Why is there still economic diversity in cities?

Remi Dormois, March 2013

The maintenance of economic specificities among European cities attracts attention. Why have some of them retained an industrial specialization in a period of tertiarization of the economy? Why do some metropolises have an economic base in which social and public revenues play a key role, whereas metropolises should, according to the literature on the new economy, concentrate high value-added jobs and therefore productive revenues, to use the vocabulary of the theory of bases? Why is it that, subject to the same economic changes, whether positive or negative, some metropolises seem to be always in a growth perspective, while others seem to be always in a crisis management or conversion situation?

Effects of inertia and learning in local economic organization

The long-term maintenance of economic, sectoral or functional specificities within European cities can be explained primarily by the sedimentation of know-how, professional skills and routines within the local economic system.

The maintenance of economic specificities is based first of all on the transmission of technical know-how and professional skills, either directly through apprenticeships between employees or via local training centers. The existence of a local vocational training system plays a central role in the capitalization of operational techniques, often based on experimentation, their formalization and their transfer to new generations. In several French cities, the national vocational schools and the national schools of arts and crafts have made it possible since the end of the 20th century to offer practical and theoretical teaching of industrial techniques and have thus played a key role in the development of skills that benefit the companies in their region of location¹. The reduced geographical mobility of workers and technicians has also played a role in maintaining this territorialization of know-how.

The maintenance of economic specificities over time also depends on the capacity of the local economic system to adapt, whether in the context of a crisis or a period of strong development.

For example, research on industrial districts and local production systems emphasizes the sedimentation of cooperation between SMEs. During periods of strong expansion, a form of regulation with a distribution of orders within the network of SMMEs is set up at the district level in order to be able to deliver products on time. And conversely, in a period of crisis, these cooperation routines allow companies to pool their prospecting efforts. Sales representatives sent to trade shows can « sell » several companies, which allows for a greater presence at a larger number of events. Companies can also pool their research and development efforts by sharing equipment and responding collectively to national or European calls for projects. This economic cooperation obviously requires a high level of trust between entrepreneurs. Indeed, what guarantees do contractors who subcontract orders to a colleague have that they will one day receive a return of investment from the latter? This trust, the researchers tell us, is based on shared values, membership of communities (religious or political) and a common geographical origin.

But these inter-firm cooperations would not be sufficient to face periods of crisis or strong development without the sedimentation of routines with local investors. The presence of capital invested in the local production system is a factor explaining the maintenance of specificities in the economic fabric of European cities. The maintenance of health, chemical and mechanical activities in the Lyon conurbation also owes a great deal to the strategy of the Lyon bourgeoisie to reinvest the profits from their activities locally throughout the twentieth century (which is less true for the bourgeoisie of Saint-Etienne, for example). The existence of powerful German or Italian regional banks also allowed industrial sectors to maintain themselves and to modernize in the cities of the Rhineland and Northern Italy. These banks have highly localized investment strategies with strong representation of local entrepreneurs in their governing bodies. The ability of companies to access credit easily, to cope with cash flow problems in times of crisis or to invest in times of growth, has helped to maintain SMEs/SMIs.

What roles do institutions play in maintaining the development paths of cities?

One of the main contributions of the work of neo-institutionalist economists has been to show the key role of institutional variables in the relations between firms and in their economic performance. The intervention of institutions - the State, local authorities, structures representing professional interests, universities, etc. - has effects on the development trajectories of a city and, more broadly, of a region. But in what way?

What immediately comes to mind is public investment to build large infrastructures and facilities and to ensure an attractive territorial offer, especially for executives (cultural programming, urban amenities, etc.). The surveys conducted annually by consulting firms on the location strategies of major foreign groups confirm that the accessibility and level of equipment of a region are indeed indicators taken into account by economic decision-makers. However, it should be noted that what they are looking at is « macro » accessibility, i.e., on the scale of a large region, rather than « micro » accessibility, for example, within a city.

What also comes to mind quite quickly is taxation. Institutions could be influential in maintaining development trajectories by influencing local tax levels. The level of tax pressure is not as systematically taken into account by investors as one might think at first glance. Of course, the characteristics of taxation on profits and the cost of labor are taken into account in their location decisions, but it is the states that are in competition with each other rather than the cities. The characteristics of the local tax system, on the other hand, are not a decisive criterion in the choice of location. The same is true for decisions to relocate within an urban area. In France, the widespread introduction of the Single Business Tax in the EPCIs at the end of the 1990s was not accompanied by a massive departure of establishments to areas outside the EPCIs. Research on this subject has shown that companies are attached to proximity to major facilities, infrastructures and their customers, which frequently leads them to remain in the urban areas.

