After weeks of uncertainty over the survival of Liz Truss’ low-tax, low-regulation investment zones, their fate was finally sealed by the Chancellor during his recent Autumn Statement. Six hundred and twenty six proposals submitted by ninety local authorities would no longer be taken forward, with the programme set to be replaced by a limited number of university-led industrial clusters.

Putting aside for a moment the sheer waste of limited local government resource in compiling these proposals, this is a welcome change of direction. While investment zones identified the right problem – that places with historic underinvestment need more targeted interventions to stimulate economic growth - they were ultimately the wrong solution. Developing low-tax, low-regulation zones in underperforming local economies was likely to compound their existing labour market issues rather than alleviate them. The new proposal, that seeks to target business investment towards places by exploiting the knowledge bases of universities that relate to potential in high-growth sectors, is more likely to generate a virtuous cycle of inclusive, local growth.

But many attempts to develop industrial clusters have failed spectacularly, and following months of political turmoil, the current plans lack detail. If the government intends to use these new clusters to mark a point of difference between their vision for growth and that of their predecessors, then they cannot reflect the growth-at-any-cost principles of the Truss administration.

Where should new clusters be located?

Previous CPP research has shown that even in areas with low growth and low investment, there are often pockets of high-productivity, high-growth industries that for various reasons, may struggle to scale up. Targeting such areas has been the approach of President Biden’s recent Build Back Better Regional Challenge in the United States, which has focused largely on high growth-sectors in rural, tribal, and coal-impacted communities, replicating a similar approach to cluster development as seen in many developing economies.[1] Areas in the UK with considerable space to catch up, with some knowledge base in a high-growth potential sector, should be prioritized by government for selection.

As well as targeting areas with below average investment and growth, areas with weaker local collaboration networks, where the local knowledge economy is more siloed, could be significant beneficiaries of targeted cluster initiatives. Recent data shows that nearly 4 in 10 (38%) higher education (HE) providers, including universities, received no income from collaborative research in 2020/21, suggesting significant fragmentation of our knowledge network.[2] Clustering interventions that strengthen university networks outwards into local communities through greater collaboration with institutions in the private, public, and the voluntary and community (VCSE) sectors, will help ensure that the social value they generate– as research and development (R&D) practitioners and as developers of human capital – is more complementary to local industrial need.

What should the funding and governance landscape for new clusters look like?

There is no one-size-fits-all solution for how clusters should be developed. The thriving Scandinavian life science cluster Medicon Valley has developed through a partnership between two separate development agencies, Copenhagen Capacity and Invest in Skåne, reflecting the cluster’s unique geographic spread across both Denmark and Sweden. But generally, successful clusters are those that embrace governance as an enabler rather than a barrier to growth, and who leverage partnership working to draw in investment and develop a global reputation. Central government should support new cluster development to be driven by local knowledge and specialisation, and designed collaboratively with local partners, rather than by any centrally set criteria. Making this possible will require deeper devolution on skills, education, and industrial policy, to both local and combined authorities, marking a sharp shift in mentality away from excessive centralisation.

Financial sustainability is also key. For new clusters to become permanent features of local economies, they will need a stream of dedicated, long-term public investment, to attract the levels of private investment necessary to drive sustainable, long-term growth. Ensuring that new clusters are not subjected to short-term fiscal windows, such as spending reviews and electoral cycles, will help ensure that they develop irrespective of any changes in the political context. We already know the limits of short-termism in local growth funding. Our current delivery model of short-term funding settlements, competitive bidding, and tightly ringfenced funding based upon centrally set criteria deters private investment. New clusters therefore represent an opportunity to depart from this approach – one that should be embraced.

How can new clusters ensure that the value they create reaches out to the wider local economy?

Industrial clusters can be effective means of attracting inward investment and generating financial value, but it is equally important that this translates into broader social and public value that is felt throughout the wider local economy. While no single policy holds the answer, building in the principles of inclusive innovation and good work, and developing clusters in collaboration with local government and anchor institutions, can help ensure that their value spreads out into communities.

A first step may be for universities and other relevant cluster-based organisations to agree and commit to mutually beneficial social objectives with local government and the wider community. This would help ensure new clusters are centres of good work – by incentivising organisations to pay the real living wage, using social value procurement to spread good employment practices through supply chains, and signing up to a local employment charter.

Clusters should also aspire to become focal points of local entrepreneurship and innovation. Offering mentoring to local entrepreneurs, reserving start-up space for local firms and social enterprises, and offering technical and management support for firms to adopt locally produced technology, would help cluster-based knowledge spill out into the wider local economy. Initiatives such as Nexus in Leeds, and Newcastle Helix, are good case studies in how to develop dedicated institutions to help knowledge outputs translate into real value in local economies.

Finally, local educational institutions should be brought into cluster networks to ensure that employment opportunities are widely accessible to the local population, giving communities a platform to the opportunities on their doorstep. Businesses should work in partnership with local colleges and universities to develop bespoke courses to meet future skill requirements in the area, creating entry routes for employment through a balance of both technical and higher-level qualifications, and apprenticeships. Addressing local barriers to inclusion and wellbeing by establishing cluster-wide innovation challenges could also help encourage a more diverse workforce, which is key to driving inclusive growth.[3]

CPP will be publishing new research on university-based cluster design and inclusive innovation in the new year