Policymakers often think about the economy’s strengths in terms of sectors, yet there is a growing gap between the leading firms in any sector and its ‘long-tail’ of less productive firms. In this blog, Burcu Sevde Selvi and Owen Garling set out an alternative approach to understanding the structure and emerging strengths of the economy in East Anglia.
It is often argued that for a regional economy to grow, it needs to understand its current strengths so that it can diversify into activities that are related to those that are already thriving in the region. Regions develop incrementally by building on what they already do. A number of different mechanisms associated with this concept of relatedness have been identified that contribute to regional growth and productivity:
- Cognitive proximity and knowledge spillovers – Firms whose activities are related can have productive interactions because they ‘think along the same lines.’ In other words, firms that share cognitive proximity can quickly learn from each other through knowledge spillovers, leading to innovation and growth.
- Employment and employment growth – The relatedness of firms or sectors also contributes to the resilience of labour markets. In regions with diverse related industries, a decrease in demand for any of these sectors will only have a mild effect on employment as workers in these industries can find similar jobs more easily than those in areas with few related activities.
- Existing industrial base – Emerging sectors that are related to existing ones with similar technologies, knowledge, or skills can benefit from existing infrastructure and skilled labour.
- Firm survival – Industries that are related or connected to each other tend to create positive growth cycles, which are beneficial for the birth of new firms. Since related sectors share similar knowledge and skills, the connections between them can lead to a multiplier effect, where the success of one firm or sector can stimulate the success of others.
A sectoral approach to regional economies tends to focus on how knowledge travels within different sectors, with the objective of understanding how less-productive firms can learn from the productivity-enhancing practices of those leading the sector. This project has taken a different approach and focused on how different sectors within a geographically defined location – in this case East Anglia – connect as a network to enable knowledge and practices to flow between different sectors.
Given the importance of the knowledge economy to UK plc, and the prevalence of knowledge intensive firms in East Anglia, particularly in and around Cambridge, our analysis has focused on those sectors of what we have called the ‘emerging economy.’
Rather than relying on Standard Industrial Classifications (SIC) to understand the structure of different sectors of the economy, we drew on data developed by The Data City that uses a combination of machine learning and expert input to build a set of Real Time Industrial Classifications (RTIC). These RTICs are based on how firms currently describe themselves rather than how they completed a return to Companies House and therefore provide a more accurate understanding of the emerging sectors of the economy.
One of the characteristics of The Data City data set is that individual firms can be recorded against a number of RTICs. Using this property we mapped the relatedness of the sectors of the emerging economy in East Anglia.
Figure One: A network analysis of the emerging economy in East Anglia
What did our analysis show us?
Whilst this diagram is certainly colourful and perhaps a little confusing on first viewing, it shows us a number of interesting characteristics of the emerging economy in East Anglia.
First, certain sectors have a more central role in the network than others. For East Anglia, these sectors are Life Sciences, Research and Consulting in Physical Science and Engineering, Data Infrastructure, EdTech, and NetZero. These sectors placed within the centre of the diagram highlight their wider importance.
Second, some sectors are better connected than others. Across East Anglia, Life Sciences, Pharma, Net Zero, Research and Consulting in Physical Sciences and Engineering, and Biopharmaceutical, are those sectors with the most connections and that can therefore quickly connect with the wider network.
It is notable that Life Sciences, Net Zero, and Research and Consulting in Physical Sciences and Engineering are among the top sectors for both of these measures, highlighting the pivotal role they play in the region for their extensive connections and influence over the emerging economy in East Anglia. Regional policymakers looking to understand how to share information effectively and efficiently across the emerging economy would do well to understand and harness the power and influence of these sectors.
As part of understanding the importance of individual sectors, we also grouped the emerging economy in East Anglia into a number of families to better understand the underlying structures of the network. Our analysis identified five dominant families across the emerging economy in East Anglia.
Figure Two: The dominant families in the emerging economy in East Anglia
Finally, there is a geographical element to our analysis. This shows that sectors of particular importance to the emerging economy in East Anglia are not equally distributed across the region. Life Sciences, Net Zero, and Research and Consulting in Physical Sciences and Engineering – the most central and best-connected sectors in the emerging economy in East Anglia – are not distributed evenly across the region as shown by the following maps.
Figure Three: Spatial distribution of the key sectors of the emerging economy in East Anglia
These maps show that the crucial sectors that can play a bridging role between the sectors of East Anglia’s emerging economy are primarily concentrated in the ‘greater Cambridge’ area, made up of the two local authorities of Cambridge City and South Cambridgeshire. There are also interesting patterns that emerge from greater Cambridge and head northwards towards Peterborough and eastwards towards Norwich.
What does this mean for the region’s policymakers?
Policymakers – both in East Anglia and beyond – can learn from this research:
- Strengthening intersectoral connectivity – Intersectoral collaboration should be encouraged to enhance connectivity between dominant and less connected sectors. Net Zero, Life Sciences and Research and Consulting in Physical Science and Engineering are among the strongest sectors in East Anglia and serve as a bridge to connect different parts of the network. As such, policies prioritising support for these sectors can boost economic development across the whole region.
- Detecting families – Identifying densely interconnected sectors can help spur growth. Significant sectors in the key family groups can influence almost all parts of the network structure through their central position and strong connections. Therefore, a tailored policy focusing on one of these sectors could generate multiplier effects and spur innovation across the family group.
- Making the best of within-region specialisation – Sectoral specialisation in regions, especially in well-connected sectors, helps identify the unique strengths and weaknesses of areas enabling targeted investment strategies to ensure sustainable development by leveraging region-specific capabilities.
- Identifying isolated sectors – By identifying the isolated sectors, policymakers can understand what is stopping them from integrating into the wider economy, and see what capabilities are missing. Investing in these sectors can enhance regional development and reduce inequalities. However, on the other hand, knowing that these sectors will not exhibit growth spurts, means the policy focus for regional specialisation could be directed to other sectors.
Over the last two decades there has been a considerable churn in local economic policy. As the successors to Local Enterprise Partnerships – be they Combined Authorities or local government economic development teams – look to produce revised Local Industrial Strategies, understanding how the sectors of their local economies are related is a valuable tool in their toolboxes.
Report: Exploring sectoral relatedness in East Anglia
The views and opinions expressed in this post are those of the author(s) and not necessarily those of the Bennett Institute for Public Policy.
