Cities aren’t the innovation incubators they used to be

Words by Matt Clancy
7th October 2020

Remote work has long been viewed with skepticism, and many doubt it will last beyond the pandemic. But what if the benefits of local work are already dwindling?

CultureEconomics

Earlier this year, a slew of major tech companies announced they would make remote work a permanent part of their operations after COVID-19 forced them to give it a serious try. In response, commentators and pundits warned that scattering tech workers across the country could undermine one of the pillars of the US technology sector. The argument is that innovation is accelerated when knowledge workers are located close to each other, since proximity facilitates the circulation of ideas and knowledge.

It’s an old argument. In 1890, economist Alfred Marshall wrote “the mysteries of the trade become no mysteries; but are as it were in the air, and children learn many of them unconsciously.” It’s also an idea that gathered serious empirical support in the last decades of the twentieth century, when economists began using various clever methods to measure how research by one entity affected its neighbors. Based on this evidence, the importance of these spillovers of local knowledge has become taken for granted.

It’s time to reassess this idea in light of new evidence and new technologies for diffusing information. A steady stream of research suggests the importance of local knowledge is waning, because increased travel and online communication has facilitated the circulation of ideas across a much wider geographic domain.

To start, consider patents. Economists use patents to study the flow of ideas in cities in a variety of ways: they count the number of patents in big and small cities; they measure the probability a patent cites local and distant patents; they look to the text of patents for words that refer to fresh new technologies; they examine the likelihood the US patent and trademark office assigns strange new sets of technology classes to patents. When examined across the span of multiple decades, all this evidence tells the same story – physically proximate inventors no longer seem to have much of an advantage over physically distant ones.

We could also look at academic work. One paper looked at the citations mathematicians make, and found they are also increasingly likely to cite distant work. Another study tracked economists over their career, as they moved in and out of top universities. If being physically near other people is important for learning about the newest ideas, then economists should experience a productivity bump (measured in terms of journal articles, adjusted for quality) when they move to a top university, and a drop when they move away. And that’s exactly what happens; or happened in the 1970s. But the study finds this effect shrunk over time, and by the 1990s, had disappeared.

Or we could look at partnerships. Do cities expose us to many serendipitous encounters that might result in breakthrough ideas? It’s long been assumed they do, but a 2017 study of Norwegian firms found that this wasn’t the case. When asked how they met a business partner who was important in the creation of a new innovation, there was no evidence businesses based in big cities enjoyed more serendipity than those in smaller ones or the country.

The evidence is pretty clear about why this is happening: cheaper travel and the internet. A variety of studies document that when it gets easier to travel between locations (either because of new rail lines, airlines, or roads), collaboration between these distant locales increases. Other studies have documented how internet access decreases reliance on locally available knowledge.

The upshot of all this is that fears about the impact of remote work on innovation are probably overblown. The flow of knowledge no longer requires us to be close enough for coffee. Instead, knowledge circulates online, either via formal writing (like the kind you’re reading now), or informal chat. It’s just the chat is now more likely to take place on Twitter or Slack than over drinks.

For more discussion of the academic work summarized in this piece (and much more), read Matt Clancy’s report on The Case for Remote Work.