Quality of Life, Human Capital and the Innovativeness of European Cities

Diploma Thesis, 2003

73 Pages, Grade: Sehr Gut



1. Introduction
1.1. Background
1.2. Goal of the study - Hypothesis
1.3. Research concept
1.4. Report structure

2. Human Capital Attraction Theory
2.1. Knowledge - Raw material of the 21st century
2.1.1. Defining knowledge
2.1.2. The central role of human capital
2.1.3. The war for talent
2.2. Connecting attractiveness of location and the knowledge base
2.3. Connecting knowledge base of population and the knowledge intensity of industry
2.3.1. Attracting high-tech companies
2.3.2. Increasing the chance of innovative start-up companies
2.4. Further competitiveness through knowledge spillovers
2.4.1. The concept of knowledge spillovers
2.4.2. Geographical impact of knowledge spillovers
2.4.3. Types of knowledge spillovers
2.4.4. Consequences
2.5. Connecting knowledge-intensity of industry and innovation

3. Research and Study Design
3.1. Theoretical concept
3.2. Evidence from US cities
3.3. Data collection and sources
3.4. Independent variables
3.4.1. Quality of Living Index 2002
3.4.2. Environment Index 2002
3.4.3. Other quality of life indicators
3.5. Dependent variable
3.5.1. Patents per million workers 1999
3.5.2. Science Citations Index (SCI)
3.6. Intermediary variables
3.6.1. Knowledge base of population - Education Index
3.6.2. Knowledge intensity of local industry - Business R&D expenditure
3.6.3. Percentage of employment in technology oriented sectors
3.7. Interfering variable
3.8. The model
3.9. Statistical tools

4. Findings
4.1. Summary
4.2. Quality of life, R&D, and the innovativeness of cities
4.2.1. Explaining the number of scientific citations
4.2.2. Explaining the number of patents
4.3. Quality of life, income and knowledge workers
4.4. Quality of life, knowledge workers, and the high-tech industry
4.5. Quality of life and R&D productivity

5. Conclusion
5.1. Quality of life and innovativeness are connected
5.2. Validity of study
5.2.1. Sample size
5.2.2. Regional vs. city level data
5.2.3. Quality of life - subjective vs. objective criteria
5.2.4. Educational level
5.2.5. Research and development spending
5.2.6. Direction of causality
5.3. Implications and Recommendations
5.3.1. Stop attracting companies by monetary means
5.3.2. Invest in quality of life
5.3.3. Create a learning environment
5.4. Areas for further research

6. References



Figure 2-1: What matters most to IT Workers (out of 11 key categories)

Table 2-2: Rank of important factors in building a positive business environment

Figure 3-1: Amenities and Education Level/Knowledge Intensity

Figure 3-2: Determinants and Weighting of the Quality of Living Index

Figure 3-3: The Statistical Model

Table 4-1: Correlations between Quality of Life and Innovativeness Measures

Figure 4-2: Environmental condition and Scientific Citations

Table 4-3: Effects of Environment and Education on SCI

Figure 4-4: Business R&D and Patents per Million Workers

Table 4-5: Effects of Quality of Life and GDP on Patents

Figure 4-6: Quality of Life and the Knowledge Base of the Population

Figure 4-7: GDP per Capita and Education Index

Table 4-8: Effects of Quality of Life and GDP/Capita on Education

Figure 4-9: Environmental Condition and Business R&D

Figure 4-10: Educational Level and Business R&D

Table: 4-11: Effects of Education and Environment on Business R&D

Figure 4-12: Business R&D expenditure and R&D efficiency

Figure 4-13: Environment and R&D efficiency

Figure 5-1: Measured Effects of Quality of Life on Innovativeness


illustration not visible in this excerpt

1. Introduction

1.1. Background

Instead of offering tax brakes to attract new companies farsighted cities now invest in environmental protection and the local music scene. Cars are being banned from inner cities and street artists are explicitly welcome in order to create a nice and entertaining atmosphere.

