Manufacturing in the New Urban Economy

In large cities in developed countries, the share of manufacturing has declined drastically in the last decades, and the share of services has grown. Many manufacturing firms have closed or moved to lower-cost locations. Manufacturing is pushed out of cities because of space constraints, rising costs of land and real estate, and an increasing environmental awareness; at the same time it is pulled to other regions because of costs advantages, availability of space, and/or better transportation possibilities. The ongoing process of globalisation seems to speed up the shift of manufacturing employment to lower-costs locations. ‘Routinized’ activities tend to disappear more rapidly than complex manufacturing. The process of deindustrialisation is often seen as part of the inevitable shift towards a ‘knowledge based economy’. In this new economy, not the production of tangible, physical goods but rather the creation of abstractions such as knowledge and information would form the economic ‘raison d’etre’ of modern metropolitan areas. Urban economies come to rely on research and development, headquarter functions, financial and other business services, and tourism. Recently, the ‘creative industries’ are added to the list as sources of growth. This study focuses on the changing link between manufacturing (defined as activities of physical transformation) and knowledge-based activities in urban regions. Key questions within this central theme include: What is the impact of de-industrialization on different types of cities; What is the link between production and R&D and service functions in space; and What is the role of urban and regional management in industrial development? To address the research questions, we have developed a framework of analysis that combines insights from organisational studies and from regional economic literature. Major elements in our framework are local and global networks, regional foundations (regional characteristics that may increase embeddedness of a certain industry in a region), external developments that influence cluster development (such as technological trends), and the performance of the cluster (for instance growth of employment and ‘upgrading’). For the networks, we make a distinction between ‘production networks’, focussing on operational functions as production and ‘knowledge networks’, related to higher parts of the value chain as R&D and design. We have applied our framework of analysis in 10 case studies in cities in Western Europe, South America, Eastern Europe and Asia. Our case cities can be divided in 5 groups: ‘Traditional’ industrial cities in transition (Rotterdam, Dortmund, Porto); post- communist industrial cities (Ostrava); advanced diversified cities (Munich, Paris); smaller industry towns (Eindhoven, Turku) and emerging giants (Shanghai, São Paulo). The case studies are based on a large number of in-depth interviews with managers of MNEs and their suppliers, representatives of universities and other knowledge institutes and with local and regional policy makers. In each city, we have analysed a specific sector: automotive (in Munich, Eindhoven, Ostrava, Paris, Shanghai and São Paulo), metal-electro (Dortmund and Porto), food (Rotterdam) and shipbuilding (Turku). We have found that role of manufacturing still plays a key role in all our case studies, but there are significant differences between the types of cities. In the post-communist industrial city and in the emerging giants, manufacturing is the driver of regional growth, with strong impacts on other sectors. In these cities, massive inflows of plants give a boost to the regional economy, and good staff has become a scarce commodity. The service sector is also growing fast and many business service companies locate in the slipstream of industrial firms. In the traditional industrial cities in transition, manufacturing is not the driver of growth, but it is still an important economic sector, with significant links to other sectors. In these cities, the transition towards a service economy will continue but manufacturing is likely to remain resilient. Industrial activities in this type of city will probably focus on two main segments. The first one is the ‘knowledge intensive’ manufacturing of complex and specialised products, in small volumes, for global niche markets. This type of manufacturing relies on the regional knowledge base: it depends on skilled engineers, it has a strong service component, and it is embedded in global networks of knowledge. In this segment, the physical ‘production’ can hardly be separated from R&D and services. Traditional industrial cities will also remain attractive for a second type of manufacturing: one for which proximity and access to consumer markets plays a role. Examples are food production and distribution, but also value added manufacturing (i.e. reworking imported products for local markets), and some process industries. Manufacturing in advanced diversified cities is predominantly knowledge intensive, and this will remain the case. These cities combine a strong knowledge base (a highly skilled workforce and excellent knowledge institutes) with a diversified and modern economy, which helps to develop of new types of networks and innovations. These cities are the home of ‘lead firms’’ in the project economy and are ‘decision centres’ from which global production networks are controlled. In these urban regions, mass production –if it still exists- will be further hollowed out, given high factor costs, and factories will be supplied from far-away regions, but this tendency will have no consequences for their knowledge base and their strengths in the upstream parts of the value chain. This does not mean that manufacturing will disappear altogether: their excellent and diverse knowledge base makes them attractive environments for small scale, sophisticated production that is linked to knowledge centres. In this respect, they will be new ‘competitors’ for industrial cities. At the same time, these cities face new competition from emerging economies. Our study shows that urban regions in Central Europe and Asia are rapidly developing research and development competences on a strategic level. The smaller industrial towns in our study have been very successful in constantly modernising their industry, and nowadays they excel in specific industrial niche markets. Industrial companies in these towns have gone up in the value chain (now, they specialise in R&D, design, assembly, and marketing), and have outsourced a large part of physical production. They benefit from growing global demand for sophisticated industrial products. These cities are very strongly embedded in global production and knowledge networks. As a result, their economic future depends heavily on international economic developments. Traditionally, the economies of these cities were dominated by one large industrial company, but our research suggests that this dominance has decreased. One reason for this trend is the increased international orientation of suppliers: they no longer depend on assignments from the big local multinational, but have successfully developed their own niche markets and exploit them internationally. Key challenges for this kind of cities are to keep talent in the region, improvement of international accessibility, and to effectively cooperate with cities nearby to overcome the disadvantage of a narrow and very specialised knowledge base. Another major outcome of the study is the tendency towards the ‘project economy’. Industrial production is nowadays organized in more or less temporary projects, in which several partners work together. Internally, many industrial firms have redesigned themselves into connected sets of semi-independent business units. Externally, they engage in a variety of networks with different types of partners, in order to pool resources, to benefit from each other’s capabilities, to share risks, and to ‘tap’ from alternative knowledge sources. Partnerships are formed with partners in the same region as well as with global partners. Other major results include an increasing global sourcing strategy by manufacturing firms and an increasing geographical scope of industrial networks. In all of our case studies, industrial companies have strategic relationships with firms located far beyond their home city. For instance, in Paris, the automotive cluster stretches out to Normandy and Bretagne. We have also found that the link between R&D and manufacturing shows a mixed picture; in some cases production has been shifted to low cost countries, while R&D has been kept in developed countries. In other cases, R&D functions have followed manufacturing to low cost countries, or production has been kept next to the R&D core in ‘the West’.