- 1- Introduction
Recent years have seen a surge of academic and policy attention devoted to the
notion of ‘competitiveness’ : the new conventional wisdom is that nations, regions
and cities have no option but to strive to be competitive in order to survive in the
new marketplace being forged by globalisation and the new information
This obsession with competitiveness has inevitably filtered down to the regional,
urban and local levels. Within governmental circles, interest has grown in the
‘regional foundations’ of national competitiveness, and with developing new forms
of regionally-based policy interventions to help improve the competitiveness of
every region and major city, and hence the national economy as a whole.
In the UK, the Labour Government has focused on the competitiveness of the
country’s regions, cities and more recently, city-regions, as part of its aim to improve
the productive and innovative performance of the national economy (HM TREASURY, 2001, 2003, 2004 ; ODPM, 2003, 2004). The emerging view has been that the
UK’s productivity, its innovativeness and its success as a knowledge-driven economy
all depend in a significant way on the competitiveness of its cities. Likewise, the
European Commission sees the improvement of competitiveness in Europe’s lagging regions as vital to the pursuit of ‘social cohesion’ (EUROPEAN COMMISSION,
Competitiveness, however, is an elusive and not particularly well understood
concept. The notion only really entered economics in the 1980s, as a buzzword from
management studies. M. PORTER’s books on competitive advantage played a key
role. By the 1990s, the term had become highly fashionable, again aided by PORTER’s
further two important books (The Competitive Advantage of Nations, 1990 ; and On
However, the concept soon drew opposition, from both left and right. Thus,
R. REICH, in reviewing PORTER’s 1990 book, argued :
” National competitiveness is one of those rare terms of public discourse to have
gone directly from obscurity to meaninglessness without any intervening period of
coherence” (REICH, 1990).
P. KRUGMAN was even more dismissive :
” Concerns about competitiveness are, as an empirical matter, almost always
unfounded... The obsession with competitiveness is not only wrong but dangerous... Thinking in terms of competitiveness leads to bad economic policies” (KRUGMAN, 1996a, p.5).
Part of the problem stems from using the term at different levels of economic
aggregation. Thus, within the economics literature, the notion of competitiveness
has been used at both ends of the spectrum, applied to the individual firm (the
micro-economic level), and to the national economy (macro-economic level).
At the individual firm level, competitiveness resides in the ability of firms to
consistently and profitably produce products that meet the requirements of an open
market in terms of price, quality, design, etc. Any firm must meet these requirements
if it is to remain in business, and the more competitive a firm relative to its rivals the
greater will be its ability to gain market share. Conversely, uncompetitive firms will
find their market share decline, and ultimately any firm that remains uncompetitive
– unless it is provided by some ‘artificial’ support or protection – will go out of
By comparison, at the macro-economic level of the nation-state, the concept of
competitiveness is much more poorly defined and more strongly contested. Despite
the fact that improving a nation’s competitiveness is frequently presented as a
central goal of economic policy, arguments abound as to precisely what this means
and whether it is even sensible to talk of competitiveness at a macro-economic level
The lack of a commonly accepted definition is in itself one source of opposition
to the concept of macro-economic competitiveness. Essentially the argument is that
it is dangerous to base economic policy around such an amorphous concept which
admits of diverse interpretations and understanding.
Unfortunately, if the notion of competitiveness is problematic at the national
level, it is doubly so when applied to cities and regions (see Urban Studies, 1999 ;
BEGG, 2002 ; MALECKI, 2004 ; BRISTOW, 2005 ; MARTIN, 2006 ; MARTIN et al., 2006). For
the purposes of analysis, however, it is essential to have a working definition of
urban competitiveness. So for the purposes of this paper we define urban competitiveness as :
« the ability of cities to continually upgrade their business environment, skill base, and
physical, social and cultural infrastructures, so as to attract and retain high-growth,
innovative and profitable firms, and an educated, creative and entrepreneurial workforce,
to thereby enable it achieve a high rate of productivity, high employment rate, high wages,
high GDP per capita, and low levels of income inequality and social exclusion ».
Using this definition it is possible to identify five different theoretical explanations of what may lead to the competitiveness of urban economies. These are :
Export base theories
Increasing returns theories
Knowledge and innovation theories
Cultural economy theories
These different theoretical frameworks are not separate alternatives, however,
and they often overlap. Nevertheless, each does tend to emphasise certain processes
and factors – or drivers, to use the contemporary policy parlance – over others. How
far it is possible to combine these various accounts into an overarching ‘general
theory’ is as yet an unresolved issue.
