Innovating, idea generating firms, drive urban growth.

Glaeser et al in their paper Did the Death of Distance Hurt Detroit and Help New York? advance the hypothesis that due to massive improvements in transportation and communication technology, which has, over a period of time reduced costs associated with transportation and transaction, the comparative advantage associated with distance has fallen – that distance as a primary source of economic advantage since the 1980’s has diminished. On the other hand, the authors argue that the propensity of the generation of ideas, and services, which help in innovating “more varieties of advanced goods”, has become an important source of the growth of cities. That New York, due to its vibrant financial service has not only been able to survive but also grow, and Detroit, which has been a traditional manufacturing centre, has, since 1980, declined, is an example of this theory.

The logic of the hypothesis lies in preferences: the authors assume that manufacturing firms need vast spaces of land more, unlike the innovative, or the idea generation sector, where the amount of real estate needed is relatively less. Additionally, the authors intuit that the gains that efficiency gains for innovative sector from the “innovative” sector is greater than that faced by traditional manufacturing firms. Therefore, since the 1980’s, due to improved communication and transportation technology, and due to increases in real estate prices in cities in the U.S, manufacturing firms left the city, either being replaced by “innovative firms” like New York, or being replaced by little else, like Detroit, causing a rather inert economy. Therefore, the advantage of agglomeration economies; of economic proximity, is more prominent in innovative firms.

Though so far the discussion has been restricted to New York and Detroit, but the authors empirically show that at a statistically significant level, taking 170 cities into consideration, that “successful cities are specialised in idea – producing industries”. It is shown that there is an “18 percent correlation between increases in patenting and increases in income between 1990 and 2000 is also significant, with a regression coefficient of .066 and a standard error of .015.” This means that if patenting increases by 1%, income has increased by 6.6% between 1990 and 2000 in the U.S.

What lessons can one draw from this? For the city of Bangalore, therefore, the policy idea we must draw from this experience of urban economic growth of North American cities is quite straightforward. To reap the benefits of agglomeration economics it is important to reduce the costs associated with transportation and communication, which means less road traffic, no call drops, efficient supply of basic public services like electricity and public transport, and more generally, better infrastructure to reduce transaction costs.

(This post was first published in Takshashila Institution’s blog)

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