Times and rules have changed in the transition from an industrial to a knowledge-based economy; a shift that has not only led to huge layoffs in the production sector and gains for high-tech companies and the new economy. In this respect, it also changed the rules for economic growth of cities and regions. The emphasis is now on the creation of new ideas produced by highly educated professionals. It is the time of creative knowledge workers that stir economic growth by finding groundbreaking new solutions rather than improving existing technologies. A high quality of life has become critical for a region to attract human capital, the new engine of economic growth.

1.2. Goal of the study - Hypothesis

A number of studies recently attempted to shed light on the role, amenities and environmental quality play in attracting knowledge workers and stirring economic growth. This paper intends to join the effort to enhance the understanding of this new field. The goal of the study is to find out whether there is evidence for the hypothesis that European cities with a high quality of life are more innovative. In order to do this the following three questions have to be answered:

1. “Do high quality of life cities attract more educated professionals?”
2. “Does an over proportionally high percentage of educated workers in a city lead to an accumulation of knowledge-based companies?”
3. “Does a high research intensity of companies automatically lead to a better innovative performance?”

1.3. Research concept

To prove the hypothesis the author first carried out an extensive research collecting relevant theoretical concepts and empirical studies in the field. Special focus laid on location patterns of highly educated personnel and knowledge intensive companies. Besides that, the author also investigated the role of agglomeration effects in determining the competitiveness of local economies. The statistical nature of the study made it necessary to get additionally information about general statistical concepts and appropriate analysis tools. In the next step an extensive amount of data had to be collected, which reflects the actual performance of European cities in terms of quality of life, innovativeness and various other factors necessary to complete the picture. Finally, regression and correlation models were used to analyze the data and to reveal possible patterns that give evidence for the correctness or incorrectness of the hypothesis.

1.4. Report structure

The report is organized in four main pillars. The first part (chapter 2) gives a summary of different theoretical concepts. Together they form the Human Capital Attraction Theory, which explains the overall reasoning for a connection between quality of life and innovativeness. After the theory follows an explanation of the research and study design. This part (chapter 3) informs about the specific reasoning used for the analysis and discusses the findings and comparability of a similar study, carried out in the United States. It further describes the data collection process and gives information about the variables used in the final statistical model. Furthermore, it illustrates the model and reviews the tools that were used to assess the relationship between the variables. The third part (chapter 4) lists and describes the findings of the research. The conclusion (chapter 5) summarizes new insight, sheds light on the validity of the results, gives recommendations for local decision makers on how to use the new knowledge and suggests further research.

2. Human Capital Attraction Theory

In the past years, economists and other social scientists have shown increased interest in the intersection of economics and geography. The latest attempts have focused on the particular role human capital plays in regional economic growth (Lucas 1988, Glaeser 1992, Simon 1998, et al.). Building upon ideas initially associated with Jacobs (1961), Lucas argues that regional economic growth mainly stems from the accumulation of human capital, or what he refers to as “Jane Jacobs externalities”. Despite the recognition that human capital is a central factor in regional growth, economists have paid little attention to the factors associated with the geographic distribution of human capital and its effects on the formation of industry. The Human Capital Attraction Theory is a new concept that may explain the agglomeration of high-tech companies in modern economies, focusing on the effects highly skilled professionals have on the location patterns of especially knowledge-based companies. Cities, which do well in attracting highly educated professionals, should enjoy a significant economic advantage over cities that do not.

The reasoning of the theory is as follows:

- Attractive cities attract more highly educated people.
- A big pool of educated labor is a major advantage in forming a competitive knowledge-based industry. Skilled workers not only attract high-tech companies and increase the likelihood of successful start-up companies; they also tend to attract other talents. This intensifies the process.
- A city that is home to many high-tech companies enjoys an additional advantage, based on positive externalities due to agglomeration. The more high-tech companies from the same sector or a from a variety of different sectors are located next to each other the higher is the chance for knowledge spillovers. This increases the research and development efficiency and attracts even more knowledge-based companies. The effect further increases the comparative advantage of a city in the future.
- A high number of research and development intensive companies causes a higher number of patents and scientific articles, which can be used as indicators to describe the innovativeness of a city.

