Reasons for the Development of 'Islands of Innovation': Evidence from Hertfordshire

Abstract

This paper analyses why innovations often cluster in a few metropolitan islands of innovation. The reason for this interest is that a growing body of neo-Schumpeterian economic theory argues that economic recovery after periods of economic recession and depression, such as we have seen during the 1980s and early 1990s, is driven by innovations. These do not spring up all over the country but are spatially concentrated in a small number of metropolitan regions. It is therefore important to know why this is so in order to evaluate the effectiveness of various UK and EU public policies whose specific objectives are to stimulate local and regional economic development. Agglomeration theory is used in order to understand the driving forces behind the spatial clustering of new innovations. This leads to four explanatory hypotheses. These are that innovation is facilitated by agglomeration in order to reduce distance transaction costs between firms in different spaces; or by local factor conditions which provide factor cost efficiencies within given localities; or by continuous production hierarchy negotiation within particular spaces; or by demand pull conditions that lead to agglomeration behaviour which maximises the coincidence between both production hierarchies and markets. These hypotheses were tested on a small sample of award-winning firms in the highly innovative county of Hertfordshire. It is one of the most innovative parts of the Western Arc around London which is UK's most innovative metropolitan region. The main findings are that, in this case study, innovations were concentrated in Hertfordshire for two main groups of reasons. The first was that the county is able to acquire important contributions to innovation production. These include high-quality human resources, venture and risk capital, knowledge and information, and new science and technology. These are not necessarily embedded in the area to start with but are comparatively available in the South East region as a whole. The second main group of findings is that innovation in Hertfordshire is facilitated by the ability to arrange simultaneously both production and consumption. Purchasers of military, health and welfare, and intermediate production goods have strong impacts on the design and development of innovations in Hertfordshire. Many of them are located in the core metropolitan regions of other advanced economies. Hertfordshire provides an innovative production node in global markets.