Proximity is also a concept with many definitions. TORRE and RALLET (2005)
distinguish, for example, between geographical, spatial nearness and organizational
proximity. They argue that, on the one hand, organizational proximity offers
mechanisms for long-distance coordination that is the basis of socio-economic
interactions. As a result knowledge exchanges and interactions need not be confined
within given localities. On the other hand, some forms of agglomeration economies
can lead to proximity benefits that do not necessarily imply significant localized
For the purposes of this paper we adopt this distinction between geographic and
interactive (organizational) proximity and seek to analyse which of these concepts is
used explicitly or implicitly in the different theoretical explanations of urban
This is a significant endeavor because the general concept of proximity in
economic geography introduces space and interactions between spaces into economic theory. This contrasts with much neo-classical economics where activities are
often assumed to proceed in some placeless realm in which location does not play
a significant part. But we argue that location and interactions between locations do
matter in explaining differences and similarities in the way economic forces play out
in different places in practice. It is descriptively clear that different cities have
different economic structures and institutions and that some are very much more
successful than others. The underlying reasons for these differences need to be
explained not only to understand the economies of cities themselves but also, in
sum, to understand better overall national economic performance as well.
In the remainder of this paper, we analyse the arguments of the different theories
of urban competitiveness and evaluate the possible contributions of the three
different concepts of proximity to the theoretical explanations offered of the competitiveness of city economies.
- 2 - Exports and urban competitiveness : the tradable base of cities
A frequent theme in recent debates is that urban and regional competitiveness
has to do with the success with which cities and regions compete with one another
over shares of (national and especially international) export markets. Such a view
has a clear resonance with traditional export base theory that ascribes a central role to
a city’s (or region’s) exports as the key determinant of urban (regional) economic
growth and performance
The argument here is that the prosperity of a region is determined primarily by
the strength of its export base ... all those activities which bring income into the
region by providing a good or service to the outside world.... The alternative term
’tradables’ is also used to denote such activities (ROWTHORN, 1999). According to
this perspective, a city’s trade balance is a telling indicator of that city’s competitiveness, of its ability to gain and maintain significant shares of relevant export markets.
In this sense, rising market shares and an improving trade balance would be taken as
indicative of increasing urban competitiveness, and vice versa. Thus, in this,
approach, urban competitiveness is linked primarily to the trade performance of a
city, and to associated notions of comparative advantage.
A number of variations on the ‘tradable base’ (or ‘export-base’) theory of urban
competitiveness can in fact be distinguished. At one end, conventional trade theory
would ascribe key importance to a city’s export specialisation, with the latter being
dependent on the city’s factor endowments and resulting comparative advantage in
particular industries and activities. Keynesian models emphasise the urban multiplier effects (on consumption, investment, and services) of a city’s export activity.
Kaldorian cumulative causation models assign importance to the central role that a
city’s tradable base can play in raising productivity and growth in the city’s economy
as a whole.
Recent years have witnessed the reformulation of Kaldorian models of regional
and urban cumulative competitiveness. The Kaldorian model builds upon the possibility of cumulative regional competitiveness in the following way. A city’s or
region’s output growth is assumed to be a function of the demand for its exports
(akin to the economic base model or Keynesian regional multiplier). The demand
for the city’s exports – its ‘competitiveness’ – is assumed to be a function of the rate
of increase in world demand and the rate of increase of the city’s product prices
relative to world prices. A city’s product prices in turn depend on the city’s rate of
wage growth minus its rate of productivity growth, where the latter will be higher the
faster the growth of urban output, as a result of dynamic increasing returns to scale - the
so-called ‘VERDOORN effect’.
The key element in this circular and cumulative process lies in the way in which
increased output leads to increased productivity. Dynamic increasing returns are
basic to this process. Several different forms of dynamic increasing returns are
postulated to follow from a (demand-led) expansion of tradable output. These
arguments are shown diagrammatically in Fig. 1.
Expansion of output may induce technological change within and across firms in
a city (or region), both through the opportunities for increased task specialisation
within firms, and through the accumulation of specific types of fixed capital (new
investment) within which technological advances and innovations are embodied.