Chapters 2.2 to 2.5 explain each part of the theory in detail and provide data about studies on related topics. To better understand the interconnection of the concept with current changes in the economic system chapter 2.1 will start with an overview of the new economic mechanisms and the importance of knowledge and human capital for contemporary growth.

2.1. Knowledge - Raw material of the 21st century

When we look at recent changes in the economic structure, we can see a tremendous shift from an originally industrial based economy towards a knowledge-based economy. According to the OECD an industry is knowledge-based when it is “…an intensive user of high technology and/or has a relatively highly skilled workforce that is required to benefit fully from technological activities” (OECD 2001). By the end of the 1990s knowledge intensive manufacturing and services accounted for 38% of total OECD value added and investment in knowledge1 exceeded 10% of OECD-wide GDP. The figure has been increasing by about 3.4% annually during the 1990s (OECD 2001).

Decentralized and home-based businesses have replaced huge vertically integrated organizations. Flexibility, specialization, quality, speed and networks have risen in importance while quantity, stability and low cost production have fallen behind. The “New Economy” seems to connect to the roots of industrialization where expertise, quality and customization were the primary basis of competitive advantage. Also the revitalized urban centers and the frequently discussed integrated regions are rather a further development of early industrial cities of the late 19th century than a process that builds on the concept of isolated technology parks and Greenfield plants, which were common in the post Second World War era. (Henton and Walesh 1998)

For a more detailed comparison of economic eras ranging from agriculture via two industrial stages towards a knowledge-based economy please see appendix A.

Knowledge has replaced natural resources and the efficiency of physical labor as the key factor of production (Peter Drucker 1993). There is a broad consensus among economists today that “knowledge” is crucial for economic success and that the importance will further increase in the years to come (Krogh and Venzin 1994, et al.). Innovation (as the outcome of intentional activities in private firms) is seen as one of the most important sources of technological progress in OECD economies (Dosi 1988, Fagerberg 1994, et al.).

The increasing importance of knowledge can be seen in many aspects of economic life. One example is the ratio between the book value and the market value of companies. While in the early 1980s this ratio was approximately one it reached six by the year 2000 (Lermusiaux 2003). The market valuation of Microsoft, whose value resides almost entirely in the heads of its employees, is now higher than that of big industrial producers such as GM, Ford or Boeing (Business Week 1999). Today the United States make more money with the export of copyrights and patents than with any other good, including weapons and industrial products (Klein 2002).

Another sign for the increased importance of knowledge is the growing number of international disputes about patents and copyrights. Quarrels between file sharing communities and the music industry over copyright issues or between health organizations and the pharmaceutical industry over the production of generic drugs for HIV/AIDS victims in developing nations make clear how valuable knowledge and knowledge-based products have become.

The folowing example shows what effect investment into the knowledge base can have on the competitiveness of a whole country.

After Finland’s economy was hurled into deep depression because of the Russian financial crisis in 1998 economists assessed the damage and found that the production of high- technology goods and services was much less wounded than other sectors. To prevent a similar setback in the future policy makers put additional emphasis on the development of new innovative industries and a first class educational system. Only three years later in 2001 Finland topped the world competitiveness ranking (up from 19th place in 1999) as well as the growth competitiveness ranking (up from 9th place in 1999) published by the World Economic Forum (2001). In the same year the United Nations Development Programme rated Finland to be the technologically most advanced country in the world (United Nations 2001).

By looking at all these developments, we can clearly say that the knowledge-based society has already become real. Knowledge has become the number one resource for competitiveness and economic success. It is the raw material of the 21st century.

