32 Within agglomeration, there are three variables: scale, localisation and urbanisation. 

Scale Economies

Sharing tasks between one business and another can be time consuming and inefficient. Business may decide to improve efficiency by growing and absorbing many different activities under the same roof. This is referred to as economies of scale and means that processes can be optimised. Jane Jacobs observes how companies in Detroit, such as Ford, improved production efficiencies by buying up smaller businesses that contributed to the production on the vehicle. The evident advantage was a cheaper vehicle, the downside was that Detroit lost most of their smaller businesses, which distabilised the local economy when vehicle manufacturing declined.

Localisation Economies

Cities are often home to clusters of businesses performing similar but complementary work within a specific sector. Businesses may have suppliers, specialist companies that perform small supporting tasks and consultants that are required to provide expertise. When located on a specific site or area, this is referred to as localisation economies. Cities can identify and stimulate specific sectors through providing financing and other resources, or networking to improve collaboration. The European Commission has encouraged regions towards smart specialisation by focusing on particular sectors that form part of larger Global Value Chains.33 If specific sectors are prioritised they should be carefully selected so they can be supported through suitable infrastructure, knowledge, training and fit into the local economy.

Urbanisation Economies

Cities of a certain size may have a wide range of sectors benefiting through sharing resources and knowledge across sectors without singling out one specifically. For example, a food production sector could be linked with a biotechnology sector as there are likely to be interchangeable research and expertise. This form of economic diversity, if located on a specific site or area, is called ‘urbanisation economies’.34 Cities can be very helpful in creating links between sectors and finding efficient public investment into research and infrastructure. Supporting the development of Knowledge Intensive Business Sectors, known as KIBS, which provides the service of knowledge and research, which is essential for innovating manufacturing as will be discussed further on. Manufacturers often create new product lines in-house but development is likely to be limited to evolutions of existing products rather than revolutionary development requiring extensive specialist knowledge. KIBS businesses can be a strategic way of improving knowledge of the ‘software’, such as materials or production processes, which is needed to drive the ‘hardware’ provided by manufacturers machines and production units.35 KIBS businesses can also export their knowledge and services.

The ideas behind agglomeration economies may be more conceptual than founded on clear parameters, but they offer some guidance on how to plan for the local economy.36 It should be noted that the counterbalance of the benefits of agglomeration are a range of costs including: high cost of land, high wages, congestion, complex regulation, impact on neighbours and so forth. Furthermore, public authorities need to be careful to support relevant sectors (through localisation economies) without neglecting relevant innovations in other areas (through urbanisation economies). 

Bringing together design and production skills

A belief prevalent since the decline of manufacturing in Western Europe was that firms could offshore manufacturing but retain high value aspects of product development like design and research, without damaging the capacity for innovation. The British technology company Dyson, for example, designs and develops products in the UK but manufactures them in Malaysia.37 US academics Gary Pisano and Willy Shih argue that offshoring manufacturing is an unwise tactic. Their research, confirmed in our fieldwork, shows that dividing production from the rest of the value chain risks missing the transfer of important, tacit knowledge and damages prospects of unexpected or spontaneous innovation. They explain that the co-location of manufacturing and development is particularly necessary for activities in which process is embedded in product innovation, such as high-end garment making or advanced materials production.38 In these cases there is material intelligence, as Glenn Adamson puts it, where highly skilled tradespeople develop skills through years of practice.39 

Where the process is new or rapidly evolving, such as in nanotechnology, researchers and makers need to work together to understand how the technology can be used in real-world applications, where the value will be created. Cities are home to both kinds of production. London, for example has a large fashion design sector, and the advanced manufacturing campus in Sheffield is an example of a high-value manufacturing ecosystem benefiting from shared skills, research and development. Designers and developers need fast feedback through prototypes or via research by design to understand how to adapt products. For other forms of manufacturing found in European cities, high-value customisations and adaptations require skilled workers to be located very close to clients.

While many companies continue to contract their production to third countries, or simply import manufactured goods, a new wave of manufacturers are actually returning production back to Europe accounting for 15% in the UK and 1 in 3 companies in Germany.40 Reasons can be attributed to quality standards, lead-times, intellectual property, research and development, skills and knowledge and threats from regime change of trade policy.41 

Addressing different types of innovation

It is easy to consider innovation as the development of new technology and fancy gadgets. However there are many forms of it, most of which go easily overlooked by the general public. The OECD defines two particular strands.42 

Product Innovation

The first, and most visible strand, is product innovation, which includes goods or services. Cities are ideal places for product innovation as the urban environment can help designers to prototype and develop products, while providing a short distance from a local market that can finance or purchase the products. Many new products emerging on the market are minor adaptations of already functional products and simply encourage greater levels of consumption. This may result in the production of products, which can result in money and jobs, but also unnecessary resource extraction and waste. The passing of ‘right to repair’ regulation in Europe can pave the way for new forms of innovation that extend the life of products to encourage decoupling growth from resource consumption.43

Business Innovations

The second strand is referred to as business innovation which more specifically includes innovation in: production, distribution, communication, administration and process development. This strand of innovation can have a much greater impact on production processes and society at large, yet is often hard for consumers to identify. Such innovation may improve efficiencies or reduce costs. Entrepreneurs and public authorities alike are particularly looking at these kinds of innovation to help leverage production closer to home or result in more affordable output. Higher levels of automation and artificial intelligence may not change the range of available products, but may make them more affordable and customisable to the end user. For example, new technology for urban agriculture is allowing food to be grown efficiently within city centres based on careful resource management. In other cases, neither the products or production processes have changed, but innovative new business models have shifted revenue streams to be generated through, for example, tourism rather than just the sale of products. 

Locally emergent trends

While manufacturing in the 19th and 20th centuries stressed the importance of high-volume production, the 21st century is becoming increasingly concerned by ‘smart’ manufacturing: manufacturing that solves pressing social and environmental problems, often within the city itself.44 This could range from new mobility solutions to treating organic waste, to technology to monitor water consumption. A combination of design skills, local technical knowledge and the market to purchase the solutions are required to spur such innovation, and cities should recognise the value of manufacturing’s contribution to achieving this. Cities that are serious about addressing urban problems are likely to blur the traditional roles distinguishing public authorities, business, civil society and the knowledge sectors while defining missions and creating conditions for risk-taking.45 They could focus on five particular growth areas for manufacturing in general, which can be applied to urban areas.46

Global innovation for local markets

This is the production of medium to high technology products that are linked to global trade and knowledge networks but are produced close to customers. It could include chemicals, pharmaceuticals, machinery and appliances.

Regional processing industries and foundational manufacturing

As referred to earlier in the book, these are activities that are hard to disengage from their context. Food, construction materials, repair, waste management or business to business services like printing. This segment of the economy often employs a large amount of people and is relatively resilient when faced with international competition. It is likely to benefit from business innovations. 

Energy- and resource-intensive commodities

From an urban manufacturing perspective, this could be interpreted as manufacturing solutions for the circular economy, whereby resources are captured and reused as possible at the urban scale.

Global technology sectors

This relates to high value density products such as electronics. Cities may have a very specific ‘smart specialisation’ cluster that focuses on a particular component of a larger componentry system.

Labour-intensive tradables

These include the production of consumer technology, furniture, jewellery and apparel (such as clothing and wearables). Typically, high value, highly customisable activities have remained close to cities. This includes furniture making, jewellery and high-end fashion. Simple and repetitive processes (such as most consumer clothing) often occur in low cost countries where working conditions and environmental standards are hard to guarantee. Re-shoring such manufacturing, or producing locally, will require process innovations that can speed up production time or reduce labour costs.