Research Proposal on "Urban Economics"

Research Proposal 11 pages (3312 words) Sources: 10

[EXCERPT] . . . .

The localization approach does not account for shifts in industry conditions than can weaken even a very strong cluster. Where there is an emphasis on fostering MAR externalities, localization economies can work in the short run, but few seem sustainable. If we compare Detroit to Seattle, the reason that Seattle has emerged as a successful economy today is that it has diversified its economy. Detroit remained reliant on the automobile industry and has gone into a long-run decline.

Monseny, Lopez and Marsal (2012) note that for localization economies, it is the labor market that is critical to success. With a stronger labor market, these economies can be successful, and there is less room for knowledge spillover. They observed that knowledge spillover and other related externalities were higher in urbanization economies. The implications of this for urban development would seem to emphasis the value of Jacobs externalities. Where the government is seeking to foster localization economies, it needs to ensure that there is sufficient labor mobility. Labor mobility is generally good in the United States, but localization economies are less likely to work effectively where there are more barriers to labor mobility such as small country size, depressed real estate markets or other factors that might impede labor mobility. History shows that many successes of the past with the localization strategy have been under conditions of labor mobility. The U.S.S.R. forced labor mobility, rural poverty in China encourages it, and similar poverty conditions and massive immigration helped America's industrial cities grow with a localization model. As people become less likely to move, labor mobility is reduced, making it more difficult to successfully grow a localized model. There are exceptions that can be found, but as a rule the precursors to success appear to be more prevalent in urbanization economies, especially given how changes in communication have increased knowledge spillover in modern cities.

Building Urban Economies

Urbanization economies, instead of relying on the benefits of a set of infrastructure elements for a select few in an industry, rely on building infrastructure common use, accessible for the benefit of many (Rodrigue, 2013). Ge, Yao & Pu (2005) found that urbanization economies rely on economies of scale in part for their success. This makes sense. If diversity is a key element to knowledge spillover, then larger city sizes foster greater diversity. A bigger city will inherently have more firms, of different sizes, and they will be from a larger number of industries than would be found in a smaller city. This means that there is a greater amount of total ideas, and it would be expected that there would be a correlation between the total number of ideas and Jacobs externalities.

It is worth keeping in mind, however, that size is not the only critical factor in the development of Jacobs externalities. Links between the different industries are important as well. The strength of these links and the congruence level of the different industries will enhance the likelihood that where knowledge spillover occurs, it will be useful knowledge that can be applied across industries. This is the type of knowledge spillover that leads to the type of "quantum leap" innovations that can not only give a company or region a sustainable competitive advantage but can rearrange an industry structure. Thus, the more likelihood that an industry has of experiencing these types of industries, the better its economic development will be. Over time, the effect of having a higher level of knowledge spillover is going to be that a city grows to have multiple industries, each one strong and diverse. A city like New York has a strong banking economy, but it is also a hub for media, fashion, the arts, music and cuisine. These are all complementary businesses that can draw on each other for ideas, and as such the economy grows to have strength in multiple areas to the benefit of all industries within that economy.

To foster such development is a challenge. Fostering a localization economy is relatively easy, because it requires creating a common set of infrastructure that can be used by a single industry. This has been attempted from scratch in a few locations. Bahrain liberalized its banking regulations in order to foster growth of a strong banking economy and seek leadership of Islamic banking. In Kuala Lumpur, a high-tech cluster was developed in an area called Cyberjaya, which featured technology infrastructure superior to that found in most of the rest of the city. Singapore fostered a strong shipping industry with extensive infrastructure investments along its shores.

To foster an urbanization economy requires an entirely different approach, focusing on the development of the precursors of diverse development. At the policy level, open immigration and freedom of labor movement is important to encourage people to come to the city to start business. Housing and transportation infrastructure, along with public services must be at a very high level in order to encourage leaders to set up in a given geography.

If the government is seeking to attract businesses, it must seek out multiple businesses, rather than focusing its efforts on a single industry. For example, where many jurisdictions offer credits to film production companies to lure productions to their area, only a few like Vancouver and Toronto have built that into a broader program of economic development that encourages several different industries simultaneously. With Vancouver, film ties into other creative industries (food and fashion in particular) and the tourism and convention business that it works hard to foster. Toronto sees film as a complement to its media business. Diversification policies work best when multiple industries are targeted simultaneously and these industries have a high level on congruence.

Recommendation

Islamic banking was mentioned earlier, and that industry is good example of the best approach to fostering cities. Bahrain and Kuala Lumpur have both sought to stake a claim as the leading center of this nascent industry. As the industry grew, Dubai emerged as a power to threaten both of those other cities. Dubai, with its stronger government, superior infrastructure and strong transportation and trade links throughout the world has a much more diverse economy and this led to it becoming a major threat to take over that industry. Bahrain was seeking a localization economy built around that one industry, but firms saw the benefits of a larger location. Kuala Lumpur has more than one major industry, but struggled to win this business because its infrastructure in substantially inferior to that of Dubai. Dubai made the most compelling case as far as diversity goes. There were simply more opportunities for knowledge transfer there.

One thing was missing, however, and that was strong links to the conventional banking world. Today, we see that London is emerging as the leader in Islamic banking, even though it is not in an Islamic country. What London does have, however, is a much more diverse economy. Already a financial hub, it has excellent transportation links through the Islamic world, and with its strong infrastructure including good governance, London trumps Dubai. There are far more opportunities for knowledge spillover because London is a global hub, a major banking center, and because it is home to many other major industries. Knowledge spillover is especially important in banking because banks need to understand the needs of their customers. Thus, the industry appears to be settling in a city that has great economies of scale, and exceptional opportunity for knowledge transfer. London won this business by being a world class urbanization economy.

For a government that wants to foster and develop cities, the antecedents of long-run success are required. First, this means that the city needs to pursue an urbanization economy, rather than a localization economy, because there risks associated with a lack of diversification. Moreover, there are more benefits associated with Jacobs externalities as the pace and intensity of knowledge spillover are accelerated in a highly competitive, diverse environment.

The pursuit of an urbanization economy is a long-run project. It requires considerable infrastructure development, but that development needs to be focused more on the city's infrastructure rather than on any one industry. Where a city does try to court an industry, it needs to court multiple industries, especially ones where there are congruencies -- so film production and steel production should not be two major targets. It is important to understand as well that after a certain point, such cities become a positive feedback loop.. The attractions of this type of city lie with large, diverse populations and diverse economies. Once a population begins to grow and economies begin to diversify, these cities begin to be attractive just for their knowledge spillover opportunities, regardless of government intervention. The largest, most powerful urban economies in the world today were, for the most part, among the largest and most powerful of a century ago (New York, Tokyo, Hong Kong, London), highlighting the power of the positive feedback loop.

Cities can begin to create such a feedback loop… READ MORE

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