2.1.1. Defining knowledge

In light of the importance of knowledge it surprises that no common term has yet been agreed on to define the word. While in many scientific discussions “knowledge” is used in a rather wide sense, often including information and feelings, traditional epistemology keeps it narrow, describing it as justified, true belief. Krogh and Köhne (1998) suggest a practically more useful definition: “...all types of wisdom and skills, which an individual can use to solve problems and which allows it to understand and interpret things such as information.” [own translation]2 Following these sources, the author makes a distinction between knowledge and information, defining knowledge as a pre-condition to understand and to be able to deliberately use information. This distinction is important because it directly leads to the new importance of human capital.

2.1.2. The central role of human capital

While information and communication technologies (ICT) have helped to transmit and store information they have not brought much progress in transmitting knowledge. The following quote from an US industrialist and innovator illustrates the difficulties one faces when trying to pass on knowledge.

" You can send a message around the world within the fifth part of a second. But it can take years till you get through some people's skull. "

(Charles F. Kettering, 1876-1958)

In a world characterized by an ever-increasing amount of information, human capital is becoming even more important. This is because it needs smart and open-minded people that use their “intellectual capital”3 and creativity to transform information into valuable knowledge. It is also people that use their knowledge for innovation purposes, to create something new, which then likely benefits not only the inventor but the whole society.

After decades of largely being wasted as a cheap production factor in large factories human capital has made its revival in the core of economic activity. Companies now increasingly organize their activities around knowledgeable people and invest an ever-growing amount of money in their further development. Regions are part of the game because they depend economically on the success of their local companies. They can also influence the process by attracting creative professionals e.g. by improving the educational system or by increasing the general attractiveness of the location.

2.1.3. The war for talent

The new importance of human capital has led to a strong demand for especially highly educated workers. At the same time demographics cause the supply to go down. In 15 years time the US population between 35 and 45 years will decrease by 15% while the economy is expected to grow at a rate of 3% to 4% per year. This will increase the demand for bright, talented 35- to 45 year olds by approximately 25%. No wonder that Ed Michaels, who describes the difficulties companies will face in the future, titled his book “The war for talent”. (Michaels 2001)

Despite higher unemployment in Europe the situation will not be much different. Estimations for Germany predict that even if the birth rate jumped overnight to 3 percent (the respective figure during the time of the baby boom) the working population would not increase before 2020. In fact there will be 1.8 million less people working then today, which will put even more pressure on companies to attract and retain good workers. The fact that some firms already pay bonuses of up to 50,000 Euros for the successful recruitment of a talent shows in which direction we are heading (Gloger 2001).

In the face of a situation where an increased importance of knowledge meets a falling supply of educated people, the Human Capital Attraction Theory , which will be discurssed in the following chapters, shows how a city’s success in attracting human capital today is going to influence its economic performance in the future.

2.2. Connecting attractiveness of location and the knowledge base

The first part of the theory explains how the attractiveness of a city increases its knowledge base.

Most knowledge resides, in the form of ideas and expertise, in human brains. To raise the intellectual base a city may invest into a better educational system, which increases the intellectual capital of the existing population or it attracts educated people from other regions. It can also combine both, e.g. by improving the reputation of its universities and at the same time opening them up for outside students. The author will argue that a high quality of life is among the most important factors to attract knowledgeable people from other regions and to keep local people from moving away.

People do not only work, they also live and enjoy their lives. A city is a site for production as well as a space for consumption. When choosing a location people take into account both, the availability of jobs and various other factors, which affect their private lives. The higher the education and skill level of a person the wider is the range of job opportunities. In addition, the mobility is likely to be higher than that of workers with low education. The need and/or will of students to relocate to a city (namely the one where the university is located) can be seen as the first major step of high educated people (as which they will later be counted as) towards a higher mobility. People that have already switched a place once are more likely to do it again in the future. While less demanded workers have to accept places where they can find a job, skilled people can choose from a variety of employment opportunities. This allows them to base their location decision mainly on non-economical factors. They still prefer cities with a stick labor market, where they can easily find a new job, in case they are not satisfied with the first one. However, if they can choose between more cities they will move to the place, where they feel most positively about to live in.

