Aviva: The changing role of cities

The role of a city is vastly different to 50 years ago. In a wide-ranging report by Aviva Investors examining the evolution of cities, the long-term insurance investor identifies how the three characteristics that make a city successful have changed entirely.

Many of Europe’s great cities grew up in an era of industrialisation when competition was heavily driven by input costs, writes Aviva Investors’ Chris Urwin, director of research, real assets, and Vivienne Bolla, analyst, real assets research and strategy. They wrote:

Locations benefited from qualities such as a natural harbour, access to a navigable river, proximity to sources of fuel (usually coal) and access to labour, suppliers and consumers. With such qualities, cities enjoyed a durable comparative advantage.

But as global markets opened up, the pace of transportation accelerated, and the cost of communication fell, such qualities no longer provided cities with a competitive edge. Global sourcing rendered the old notion of comparative advantage less relevant.

Yet location matters no less than it did in the past. Today, a city’s success is driven by its ability to facilitate knowledge exchange and information sharing to nurture idea creation. Competitive advantage no longer rests on access to inputs but on making more productive use of inputs and this requires continual innovation.

Aviva Investors says the characteristics that make a city successful have changed entirely. In an era of knowledge capitalism, Aviva Investors says cities need:

1. Talent – cities need deep pools of highly skilled labour to thrive. As the urbanist Richard Florida says, access to talented and creative people is to modern business what access to coal and iron ore was to steel-making. Large agglomerations of highly-skilled people are therefore critical to a city’s prospects.

2. Clusters – established clusters of high value-add economic activities. Being part of a cluster provides companies with easier access to information and technology, while providing efficiencies in sourcing inputs such as labour. This enables a city’s firms to be more productive.

“3. Scale – agglomeration effects are the benefits that arise when firms and people locate near one another. Co-location makes the exchange of goods and ideas easier and cheaper. The larger the agglomeration, the greater the benefits. Indeed, these benefits tend to increase at an exponential rate as cities increase in size. So larger cities are more productive simply because they are larger.”

“Such characteristics are the most important drivers of cities’ success. Of course, in an era of globalisation, cities that have an ability to attract global talent and capital will also benefit from an international profile and global connectivity. An appropriate level of autonomy combined with visionary leadership can also improve a city’s prospects.”

Overall, Aviva has identified 12 European cities that the insurance investor is strategically committed to over the long-term.  These comprise two megacities; three international business hubs; three regional powerhouses; and four tech cities.

Aviva’s analysis continues throughout this week.

james.wallace@realassetmedia.com