History Matters: Path dependence and innovation in British city ...

Figure 15: New firm formation in selected cities 1980-2005
18
16
14
12
Annual VAT
registrations
as percentage
of start of
year stock
10
8
6
4
2
0
1980 1991
2005
Years
Reading Leeds Oxford Aldershot Cambridge
Northampton Warrington Great Britain
Newport
Swansea Wakefield Norwich Middlesbrough
city-regional economy. Much of this capacity
is based on the creativity and R&D of existing
medium and large firms. Nevertheless, a
significant proportion of new ideas are
commercialised by new small firms. Figure 15
examines the rates of new firm formation in our
sample cities. While average new firm formation
fell across Britain during the 1990s, it is
noteworthy that some of our more innovative
city economies such as Aldershot, Cambridge
and Oxford saw even lower numbers of new
firms. This may indicate some loss of dynamism
in these economies.
Conversely it is also interesting to note the
slightly above average rates of new firm
formation in some of our less innovative
cities such as Wakefield, Newport and
Middlesbrough. Although the rate is now
declining, this may indicate that the “gales
of creative destruction”, to use Schumpeter’s
famous phrase (Schumpeter 1939),
experienced by their traditional industries may
have given local entrepreneurs the incentive
to start new firms – partly because of a lack of
alternative employment options.
Heterogeneity and diversity
There has been a long-running debate about
whether economic growth and the creation
of new pathways are driven by heterogeneity
and diversity or by specialisation. The question
is whether urban economic specialisation
or diversification is more likely to produce
the external economies associated with the
localised spillover of technology and the
promotion of local innovation. Marshall’s
(Marshall 1890) original theory of localisation
economies, developed subsequently by
Arrow (Arrow 1962) and Romer (Romer
1990) (known as MAR), focused on the
benefits of local industrial specialisation, and
this has been carried into much of the ‘new
economic geography’ theory, and to Porter’s
cluster theory. This contrasts with the work
of Jane Jacobs (Jacobs 1969) who argued
that the more diverse a city’s economy, the
more general the external economies of
agglomeration, the more the scope for varied
interactions between firms and the more likely
spontaneous innovation will occur. She also
held, conversely, that the more economically
specialised a city is, the more prone it is
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