To some extent it is also possible to drag workers to a new location by offering a higher pay but at the end of the day it is questions like: “What is there?”, “Who is there?” and “What is going on in a city?” that determine where talented professionals will concentrate (Florida 2002). A survey among 20,000 IT workers in the United States revealed that the received wage level is rather unimportant when asked about the wish list for a perfect job. Challenge tops the ranking followed by flexibility. Base pay only comes third with merely 25% of the respondents saying that it is important.

Figure 2-1: What matters most to IT Workers (out of 11 key categories)

illustration not visible in this excerpt

Source: Information Week Salary Survey, 2001, analysis by Richard Florida and Kevin Stolarick in “The rise of the creative class” (Florida 2002).

The survey clearly shows that money is not the key to attract knowledge workers. The answer lies in soft facts as interviews with technology graduates at Carnegie Mellon University reveal. According to these students, cities with the following attributes are especially attractive:

- High quality of life (environmental quality, natural amenities, life style amenities)
- Political openness (tolerant and welcoming atmosphere)
- Diverse population
- Favorable earning/living cost ratio
- Possibilities for continuing education
- Good climate

The first three factors are seen to be most important. Quality of life includes several types of amenities that give people opportunities to enjoy their lives. These are a good environmental condition (low traffic, low pollution, no waste problem, etc.), natural amenities (parks, preserved lakes, a beautiful landscape) and life style offerings (bike paths, climbing walls, outdoor events and concerts). In addition, the variety of restaurants, bars, museums and theaters matters. A diverse and tolerant population or in general terms, political openness, attracts knowledge workers because it indicates a welcoming atmosphere where different perceptions and new ideas are respected. An open-minded population also helps newcomers to easily plug into the new surrounding, to get to know people and to pursue their individual goals. Excellent institutions for continuing education and a good climate are less important and only play a role when people have to make a choice between two locations that are equally attractive in the first place. (Florida 2002)

The fact that especially highly educated people prefer these factors leads to an accumulation of skilled labor at places that offer a mix of interesting job opportunities and a nice living environment including a tolerant and welcoming atmosphere.

The tendency of a big pool of educated labor to attract other talents further intensifies the accumulation effect. Social ties and similar attitudes among educated professionals influence the location decision. When having the choice between two cities of which one is home to a good friend who may even help to find an apartment or a job, one will likely choose this option. Social ties make it easy to adapt to a new situation. They substantially reduce the entrance barrier to a new place. The desire of talents to be challenged by the best (as shown in figure 2-1) is an additional force that makes them settle down in places where other professionals have already gathered.

2.3. Connecting knowledge base of population and the knowledge intensity of industry

While the first part of the theory has stressed the importance of a good living environment in order to attract educated professionals. The second part explains why a big pool of educated labor is a major advantage in forming a knowledge-based high-tech industry. A city has two options to build up a competitive high-tech industry. Either it can attract businesses from other regions or it tries to build its own companies by promoting the creation of local start-up companies. The following two sections argue that the availability of skilled labor is crucial for the success of both approaches.

2.3.1. Attracting high-tech companies

There are various reasons why high-tech companies locate at certain locations. Attracting factors are a favorable geographic location, a big market size, a state of the art communication system, a smooth local and international transportation system and the existence of an innovative milieu. The most important factor though is the availability of skilled labor. Two surveys, of which one was carried out among European businesses (Cushman & Wakefield 2002) and the other one asked highly ranked executives worldwide (Arthur Andersen 2000) underline the importance of this resource.

Table 2-2 lists the results of the second survey. When asked about the most important factors for building a positive business environment the local availability of professionals ranked second just behind “pro-business attitudes”. Technology/telecom infrastructure, corporate taxes and research/innovation activities were all less frequently mentioned as being among the three most important factors.

Table 2-2: Rank of important factors in building a positive business environment

illustration not visible in this excerpt

Source: Based on Arthur Andersen (2000)

The survey is based on interviews among companies from all sectors. High-tech companies, which are responsible for the most part of new economic growth and regional income, are even more dependent on human capital because their products are to a bigger extent based on expertise. Carly Fiorina, CEO of Hewlett Packard made this clear when he stood up at the meeting of the US Governors’ Association and told the audience that he wouldn’t care anymore about tax incentives, highway interconnections and more physical infrastructure but would simply go where the highly skilled people are (Florida 2002).

