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Are you interested in how cities and entrepreneurship are connected?

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Our summary today works with the article titled Entrepreneurship in cities from 2021 by Sam Tavassoli, Martin Oschonka, and David B. Audretsch, published in the Research Policy journal. Since we are investigating the future of cities, I thought it would be interesting to see how cities influence entrepreneurship and vice versa. This article presents which are the best performing cities in terms of knowledge spillovers and economic performance.

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Welcome to today’s What is The Future For Cities podcast and its Research episode; my name is Fanni, and today I will introduce a research paper by summarising it. The episode really is just a short summary of the original paper, and, in case it is interesting enough, I would encourage everyone to check out the whole paper. Stay tuned until because I will give you the 3 most important things and some questions which would be interesting to discuss.

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Cities are recognised to be economic engines in the national and international economy. About 80% of global GDP is estimated to be produced in cities. They are also referred to as high quality entrepreneurship hotspots and innovation machines. Given this kind of importance, we need to understand how knowledge is generated and transferred in cities. Contemporary analysis commonly leads back to Jane Jacobs who was one of the pioneers of makes cities entrepreneurial and innovative. She believed in urban density and diversity as the favourable structural city environment for novel idea generation and economic performance, and her theories have been majorly confirmed.

However, there are four major issues in the knowledge spillover literature. First, the studies have mainly focused on the structural city environment with density and diversity in terms of firms and industries but not people, therefore probably missing people’s diversity and density. Second, the human capital part has been more focused on the capital than the human part, thus attention on humans is largely missing from the literature. Third, people’s willingness to interact with each other hugely influences knowledge spillovers and economic performance which has rarely been investigated. And fourth, the effects of the environment on people and their behaviour has been mostly missing. Therefore, the purpose of this paper is to develop a model on human capital and knowledge spillovers by explicitly taking into account psychological perspectives and density of people, and to measure and investigate the effects of human heterogeneity in the prediction of local economic performance and quality entrepreneurship.

According to research, knowledge spillovers are the engine of growth and that density and concentration of economic activities are important, but there are debates regarding on the industry structure of cities facilitating such knowledge spillovers. Jacobs’ knowledge spillover due to density and connected diversity appears to have a more robust positive influence on new knowledge generation, creativity, innovation, and high quality entrepreneurship while specialisation is more conducive to efficiency and labour productivity. Although the density and diversity argument seems widely accepted as conducive to the cross-fertilisation of ideas and fostering the generation of new knowledge, the empirical evidence seems to be mixed.

The authors wanted to understand local conditions for learning by analysing how productive knowledge spillovers in cities are conditioned by local personality traits as well as interactions with the structural city environment. They used psychological research showing that one often cannot separate the study of inter-individual differences and the study of effects of the environment when explaining human behaviour and learning. It might be this person-context interaction that is key to the economic vitality of cities due to enhancing effects of such interactions on knowledge spillovers. They had 2 hypothesis: one is local openness has a positive effect on entrepreneurship quality of cities, and two a favourable structural city environment can moderate and strengthen the positive effect of local openness on entrepreneurship quality of cities. They used data from the States to test their hypotheses.

During their analysis, the authors were able to confirm the first hypothesis, that local openness has a positive effect on entrepreneurship quality of cities. They realised that increasing openness with only one point will increase the quality entrepreneurship by 10 percent. Density and diversity also have positive effects on the quality of entrepreneurship. The openness-diversity-density triangular also proved to be significant in explaining the quality entrepreneurship. Finally, they also proved the second hypothesis to be true, that a favourable structural city environment can moderate and strengthen the positive effect of local openness on entrepreneurship quality of cities. Interestingly, specialisation – which can create a lock-in for innovation and generating new ideas had a negative effect on quality entrepreneurship of cities.

The results show that, first, the local openness is positively associated with quality entrepreneurship. Second, there is an important interaction between local openness and the structural city environment, like diversity and density. A favourable structural city environment meaning high density and diversity strengthens the openness effect on quality entrepreneurship by up to 35%. On the other hand, local openness has a clear additionality for quality entrepreneurship of those cities that already have a favourable structural city environment. Such cities can further enhance their quality entrepreneurship up to two times by having more open people.

Taken all this together, knowledge spillovers and economic performance not only require populations with agency, but are considerably amplified and increased with local openness embedded in and interacting with a favourable structural city environment. This empirical evidence proves that people matter in terms of what makes them human, the dimension of their personality. Knowledge spillovers is not only about having new knowledge stemming from diversity and frequent interfaces among people stemming from density, but also about the openness of those people to the ideas and possibilities inherent in those new ideas and human interactions.

So what makes a city successful? The extent of density and diversity matters greatly in shaping economic vitality – meaning quality entrepreneurship. But the human side is important too. The psychological characteristics of the people themselves matter in shaping local economic vitality in two important ways. Local openness and people’s agency enhance knowledge exchange and interactions between people, thus knowledge spillovers, leading to economic vitality. Moreover, a favourable structural city environment is therefore more effective in enhancing knowledge spillovers than other city environments because it also enables people to achieve amplified knowledge exchange and interactions. Urban diversity and density may operate as an external enabler or catalyst for locals with openness to contribute to knowledge spillovers. It is not just firms and industries that matter for knowledge spillovers, but ultimately the inhabitants. And people differ from one another not just in terms of human capital but in their personalities too, which is a key ingredient driving knowledge spillovers. What may really matter is how people in cities unlock their agentic tendencies to help turn a favourable city environment into economic outputs.

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What was the most interesting part for you? What questions did arise for you? Do you have any follow up question? Let me know on Twitter at WTF4Cities or on the wtf4cities.com website where the transcripts and show notes are available! Additionally, I will highly appreciate if you consider subscribing to the podcast or on the website. I hope this was an interesting paper for you as well, and thanks for tuning in!

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Finally, as the most important things, I would like to highlight 3 aspects:

1. The extent of density and diversity matters greatly in shaping economic vitality – meaning quality entrepreneurship.
2. It is not just firms and industries that matter for knowledge spillovers, but ultimately the people who differ from one another not just in terms of human capital but in their personalities too, which is a key ingredient driving knowledge spillovers.
3. What may really matter is how people in cities unlock their agentic tendencies to help turn a favourable city environment into economic outputs.

Additionally, it would be great to talk about the following questions:

1. Do think that cities are the economic engines this article presents?
2. How do you participate in innovation and knowledge creation in your city?
3. What do you think how your city structure helps or obstructs such innovation and knowledge generation?
4. How do you unlock your agentic tendencies to help create economic outputs due to your city structure?

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