Agglomeration costs limit sustainable innovation in cities in developing economies

What is it about?

Existing research has demonstrated that in developed economies, innovation activities by firms benefit greatly from agglomeration in large urban centres where spillovers between innovators facilitate innovation. However, it is not known whether the same agglomeration effects can foster innovation in developing countries. We argue that, though agglomeration benefits still exist in cities in lower-income countries, innovating firms there also face significant agglomeration costs which will eventually outweigh agglomeration benefits. To explore this, we construct a novel dataset that consistently measures both urban economic density and innovation across a large number of developing countries. Our analysis shows that looking across cities in developing countries, the extent of firm innovation initially rises with urban economic density but declines beyond a certain threshold. The drop is the most severe in the very largest cities. This contrasts with the results for developed economies, where innovation still increases with urban economic density in the largest cities. This suggests that high agglomeration costs may prevent the largest cities in developing countries from being sustainable hubs of innovation, and their agglomeration dynamics may differ significantly from those in developed countries. These findings emphasize the need to address agglomeration costs in developing countries to promote sustainable innovation and economic growth.

Featured Image

Photo by NASA on Unsplash

Photo by NASA on Unsplash

Why is it important?

Researchers have dedicated to finding a general relationship between urban agglomeration and innovation that is universal, transcending nations, urban systems, and eras. In addition, large cities have traditionally been seen as hubs of innovation, offering agglomeration benefits that foster collaboration and knowledge-sharing. Indeed, evidence from developed economies strongly supports these ideas. However, our research shows that these general theories and findings are not always applicable to developing countries, indicating that policies based on experience in developed economies might be misleading when applied to developing countries. We propose a framework highlighting how urban agglomeration in developing countries might hinder, rather than enhance, innovation. While cities in these regions can still offer agglomeration benefits to firms, the costs associated with high urban economic density—such as congestion, infrastructure strain, and environmental challenges—may outweigh these benefits. Moreover, this negative effect is most marked in the largest cities. To investigate this, we created a unique dataset that measures both innovation and urban agglomeration consistently across a wide range of developing countries. We use geospatial information to combine data on nightlights at the city level as a proxy for urban density with firm-level data on innovation activity. Our findings carry significant policy implications. By linking two of the United Nations’ Sustainable Development Goals (SDGs)—SDG 9 on innovation and SDG 11 on sustainable cities—we highlight the critical challenge of managing urban agglomeration. High urban economic density, especially in large cities, sits at the core of issues impeding sustainable and innovative growth. This calls for immediate action by policymakers to address the negative externalities of excessive agglomeration. Large cities in developing countries play the leading role in technological and economic advancements. Failure to act risks losing the innovation potential of these important cities. Balancing the benefits and costs of urban growth is not only timely but essential for sustainable development.