That this is not merely a single opinion of one executive but rather a distinctive force in knowledge-based industries show the actual relocations of two leading companies in the sector. Lycos, one of the first commercial internet companies moved its headquarter from Pittsburgh to Boston. The media giant Bertelsmann, which is bound by the founder’s will to keep its headquarter in the little German town of Gütersloh, transferred most of its businesses units to Munich and Hamburg. Both moves were clearly based on the desire and need to better attract professional workers.

The main motivation for knowledge companies to prefer locations with a highly skilled labor force is its positive effect on economic performance. There is a clear link between recruiting excellence and superior financial results (Watson Wyatt 2002). Companies that do a better job of attracting, developing, and retaining highly talented managers earn on average 22 percentage points higher return to shareholders (Michaels 2001). Skilled labor has by far the biggest impact on average labor productivity, followed by investments in physical capital, research outlays and advertising (Peneder 1999).

The best workers might be able to turn around a bad business while unskilled ones may even ruin the most promising ones. A high number of talents at a single place gives companies a better choice from which they can pick the best. At the same time, they may save on training, when hiring workers that have already been trained by others (Marshall 1890, Krugman 1991). Being located at the center of new ideas also fuels companies with knowledge and industry trends, which prompts Doz, Santos and Williamson to advise businesses to carefully sense where the “interesting people” are migrating to live in order to find the best location for the access of their intellectual capital (Doz 2001). More on the positive effects of knowledge and human capital agglomerations will be discussed in chapter 2.4.

2.3.2. Increasing the chance of innovative start-up companies

A big pool of educated people also increases the chance of successful start-up companies. Technically skilled labor and the presence of experienced entrepreneurs are among the most important factors for a dynamic entrepreneurial activity (Bruno and Tyzoon 1980). Knowledge about cutting edge technologies and market forces and a profound education in entrepreneurship and management techniques increase the chance of survival of a new business. Close ties to former student colleagues, which themselves eventually hold key positions in related sectors may further add to the success of a new business.

The existence of skilled labor is an important precondition for building up new companies that rejuvenate the economy. Regions that keep relying on old technologies will one day be leapfrogged by others and experience increased pressure to improve or simply hold the living standard of its population (Brezis, Krugman and Tsiddon 1991).

2.4. Further competitiveness through knowledge spillovers

This part of the theory shows how a city, that is successful in building and attracting a knowledge-intensive industry, enjoys additional advantages, which will allow it to keep or even increase its competitive position in the future.

These advantages are not caused by an external force but derive from the accumulation of companies and people. The effect, called knowledge spillovers, is naturally especially strong in those sectors of the economy that are very knowledge-intensive. High-tech companies with their focus on the production of research-intensive goods and services benefit most.

2.4.1. The concept of knowledge spillovers

The concept is based on the theory that market participants can to some extent take advantage of the knowledge produced by others without having to pay for it. “Spillovers occur when someone’s actions affect anyone else in either a positive or negative way and this effect is not [fully] paid for (in the case of a benefit) or [fully] compensated (in the case of a cost).” (Bureau of Industry Economics 1994, emphasis in original).

There are various ways how knowledge spillovers can affect economic growth. International spillovers of ideas for example directly raise an economy’s rate of growth by enabling domestic researchers and scientists to exploit ideas discovered by their foreign counterparts (Grossman and Helpman 1991). Research from Australia adds to this picture by giving empirical proof that patents are generally ineffective in preventing these learning effects. Their empirical studies have shown that normally rival firms get to know about technical characteristics of new products and processes within 12 months of their introduction (Petit and Tolwinski 1996).