These technological advances raise the city’s labour productivity and thence its
Figure 1 -
Trade and City Competitiveness
Yet whilst these recent modifications certainly improve on the original formulation, export base models still confine attention to a city’s exports. They have little to
say on the role of import substitution as a facet of city competitiveness. Clearly, if a
city can create and sustain local firms that can compete with external firms in
supplying goods and services demanded locally, this too should be seen as a
measure of a city’s competitiveness.
The role of proximity in export based models is primarily related to the interactions between the markets for a city’s goods and services. Some of these will be local
and regional and therefore spatially proximate to production. More significantly,
however, will be the relationships to national and international markets. In these
instances, time proximity is likely to play a more critical role than simple spatial
distance. Some export markets will take less time to access than others as a result of
the relative efficiency of transport and communications networks. This will not
necessarily reflect the precise spatial distance between them. Thus, time proximity
and potential interactions with existing markets can be altered radically as a result of
changes in air transport. Some entirely new markets can also be opened up as a
direct result of changes in air freight networks. In the context of the increasing
internationalization of the world economy these changes have increased the significance to exporting cities of spatial proximity to international airports and market
interactions leading to comparative economic advantages.
- 3 - Agglomeration economies : the city as a source of increasing returns
The following three theories of urban competitiveness, agglomeration economies, endogenous growth models and cluster theory share similar theoretical
concerns with spatially localized externalities and knowledge spillovers. In these
respects they tend to focus, in different ways, more on the significance of geographically local than distanced interactive types of proximity.
First it is argued that although very significant, the competitiveness of cities and
regions is not just about comparative advantage in trade. For example, CAMAGNI
(2002) takes the view that places do indeed compete, over attracting firms (capital)
and workers (labour), as well as over markets, but on the basis of absolute advantage
rather than comparative advantage.
According to CAMAGNI, a region (or city) may be thought of as having absolute
competitive advantages when it possesses superior technological, social, infrastructural or institutional assets that are external to but which benefit individual firms
such that no set of alternative factor prices would induce a geographical redistribution of economic activity. These assets tend to give the region’s (city’s) firms, overall,
a higher productivity than would otherwise be the case.
The question is : what are these ‘common features’ and what makes them
specifically urban (or regional) in nature ? One way of thinking about these questions is in terms of ‘externalities’, or the resources and capabilities that reside outside
of individual local firms but which are drawn on – directly or indirectly – by those
firms and which influence their efficiency, innovativeness, flexibility and dynamism : in short, their productivity and competitive advantage.
Recent years have in fact seen a revival and rediscovery of increasing returns
within economics, and a growing realisation that these not only help explain the
growth and economic performance of cities and regions, but that the spatial
concentration of firms and industries in cities and other geographical agglomerations is itself an important source of increasing returns in the form of various external
economies of localisation.
Much of this work draws upon Alfred MARSHALL’s (1890, 1919) original triad of
localization economies : the accumulation of a skilled labour pool, the growth of
specialized supporting and ancillary industries and services, and knowledge transfers and spillovers between firms. He also emphasised what he called the ‘local
industrial atmosphere’, by which he meant locally embedded and commonly
accepted routines, traditions, and social norms - akin to what nowadays might be
labeled ‘social capital’
HOOVER (1937, 1948) added a further dimension to agglomeration economies
namely urbanization economies. Another aspect of this increasing returns approach to
explaining the economic competitiveness of cities is that it suggests that a city’s
relative economic performance will depend, in part at least, on its ability to attract
skilled and educated labour, capital and technology. JACOBS (1968) argued that
variety was an important aspect of such urbanization economies. These pools of
urban assets can be drawn upon by all firms in a city without those firms necessarily
interacting among themselves. In this sense such economies can represent geographical proximity without much interaction. These arguments are summarized in
Figure 2 -
Increasing Returns (External Economies) and City Competitiveness
Conventional economic theory would predict that inter-city competition over
labour and capital should lead to allocative efficiency and innovation, so that all
cities benefit, and urban growth differences should not be self-reinforcing over the
long run. In reality, processes of cumulative causation are more likely – precisely
because of increasing returns – so that urban competition may well lead to a
progressive divergence in urban growth outcomes, with certain cities becoming
locked into slow relative decline.
