BER21: Innovation clusters in emerging industries - a hidden competitive advantage for regional economies?

WM-Redi/City-REDI/University of Birmingham

This blog post was produced for inclusion in the Birmingham Economic Review for 2021.

The annual Birmingham Economic Review is produced by the University of Birmingham’s City-REDI and the Greater Birmingham Chambers of Commerce. It is an in-depth exploration of the economy of England’s second city and a high-quality resource for informing research, policy and investment decisions.

This post is featured in Chapter 2 of the Birmingham Economic Review for 2021, on Industry and Innovation: Pathways to Prosperity

Click here to read the Review.

Policies designed to support the economic growth of city-regions tend to rely on data and evidence which captures the past track record, rather than the future growth potential of a region. This works well when it makes sense to build on an established reputation in one industry cluster, such as automotive manufacturing. But it may create a blind spot when either the growth projections of this industry look bleak, or the factors that underpin local competitive advantage in these legacy industries have changed.

We know that historically the West Midlands evolved a unique blend of entrepreneurship, technological capabilities, engineering skills, private sector investment, and university-industry collaborations to create a regional advantage in automotive R&D, production, and exports. The key question now is to understand how new combinations of existing assets and capabilities might underpin future comparative advantages for the region.

This means developing a broader and better set of measures for understanding these potential growth pathways. Some proxy measures, such as standard industry codes (SICs) used in the analysis of location quotients and specialist industry clusters in regions, are good at mapping past investment patterns. But these tend to lag real-world industrial and technological change, and fail to capture latent, or hidden assets and capabilities which may provide the foundations for the growth of emergent industry clusters in particular regions.

Newer approaches are possible using ‘big data’ to map the collective assets, employee skills, technologies, processes, products, and services of local firms, together with local endowments such as transport infrastructure, universities, and amenities.[1] These, in combination, underpin the current and potential future competitive (dis)advantages of a regional economy, relative to other regions. Although these place-based characteristics can drive path-dependency and an inability to adapt in the face of change, they can also provide the stepping-stones to new areas of specialisation, aligned to new opportunities. But they need to be identified and developed as part of a future growth strategy.

Could the West Midlands become a global centre for the creative industries, fintech, the space sector, or green technologies, for example? To answer this question, we need to know:

  • Do we have a critical mass of the right assets, technologies, skills, knowledge and expertise, compared to other national and in some cases global regions?
  • Is the region attractive to investment from firms outside the region, and skilled employees with the relevant expertise?
  • How easy or difficult would it be to recombine and reorient (pivot) these ‘ingredients’ towards new kinds of technologies, products and services. How ‘related’ are they? i.e. how much of a step-change is it for current firms in the region to collectively reorient and adapt to compete in the emergent industry?

This was the approach we used to examine the potential for the West Midlands to become a regional centre for the UK space industry, which has grown ten-fold since 2010, is worth £15 billion and employs 42,000 people.[2] We found that many of the specialist innovation capabilities across groups of existing firms were well-suited to the needs of the evolving space sector. These include precision machining companies which work across the aerospace, automotive, motorsport, energy, defence and nuclear sectors. We also have a strong lead in the ceramics industry. No other UK region has the equivalent mass of advanced ceramics specialist suppliers, end users and researchers.

More broadly, we have some excellent foundations for an innovation-led growth trajectory. Businesses across the West Midlands invest £2.46bn annually in R&D, making up 10% of all UK Business Enterprise expenditure on R&D (BERD) this is the 4th highest of any UK region. So we are an engine of private sector R&D, but we receive considerably less per head in public R&D spending.[3] This is despite having 12 universities, some top-class nationally and internationally in terms of the quality of their pure and applied research. We also host three major ‘Catapult Centres’ funded by Innovate UK, two focused on High Value Manufacturing (MTC, the Manufacturing Technology Centre and WMG, the Warwick Manufacturing Group) and the Energy Systems Catapult, 11 science parks, 14 incubators, and 10 accelerators.

These STEM (‘science, technology, engineering and management’ in this case) assets are worth particular attention. They help firms become more innovative by translating ideas, knowledge and expertise into applied technologies, products, services and processes. This involves developing industry-specific, problem-oriented combinations of skills, processes and technologies to enhance the innovation-related capabilities of firms in the region. Our STEM assets, alongside other components of the regional innovation ecosystem, are one of the keys to transforming nascent clusters, from life sciences to cyber-security in modern services, online gaming, or future energy storage technologies, into regional growth champions.

Professor Simon Collinson
Deputy Pro-Vice-Chancellor for Regional Engagement, Director of the West Midlands Regional Economic Development Institute (WM REDI) and City-REDI, University of Birmingham

[1] Nathan, et al., 2017, Industrial Clusters in England, BEIS Research Paper No. 4 (NIESR, SpazioDati, City REDI, University of Birmingham)

[2] City REDI research report, Billing et al., 2021, The West Midlands space sector strengths, underpinning assets, and market opportunities

[3] Collinson, 2021, R&D Investment in Our City-Region: Local Potential for Future Inclusive Growth