2.4.2. Geographical impact of knowledge spillovers

The geographical impact of knowledge spillovers is bound to the region where the knowledge is produced. For a better understanding, it helps to see that knowledge can be divided into two categories, explicit knowledge and tacit knowledge. The first form can be easily articulated, transferred or saved. It is not bound to a person, for which it is also referred to as “disembodied knowledge”. Tacit knowledge is in many ways not apprehensible and can only be exchanged via face-to-face contact (Polanyi 1985). When it comes to innovation processes, the second form is especially important. While it is easy to read about a new idea on the internet, it might need detailed explanations and personal guidance from the innovator to fully understand and repeat the process.

This severely limits the geographical impact of most spillovers. Two studies, one about patent activities in 59 US cities (Audretsch and Mahmood 1994), the other one about 75 West German regions support this theory with empirical findings. The latter also gives a geographical half value of technological spillovers setting it between 23 km and 30 km. In other words the intensity of spillovers declines by 90% over a range of 120 kilometers (Funke and Niebuhr 2000). The consequence of this is that only companies or persons that are located very close to producer can fully benefit from the new knowledge.

2.4.3. Types of knowledge spillovers

Two different types of spillovers are responsible for the better economic performance of industries that have agglomerated at certain places.

The first form is called MAR-Spillovers (Marshall 1890, Arrow 1962, Romer 1986) or intra- industrial knowledge spillovers. It derives from a concentration of companies of one sector. The most famous example is Silicon Valley, where a well-established informal network between similar minded people created a highly efficient learning community. Neighboring firms learn by observing what others are doing; about technological developments, whom to buy from and sell to, whom to hire, what product lines are selling, and the like (Eberts and McMillen 1999).

The second form is called Jane Jacobs externality (Jacobs 1969 and 1984) or inter-industrial knowledge spillovers and is a by-product of a city’s industrial diversity. The idea is that companies also benefit from ideas originally developed in other sectors. A good example is the alliance between biotech companies and the computer industry to decode the human DNA. Also successful is the “macroeconomic joint venture” between cell phone operators and banks, which led to the innovation of mobile payment services. Latest research gives evidence that this form of knowledge spillovers is the more important one of both types (Feldman and Audretch 1999).

High-tech companies enjoy especially high benefits from these effects because their production is to a bigger extent based on ideas and knowledge. That this is likely to be true can be seen on inner city location patterns. Knowledge intensive companies tend to settle down in the center of cities, where most social interactions take place, willing to accept a higher rent, whereas production companies, which are to a lesser extent dependent on knowledge, move out of conglomerations to save on land prices. In their case, the value of increased knowledge spillovers in inner cities does not exceed the higher cost for the rent. (Beise 1999, et al.)

2.4.4. Consequences

Both types of spillovers increase the competitiveness of a regional economy but the effect in knowledge-intensive regions is stronger. First of all because these regions have more companies that produce ideas, which increases the amount of knowledge that spills over and helps others to improve their efficiency of production; secondly because a high number of ideas also increases the number of possible combinations of the same. When two people come together, each having an idea, they may combine them to create something new. When 10 people come together the possibilities of different combinations are substantially higher.

The learning effect of regions is an important aspect that likely helps cities with an already high share of high-tech companies to further strengthen their competitive position in the future.


1 Total investment in knowledge is defined and calculated as the sum of expenditure on R&D, on total higher education from public and private sources and on software, adjusted by overlaps between the three factors (OECD 2001).

2 The original definition is: “… sämtliche Kenntnisse und Fähigkeiten, die Individuen zur Lösung von Aufgaben einsetzen und welche Handlung sowie Interpretation u.a. von Informationen ermöglichen…“

3 Intellectual capital: „ […] intellectual material - knowledge, information, intellectual property, experience - that can be put to use to create wealth. “ (Stewart 1997)

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Quality of Life, Human Capital and the Innovativeness of European Cities
University of Applied Sciences Kufstein Tirol  (International Business Studies)
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innovation, cities, quality of life, human capital, knowledge economy, Florida
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Roland Spitzlinger (Author), 2003, Quality of Life, Human Capital and the Innovativeness of European Cities, Munich, GRIN Verlag, https://www.grin.com/document/151236


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