The role of proximity in such supply side explanations of urban competitiveness
is essentially concerned with the spatial concentration of urban assets such as
educated labour and interdependent industries. The size of agglomerations matters
to both because, on the one hand, qualified labour can find and change employment within the same city, while, on the other, the firms located there can recruit
and retain the kinds of specialized labour required to compete in the modern
international economy. In these instances spatial proximity to large numbers of
workers and firms is argued to be a key element of urban competitiveness.
In some ways agglomeration economies, especially urbanization economies
represent static externalities. Endogenous growth models, on the other hand, are
more concerned with the dynamic processes of knowledge accumulation through
mainly localized interactions.
- 4 - Endogenous growth models : the city as a hub of knowledge and innovation
Endogenous growth theory also stresses the importance of increasing returns in
shaping economic growth and productivity. There are several variants of endogenous growth theory but almost all are based on elaborating the unexplained ‘total
factor productivity’ (TFP) component of standard growth models, in terms of the
factors making for technological progress.
Two main types would seem to be of most possible relevance to the competitiveness of cities. The first are ‘intentional human capital’ models (of the sort
developed by LUCAS and ROMER) that stress the importance of education, ‘learning
by doing’ and spillovers of knowledge. Second there are the Schumpeterian innovation models of purposive profit-seeking research and development by firms.
Essentially, the first group of models portrays technological progress as the result
of intentional research and education (R&E) and introduces human capital into the
production function. In these versions, investment in human capital generates
spatially concentrated spillover effects which increase the productivity of both
physical capital and the wider labour force.
In Schumpeterian endogenous growth theory, it is assumed that it is the prospect
of temporary monopoly profits that stimulates firms into undertaking research and
innovation. These innovations subsequently become the intermediate inputs to
other firms, so that the rate of innovation determines the overall rate of growth.
These models suggest that a city’s competitiveness (and productivity) will
depend in large part on the educational quality of its workforce, on the incentives for
its firms to undertake R&D and to innovate, and the degree to which technological
knowledge diffuses through the city’s production and service structure. In particular,
a city’s ‘propensity’ to innovate, and its ‘social capabilities’ to absorb, apply and
adapt to, new technologies are crucial.
Technological spillovers are thought to be spatially localised, so that a city or
region that is able to establish a leading position (‘first-mover advantage’) with
respect to particular technologies and innovative products, is likely to be able to
establish and maintain a competitive advantage in these activities, with highly
positive benefits for local productivity, wages and employment. These arguments
are summarised in Figure 3.
Figure 3 -
An Endogenous Growth View of Urban Competitiveness
In these explanations proximity in terms of dynamic localized interactions play
significant roles. Investment in human capital in a particular urban context is
critically important for learning and innovation. Spatial concentrations of high
quality human capital are what give cities that contain them the competitive edge
with respect to innovation over those that do not. The limits of commuting time and
distance mean that much labour has to live within or near the city region that is the
source of its income. Thus, one of the ways in which cities may be said to compete
with each other is in terms of their different abilities to attract and retain spatially
concentrated pools of high quality labour.
Similarly, the diffusion of innovation and technology through local production
structures requires intellectual proximity among those using and adopting new
ideas and technologies. Such knowledge spillovers are widely thought to be relatively local. Furthermore, generally speaking the ability to understand and absorb
these new phenomena is greater among those who share similar educational
backgrounds, specialisations and culture. Absorptive capacity based on prior knowledge concentrated in urban economies is one of the key requirements of innovative
firms and the urban economies in which they are located.
- 5 - Cluster theories of city competitiveness
By far the most influential and widely used model of city and regional competitive advantage must be M. PORTER’s cluster theory (PORTER, 1990, 1998). It is the
rather open-ended, eclectic and ‘common-sense’ nature of his cluster concept that
has made it so popular amongst analysts and policy-makers alike. It has also
changed considerably over time to the extent that, like SCHUMPETER, it is possible to
distinguish two rather different explanations in SCHUMPETER’s case of innovation
and with respect to PORTER of clusters.
In PORTER I model, the same basic framework - the so-called ‘competitive
diamond - is used to explain the competitive advantage of firms, industries, nations,
and in his recent work, cities and regions, even local neighbourhoods. Spatial
proximity plays a significant role in his explanation here.
The competitive diamond highlights four basic determinants of competitive
intense firm rivalry and competitive strategy ;
favourable and sophisticated demand conditions ;
the presence of specialist supporting industries and services ;
and favourable factor supply conditions.
