"Knowledge-Value Cities in the Digital Age" Why Human Capital Is Emerging Tech Centers' Best Asset

By: Joel Kotkin, Senior Fellow, &

Ross DeVol, Director of Regional &

Demographic Studies, Milken Institute

Executive Summary

The revitalization underway in some of America's urban centers represents one of the most important, if surprising, developments of the new millenium. Cities across the country are showing signs of a new dynamism that would have been impossible to imagine only a decade ago.

The origins of this renaissance are at once demographic, economic and cultural. A growing interest in urban life among young, unattached and well-educated individuals, and middle-aged empty-nesters, constitutes one source of urban renewal. Immigration is another, fortifying our cities' traditional role as centers of international trade and commerce in the process. Notably, tourism has also contributed significantly to this rise in urban activity, but perhaps the most salient reason for urban revival comes from the role our cities are playing in the enormous technological revolution now transforming the larger economy.

Until the early 1990s, cities were on the periphery of the technology boom, with the vast majority of technology-driven activity occurring in suburban and even quasi-rural areas. Later in the decade, however, access to the Internet on a mass scale sparked greater demand for entertainment and other creative web content. It is here, on the "soft" side of the technological revolution, that the traditional strengths of cities in the arts, marketing and graphics have come strongly into play.

As the digital age enters a new and potentially tumultuous phase, urban communities are faced with new challenges and opportunities. The opportunity lies first in appreciating that, although it is in consolidation, the shift to a digital economy is not slowing, but accelerating. Despite the dramatic drop in many technology firms' stock valuations in recent months, the business models of a large number of firms having been proven unsustainable, the trend toward use of the Internet as a communications and business tool remains in place. Many were led to believe that the New Economy was a "dot-com" economy. Certainly, Internet-based business models have an important role to play, but they, by themselves, are not the New Economy.

Knowledge and the innovation capacities of human capital are at the core of the New Economy. The key source of competitive advantage, be it among regions or industries, is its intellectual capital-that is, the knowledge embedded in its people. In the old industrial economy, the accumulation of hard assets determined economic success or failure. Today, the knowledge, skills, experience and innovation potential of talented individuals has greater value than capital equipment or even capital itself. Talented individuals are highly mobile and can reward those regions that attract them. Likewise, their loss can be punishing. To attain a competitive advantage in the New Economy, urban centers must access, create and utilize human capital. Cities that tap the knowledge assets in their midst, such as universities and research centers, will benefit from the talent that they attract to fuel local economic growth. Life-long learning and retraining programs will bolster urban economic success, forestalling the creation of a labor force that is "finished at forty." Urban areas that do not continually educate their populations face the prospect of being left behind in the New Economy.

The urban revitalization process is still in its early stages. The first cities to see the full benefit of this transformation are those that held the strongest appeal for artists, creative individuals and predominately younger educated people. By the late 1990s, these "first-tier" cities, among them, Manhattan, San Francisco, Boston, Los Angeles and Chicago, emerged as leaders in the expanding digital economy.

Today these cities have burgeoning "cyber districts" that have transformed large blocks of formerly destitute warehousing and manufacturing space into highly desirable post-industrial hubs. In many cases, these districts have become knowledge-value neighborhoods with strong residential, retail and cultural components. Concomitantly, rent for both work and living space has increased markedly in these districts, driving newer firms and workers into adjacent, formerly depressed neighborhoods. Though reduced affordability for housing, and traditional manufacturing and warehousing space, is one consequence of this new development, growing price pressure and anti-growth sentiment present prospects for choosing from a broader range of urban locations that are only beginning to harvest the opportunities of the digital economy.

Emerging-technology cities, whose populations are near or less than 500,000 persons, offer several advantages to firms, knowledge workers and entrepreneurs over their first-tier counterparts. These include far lower costs of living, a supportive business environment and an often concerted effort by local officials and business leaders to lure and nurture new industries.

A knowledge-based economy rests upon two interdependent but distinctively different skill sets. Knowledge-generation is contingent upon highly educated and skilled creative people at the pinnacle of the skill continuum, typically found in first-tier urban areas.

Knowledge deployment requires widely held quality skills and education in the middle of the skill distribution. A city will have comparative advantage in one or the other area. Most successful emerging-technology cities will find their comparative advantage in the area of execution competence, but many can position themselves as implementers of innovation. These cities excel in making products or services based upon an infrastructure and supply network that support high value-added, cost-effective production. World-class manufacturers gravitate toward execution cities.

Many cities around the country are trying to become emerging technology centers and some have made particular progress. Our research identifies several, among them, Reno, Albuquerque, Tulsa, Huntsville, Omaha and Boise. These centers, for various and often quite unique reasons, are positioning themselves well for the information age, particularly by concentrating on the infrastructure and "blue collar" functions connected with the Internet such as the development of enabling software, customer support and on-line order fulfillment.

Perhaps the most encouraging phenomenon of this digital revolution has been the movement to yet another kind of urban area-the old industrial center. Once seen as "basket cases," these regions have begun to attract significant investment and growth in their technology-related sectors. Like emerging-technology cities, they often offer lower costs than the first-tier urban centers, but often possess an impressive mix of rich architecture, history, cultural activities, institutions of higher education and well-developed transportation infrastructure. These comeback cities represent perhaps the most dramatic evidence of the potential for urban centers in the information age. Our research identifies several such centers in various stages of recovery, including Baltimore, Oakland, central Dallas, downtown Los Angeles and Hollywood, as well as smaller, old industrial communities like Kingston in New York's Hudson Valley, and Dayton, Ohio.

The resurgence of these first- and emerging-technology cities as urban centers offers many positive examples of revival in older areas. Executing clearly focused policies such as zone changes to accommodate New Economy companies and "new urbanites," crime reduction, bolstering local education and training, and reinforcing ties with local universities, creates wide-ranging urban recovery in all cities. Success also has its downside as evidenced by the pricing-out of traditional industries and working-class populations resulting in the emergence of a "dual city" of rich and poor. As the information revolution spreads and deepens, cities will need to find ways to ameliorate these unintentional consequences of success.

Despite these dilemmas, the digital revolution presents enormous opportunity for urban centers. The imperative for each city is to recognize the attendant challenges and pursue a path toward participation in the New Economy. Urban viability is linked to the extent to which a region can establish local industry clusters that are networked into the global business community.

The paradox of the global- and technology-based economy is that the enduring competitive advantages lie in location-specific competencies-knowledge, workforce skills, customer and supplier relationships, entrepreneurial infrastructure, and quality-of-place attributes-that allow firms and talent to thrive. In essence, thinking locally to succeed globally. Cognizance of these components will enable municipal economic development and political officials to adjust their strategies accordingly, or risk being left behind. The alternative is a return to the pattern of stagnation and hopelessness that nearly buried America's cities a decade ago.

The Milken Institute would like to thank the U.S. Dept. of Housing & Urban Development for commissioning this study. Copyright © 2001 by the Milken Institute. The Milken Institute is a not-for-profit, nonpartisan, nonideological, independent economic think tank founded in 1991. Based in Santa Monica, the Institute is a resource for economic and public policy research and analysis, and a center for advancing discussion about economic, financial, social and policy issues.