The quite remarkable insights into innovation in mega-regions recently in Shanghai has led to new innovative strategies to increase innovation in China. It is recognised there that innovation is the foundation for progress to prosperity. Innovation, of course, has taken us from the caves.
Three large new high-rise office towers were built in Shanghai not long ago. After several years it was found that they were only 30% occupied. (It is unknown whether the 30% were anchor tenants.) No doubt, the towers would never have been built had they been expected to be almost empty after some years in such a large, busy CBD.
It turned out that many managers had transferred their businesses from the CBD to suburban hubs in Shanghai nearer to where their staff lived. The reason was that staff found it too challenging to continue to commute to the CBD everyday in the overcrowded city.
Until then, it was thought that it was efficacious to agglomerate people in the CBD for optimum innovation. Now businesses were relocating to smaller, suburban centres, which would be lower cost. Dis-agglomeration into poly-centricity was potentially reducing innovation long-term.
It may be instructive to examine some of the issues that managements must face in moving to suburban hubs. The cost of renting or building an office would be less in the suburbs and a major incentive. Loss of good staff would be a disincentive that was overcome by the imperative to move nearer to where most staff live in a response to high congestion.
The first major issue would be where do staff live, and which hub was nearest to most of them? Clearly, more staff would be retained, if the office were located there. In any case, most staff would be lost from the opposite quadrant of the city. Many would be lost from the adjacent quadrants, as staff from other quadrants would have farther to commute than to the CBD, if people would have to travel into the CBD and out again to reach the new location.
The structure of many public transport systems is CBD centric with few ‘cross-country’ services to other hubs and jobs. This isolates hubs in the suburbs even more, exacerbating their smaller size. It reduces the opportunity for informal meetings and discussing innovative ideas.
A related issue would be where are similar businesses located? If it were an insurance business for instance, in which hub do insurance businesses tend to congregate? It would be attractive to relocate to an existing favourable labour market. Do most of the staff live in this labour market already?
There is the prospect of losing 50% or more staff who live in other quadrants and who would have to commute farther when commuting is a challenge. If the business relocated to a favourable labour market, it would have access to suitable staff to employ as replacements. If most staff lived elsewhere, it would be more difficult to replace them. It would cost more to give incentives to key staff to stay and commute farther or to relocate where they live to near the chosen hub.
The second major issue is the office building. Are there suitable buildings to rent or must the business build a new one? There may be considerable competition for rented offices in the selected hub. To build would delay the move 2-3 years. These add to the cost, but they are still likely to be less than in the CBD where there is a property price premium for close access to others and the centre of the public transport system.
The prime concern of management in a move would be ensuring continuity of operations. Innovation would be on the back-burner. Indeed, a smaller staff would tend to reduce innovation until it recovered size, experience and quality in maybe some years’ time. The hub would be a smaller labour pool than the CBD, even if there were some like businesses from which to acquire staff.
The hub by definition would be a smaller agglomeration than the CBD in which to anticipate “serendipity collisions” to foster exchange of ideas for innovation.
Certainly, there are vastly more people working outside the CBD in a city. Are they innovative, or do they seek innovation or are they responsible for innovation? Of course, innovation occurs outside the CBD in non-agglomerations, but not at the same pace and intensity as in large agglomerations, or even in smaller hubs. Innovation does occur in somewhat isolated factories and offices and possibly more in industrial complexes. Innovation in these organisations may be characterised more as productivity improvements, often incremental. More could be done, as illustrated by Toyota.
In the 1980s, Toyota car plants in Japan received 70,000 suggestions a year. They were encouraged, investigated and rewarded if good. Toyota was successful, very competitive, grew and became more resilient. Job security was high (which supported the ‘jobs for life’ policy). Probably, the higher job security resulting from productive suggestions is an incentive for the shop-floor and office to make more suggestions. It is a management issue that can be mutually rewarding.
Major steps in productivity generally arise when new plant, equipment and computers are installed which are more productive than the old ones they replace after they have depreciated over some years. The new machinery incorporates the greater productivity and innovation that its manufacturers have generated over the years since the old machinery was first purchased. It can be significant: 10 to 20 to 30 percent on installation. This is a wide spread and common source of productivity improvement (innovation) in the economy. Competition drives replacement of old by new more productive equipment. Competition drives machinery manufacturers to innovate. High Speed Rail and Fast Freight Rail introduced in Australia would halve fares and freight rates by replacing very old railways with new high-tech railways for a huge step change in productivity improvement.