The positive and mutually reinforcing interaction between these four sets of
factors is considered crucial in order to produce competitive advantage and innovation among firms.
According to PORTER, it is geographical/spatial proximity in particular that
intensifies these interactions, by fostering a range of localization externalities
(increasing returns) that enhance the effect of the four components of the diamond.
This is the more so if the firms are in the same sector or in closely related ones : that
is, if the cluster is industrially specialized.
Thus, there are two core elements in PORTER’s definition. First, the firms in a
cluster must be linked in some way. Clusters are constituted by interconnected
companies and associated institutions linked by commonalities and complementarities. The links are both vertical (buying and selling chains), and horizontal
(complementary products and services, the use of similar specialised inputs, technologies or institutions, and other linkages). Moreover, most of these linkages, he
argues, involve social relationships or networks that produce benefits for the firms
Hence, the second fundamental characteristic is that clusters are geographically
proximate groups of interlinked companies. Co-location encourages the formation
of, and enhances the value-creating benefits arising from, networks of interaction
between firms. These arguments are summarised in Figure 4.
In summary, PORTER argues that localised clusters deliver innovation because :
They allow rapid perception of new buyer needs.
They concentrate knowledge and information.
They allow the rapid assimilation of new technological possibilities.
They provide richer insights into new management practices.
They facilitate ongoing relationships with other institutions including universities.
The knowledge-based economy is most successful when knowledge resources are
Figure 4 -
A Porterian Cluster Model of City Competitiveness
The social networks emphasised by PORTER remain something of a black-box in
his discussions. There is also the question of how clusters relate to and impact on the
rest of a city’s economy, and how far they drive the competitiveness of other,
non-clustered activities : in short, while undoubtedly important, clusters are only
one component of the urban economy.
In the PORTER II model the two basic elements of a cluster, namely that the firms
in a cluster must be linked in some way and also be geographically proximate are
supplemented by a third important characteristic. This is that it is export-orientated
clusters, not those serving local demand, that are the most important sources of
competitive advantage and high productivity. The implication in the PORTER II
cluster model is that for a city to be competitive it must have one or more successful
clusters of specialized, export-orientated activity. He argues strongly that it is the
presence of export-orientated specialised industrial clusters that determines local
According to PORTER, such clusters promote innovation (high R&D and high
patenting rates) which in turn feeds through into higher productivity, and thence
overall levels of prosperity and living standards. Further, the latter will attract skilled
labour and capital, which in their turn help to ensure favourable factor supply
Spatial and time proximity are significant in both PORTER I and II. In the first
model he argues that geographic proximity is important in enabling important local
linkages between firms, their supporting industries and factor input conditions.
Networks, although left as something of a black box in this theory, are clearly a
significant element of the ways in which local clusters are said to function. But in
PORTER I it is clear that spatial proximity is regarded as important in facilitating the
linkages between different firms involved in particular supply chains.
In PORTER II, as with export based theories, time proximity to markets is important for export oriented firms in the cluster. In these essentially demand led theories
access to customers and their requirements is a critical factor in the ability to export
goods and services to them. As with previous export base theories discussed above
transport and communications infrastructure play important roles in minimizing
the times taken to reach different markets.
An adaptation of the cluster concept has been proposed by SIMMIE (2003) and
developed by the Bordeaux School as the notion of « clusties ». This focuses not so
much on interactions between companies as key actors but on the generation and
transfer of knowledge between knowledge nodes whether located locally or not. In
this latter respect they differ from endogenous growth models in so far as they
combine both localized geographic and non-local interactions concerned with the
production and circulation of knowledge. In this variant, therefore, both kinds of
proximity analysed in this paper are significant for the generation and maintenance
of knowledge nodes or « clusties ».
- 6 - Cultural models of urban competitiveness
Finally, we examine cultural models of economic competitiveness in cities. It has
become increasingly common in recent years to talk of the ‘cultural economy’, in
several different senses. First, it is now generally recognised that what we call ‘the
economy’ is in fact culturally and socially ‘embedded’, that is to say grounded in
social structures and networks of social attitudes, values and institutions (where the
latter refer to formal and informal routinized and customary codes of conduct,
traditions and norms). It is socio-cultural ‘embeddedness’ that helps differentiate
different national ‘models’ of capitalism.