But the role of institutions in local development is far from being limited to the production of facilities and services or to taxation. Institutions can also act to structure a capacity for collective action on the scale of the agglomeration. The capacity to agree on common objectives, the capacity to gather the resources needed to implement the objectives, and the capacity to define the principles for allocating the benefits of collective action. What form can the action of institutions take to help the emergence of this capacity for collective action?

Institutions can first of all encourage processes that will help the agglomeration or the territory to think collectively, to build an identity, to define an agenda (in the sense of a set of priorities for action). Territorial foresight exercises, the preparation of strategic territorial planning documents, the preparation of « white papers » or the organization of general assemblies can be public action tools to help the emergence of this capacity for collective action. One of the challenges of these approaches is to conduct an introspective exercise on the strengths and weaknesses of the territory and, in so doing, to share common references that can then be activated to obtain support for development objectives.

Institutions can also set up governance frameworks that make decision-making systems more compact. Agglomerations are home to a large number of actors with diversified resources who are involved in multiple decision-making frameworks (boards of directors of structures, project steering committees, etc.). In some cities, political leaders take the initiative to set up very tight decision-making structures open to a few economic leaders so as to be able to make quick decisions concerning possible reorientations of economic strategy, for example. The steering committee for Greater Lyon’s economic strategy includes the President of Greater Lyon, the President of the Lyon Chamber of Commerce and Industry, the President of the Rhône Chamber of Trades and Crafts, the President of MEDEF Lyon-Rhône (the French business movement), the President of the Rhône Confederation of Small and Medium-sized Enterprises and the President of the University of Lyon. Several English cities have set up a Local Strategic Partnership that brings together the mayor and the president of the local Chamber of Commerce and Industry with the heads of large companies, major facilities (hospitals, universities) and sectoral agencies (notably transport). Each member is responsible for the execution of a part of the development strategy and is accountable to the entire Local Strategic Partnership for the progress of their mission.

Other variables to consider: population changes and sociology, proximity to other cities

The role played by demographic and social variables is often overlooked in the analysis of the maintenance of cities’ economic specificities over the long term. Yet their effects are structuring. The significant departure of retired households from productive regions to coastal areas is a perennial demographic flow that explains the specialization of certain cities in tourism and trade functions, but also in health care. Some analysts, forcing the issue, speak of Nice and Cannes as urban economies strongly centered on the production of services for the elderly, which is not apparent from the urban marketing policies developed by these two cities. Similarly, reversing demographic trends is a long and uncertain process. Despite the implementation of ambitious urban projects since the early 2000s, Le Havre and Saint-Étienne continue to lose inhabitants even though the number of their households has increased (effect of aging). Development routes are also strongly constrained by the social characteristics of the population. The share of social income in the economic base of Marseille and Montpellier is a major trend: these cities have traditionally been popular with migrant households or very modest households living in cities in the north or east of France. These migratory flows explain the maintenance of a highly developed health and social sector in these two urban areas, but again, this is not reflected in territorial marketing strategies.

The proximity of other urban areas is also an element to be taken into account in explaining the maintenance of sectoral and functional specificities of urban economies. The proximity of a large, dynamic tertiary metropolis will have an impact on the profile of business services in the surrounding urban areas. The main consulting firms will prefer to locate in the metropolis because of the density of clients and the better accessibility to the structuring networks. But they may also favor the development of subcontracting companies that can perform back-office activities on their behalf and that will seek out office space at lower rents, which will benefit the secondary urban areas. More generally, the complementarity of economic functions between relatively close urban areas is a « premium » for maintaining sectoral specificities. Geographical proximity allows economic relations between companies located in different poles of the metropolitan area. The skills needed for the production process can thus be found at the scale of the urban region and not necessarily at the scale of a conurbation. The cost of structuring a sector and the uncertainty about the sustainability of demand are such that it is economically advantageous for economic actors to rely on know-how where it exists.

The economic profile of European cities emerges here as less systematic and unique than the literature on metropolization would suggest. The maintenance of these specificities should not lead to a representation that is just as erroneous as the previous one, i.e., an identical renewal of the characteristics of the local economic system. In each sector, technical and organizational innovations have spread. The specificities remain, but the ways of producing and the trades have of course evolved considerably. One of the illustrations of this is that the curves between the creation of wealth and the number of jobs in the various sectors have fallen apart. In predominantly industrial cities, production capacity measured by value added has been maintained, while at the same time the number of industrial jobs has fallen considerably.

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