Machinery replacement is spread over many years and many businesses. Its productivity can be quite large for individual businesses, but they do not all buy at once, so the total economy-wide effect of ‘capital productivity’ is spread over time and is only up to around 2%pa. Average annual private investment indicates the rate of installation of new equipment. This fluctuates with economic growth: higher in a boom, lower in a recession as it is brought forward or deferred. ‘Labour productivity’ is associated with organisation of work at up to 2%pa and varies with growth. Both forms of productivity combined create real annual GDP growth, presently low, at about 2.3%pa on average in Australia. Labour productivity is average, but capital productivity is very low based on low private investment.
It is recognised that lone innovation by individuals in their home garages still may happen with spectacular results. These may grow into very big new businesses.
It seems reasonable to suppose that innovation would fade as businesses leave the prime CBD agglomeration. This would be particularly concerning in a major mega-city like Shanghai. The 70% vacancy of the three big new office towers was not sudden, though it indicated the scale of the issue. Many businesses must have been relocating for some years when it may take 2-3 years to build new offices in a developing hub and as many again perhaps to reach the previous business operating scale. Innovation must have been fading for some time in Shanghai.
Chinese policy response
The reaction of the Chinese government to these developments was to reinforce the construction of High Speed Rail (HSR) between cities. It selected satellite cities of major cities and ensured that both their CBDs were connected by HSR. Generally, the CBDs of satellite cities are much larger than the hubs in major cities. They formed mega-regions made up of several major cities and satellite cites connected by HSR to pull together as the Chinese population urbanised rapidly on a large scale.
The Chinese President Xi Jinping is personally supervising the construction of a large new high-tech city called Xionan 120km southwest of Beijing as a leading element of the Beijing mega-region and as a signal of government policy priority. The new city is on a HSR line connecting it to Beijing. It is 60 Km from the new second Beijing Airport on the same HSR line.
There is determination in China not to allow poly-centric mega-cities to fade the country’s innovation. China has developed a policy to reverse the trend by connecting city CBDs by HSR in mega-regions for easier connectivity and agglomeration of its most innovative people. President Xi aims to make China the world leading high-tech nation based on superior performance of its mega-regions. It will increase its international competitiveness and comparative advantage through mega-regions.
In China, Australia has a high-tech, world leading model for a mega-region and a preview of the effect of poly-centric mega-cities some decades before they fully develop here. It raises serious questions about present government policy of letting Melbourne and Sydney grow to 8-10-12 million people. Polycentricity in suburban hubs is already occurring at Sydney and Melbourne populations of 5 million. People are complaining of challenging commutes to their CBDs. Innovation is beginning to fade.
The message that seems to be there is opportunity, which should be explored in Australia for enhancing innovation rather than letting it fade. This would be achieved by dispersing population increase in the regions in highly productive and innovative new cities. They would be built with excellent public transport to their CBDs for “serendipity collisions” from the start and growing with the population, not after. The cities would be built at lower cost in stages and brought together along an east coast mega-region. People would be well connected between their new city CBDs and old cities’ CBDs rapidly by HSR in one large mega-agglomeration. Growing innovation in new cities would offset fading innovation in old cites. It would reduce fading through greater CBD inter-connectivity by HSR. In time, businesses would move to the CBDs of new cities in the mega-region, rather than hubs of congested mega-cities.
The advantages of mega-regions are that they create larger joined up labour and job markets; a single, more diverse housing market; greater access to a bigger variety of leisure facilities; closer connectivity and cooperation of businesses for productivity improvement and innovation to increase international competition; and collaboration of states instead of unproductive competition.
It has been said that there is a trend for businesses to disaggregate or demerge to focus their main capabilities on core activities and to sell-off other parts of their no longer needed internal supply chains. This creates many new businesses in the supply chain, all of which need close collaboration with suppliers and customers. The mega-region would facilitate the many business connections and collaborations which enhances performance, whether or not businesses were demerging.
A superior performing Australian east coast mega-region would be preferable to relatively isolated, overcrowded, highly congested poly-centric mega-cities of less than full capacity to innovate, which would have lower international competitiveness compared to the already developed mega-regions in Japan, China and India all with HSR. (Please see www.veryfasttrain.com.au )
People in Melbourne and Sydney are already showing their dissatisfaction with government policy at present population size, resulting in overcrowding, high congestion, and low growth. An east coast mega-region would be practical and viable. It would be worth considering. The investment would lift GDP growth back to pre-GFC 3.5%pa. Higher growth would sustain Australia’s high wages and high welfare, which are under strain from lower growth. The mega-region would overcome these worrying issues and enhance innovation and hence prosperity rather than continue to dissipate it as at present.