In the same way, it is also argued to play a role in explaining patterns of growth
and development amongst regions and between cities. Socio-cultural structures and
systems can either promote or hinder economic growth, and upgrading : successful
regions and cities are argued to owe part of their superior economic performance to
having favourable social, cultural and institutional set-ups that are accommodative
of and actively encourage change, innovation and creativity.
A second way of thinking about urban competitiveness in ‘cultural terms’ is
associated with the importance that is increasingly being given to ‘quality of life’
factors in attracting educated labour, entrepreneurs and innovative firms to cities
(Fig. 5). The stock of ‘cultural capital’ or ‘cultural assets’ is now seen by many as key
to urban competitive advantage. Successful cities have an extensive array of cultural
facilities – from panoply of restaurants to cinemas ; from concert halls to sports
gyms ; from regenerated waterfronts to revamped public spaces ; from art galleries
and museums to modern shopping centres – that make cities pleasant and exciting
environments in which to work and live.
Yet a third use of the idea of the cultural economy refers to the whole shift of
economic production itself to a raft of activities that involve cultural (i.e. symbol
intensive) products and services (the ‘commodification of culture’). Prominent
amongst these are the so-called ‘creative industries’ or ‘knowledge industries’ that
span the arts, media, entertainment, fashion, design, education, communication,
and science. In this vein some geographers argue that cities are changing their role
from being centres of material production and conventional service provision, to
centres of cultural (‘dematerialised and symbolic’) production. Creativity thus
becomes the basis of competitive advantage, and cities are even being ranked in
terms of so-called ‘bohemian indices’ intended to reflect their propensity for creativity (FLORIDA, 2002).
In this group of theories cultural proximity and diversity are both said to play key
roles in urban competitiveness. On the one hand, the cultural bases of the economy
require some degree of similarity and understanding as the basis of shared values,
accepted institutions and social networks. On the other hand, cultural diversity,
rather like economic diversity (JACOBS, 1968) is one of the key characteristics behind
the notion of the ready acceptance of new ideas and also the offerings that attract
workers and tourists to a city. In contrast too much cultural proximity can also lead
to intellectual sterility and a lack of openness to new knowledge and ideas that are
critical to the stimulation of continual innovation. In addition too much localised
cultural proximity can also reflect social segregation and a lack of social cohesion
with the rest of an urban population.
Figure 5 -
The Cultural Bases of the Competitive City
- 7 - Conclusions
Neoclassical economics often ignores the relevance of space and location to
economic activities. These are either assumed to exist in a non place realm or on
perfectly uniform and accessible plane. Even at a basic descriptive level this is clearly
not the case. This gives rise to the question what difference does location make to
those economic activities ? In this paper we have examined one element among the
complex range of possible approaches to this question. We have focused on the issue
of what theoretical differences do the interactions made possible by certain types of
proximity make to the competitiveness of urban economies as seen from the
perspective of the five main theories.
For the purposes of this analysis we selected two main types of proximity for
analysis. These were geographic and interactive (organizational) forms of proximity.
To this we have also added a third, namely cultural proximity. Our first conclusion
is that proximity plays a role in all the theoretical explanations of urban competitiveness. But different theories emphasise different concepts of proximity.
In general, demand led models tend to imply the significance of interactive
proximity to markets wherever they may be located. Thus, trade and export base
theories argue that a key element in the competitiveness of city economies is the
tradable economic base of individual cities. In this theory exports are said to be a key
driver of economic success. This theme is also taken up in PORTER II where he argues
that economic performance is driven by export based clusters. In both these demand
led theories interactive proximity to customers and markets plays a critical role. The
ability to establish international value chains, linkages and networks are important
for the development of exports.
Modern transport and communications infrastructures and the ways in which
they reduce the times taken to access and respond to international demand are
critical enablers of international linkages. They are unevenly distributed between
cities. As a result some urban economies form well connected nodes in the global
economy while others that are less well connected form lower tier nodes or spokes
in the urban hierarchy. In practical terms international hub airports and wide
bandwidth telecommunications systems provide international nodes like London
with better trading connections with similar nodes such as New York than even
some of the lesser connected cities within the UK.
In contrast to demand led models the theories that focus on the supply of local
urban assets focus much more on the importance of spatial proximity and knowledge spillovers in local production systems. Agglomeration models based on the
idea of increasing returns seek to explain urban competitiveness in terms of the size
and geographic proximity of significant assets such as pools of skilled labour,
interrelated industries and services, and local knowledge spillovers and technology
transfers. In these theories the physical concentration of such assets in large cities
facilitates their interaction and reduces the transaction costs between them in those
Similarly endogenous growth models that focus especially on what makes some
city economies more innovative than others seek to explain these differences in
terms either of higher successive investments in human capital or R&D that are
spatially concentrated in the more successful cities. With respect to human capital
higher levels of education, skills and training form the basis of the absorptive and
learning capacity of a city’s economy. This is crucial to the translation of new ideas
Similarly, successive investments in systematic R&D can generate both specialised local knowledge spillovers and the ability to access and interpret leading edge
knowledge from other innovative nodes in the international economy. In this
instance the local spatial proximity of knowledge generating activities contributes to
local innovation per se, local knowledge spillovers and the capacity to identify and
make use of new knowledge from elsewhere in the global economy.
The PORTER I cluster theory of city competitiveness is the supply side model that
argues most explicitly for the importance of spatial proximity between the four
elements of his diamond in contributing to the competitiveness of city economies in
which clusters are located. In this theory local factor input conditions, related and
supporting industries, firm rivalries and strategies and demand conditions and the
local interactions and linkages between them are what drives local competitiveness.
Their spatial proximity is said to facilitate these networking activities. Unfortunately
in Porter I the exact nature of these activities is never made clear so while in theory
spatial proximity is important to their success as we are not informed of what they
empirically consist of it is difficult to establish in any detail what the contribution of
spatial proximity might be.
To some extent this argument has also been overtaken by the emphasis on export
based clusters in PORTER II. As argued above, in this version of cluster theory demand
conditions refer mainly to those for exports and so are not locally confined. As a
result it can be argued that economic growth is more dependent on the time
proximity to international markets than on the local spatial proximity of customers.
The processes of globalization, however, have increased the significance of
knowledge nodes in the international economy. As a result some analysts argue that
it is not only the endogenous generation of knowledge that is important in particular cities but how those cities interact with similar knowledge nodes in other places.
The term « clusties » has been employed to denote such interactions concerned with
A number of the theories of city competitiveness also rely on cultural proximity
as part of their explanations. The most explicit of these, however, are those that
emphasise the cultural bases of urban economies in terms either of the cultural
infrastructure of cities or in terms of their creative, symbolic and knowledge intensive industries. In the first instance it is argued that the cultural offer of a city is one
of the features that help to attract and retain educated labour to the city. This has
already been argued above to be a critical asset underlying the development of
modern knowledge based economies.
In the second set of arguments the cultural industries themselves are seen as
important in generating economic growth. This is particularly the case in and
around the central areas of cities where many traditional manufacturing or transportation industries have declined or died out altogether in recent decades.
The supposed role of cultural proximity is rather different in each of these
arguments. In the first set in which cultural activities contribute to the quality of
urban life and attract highly qualified labour and also tourists, there is an assumption of cultural proximity in that what is on offer is reasonably close to the tastes and
values of at least some of the local labour force. In the second set of arguments
cultural diversity and difference are seen as strengths. It is argued that the more
cultural variety concentrated in a city economy the greater is likely to be the
acceptance of new ideas and that this contributes to innovation in the economy. In
this way the two theories take rather different views of the significance of cultural
Overall, because most economic activities originate in or are located in different
places, in the identified theoretical explanations of the relative competitiveness of
those places proximity is either explicitly or implicitly regarded as an element of
those explanations. Differences in the importance attributed to the concept have
been shown to rest first on the nature of the different theoretical explanations of
urban competitiveness and second on the different possible characteristics of the
notion of proximity itself.
We conclude form this analysis, however, that with respect to the economic
competitiveness of cities a combination of both geographic and interactive proximities are significant to their economic success. On the one hand, differences in the
endogenous economic assets located within cities play determinant roles in how
they are currently equipped to compete in world markets. So their mix of specializations, pools of available resources and the variety of knowledge located in them
determine their current capacities to act economically. On the other hand, in the
context of the global economy, their linkages and interactions with other cities in
their national or the international economy not only provide them with potential
exogenous sources of new knowledge but also with market information concerning
what they might produce and where it could be sold. Thus, combinations of
different forms of proximity are required for the competitive success of urban