Technology – The first of the three “T’s” of prosperous cities

In the first article of this series “Global City Competition”, we discussed the success factors of the top metropolises according to the theoretical approach to the creative class developed by the US economist Richard Florida. Richard Florida bundles his assumptions into an economic growth theory: “Technology, Talents and Tolerance”. These three “T’s” mark out the field in which regions and cities compete for a successful economic future. This article deals with “technology” as the first of the three factors.

The first T (for Technology) in Richard Florida’s concept refers in particular to innovative future technologies that are critical to regional growth in a knowledge-based world. For example, the emergence of new professions as a result of technological innovations makes a significant contribution to long-term economic growth. According to a study by economist David Autor, more than 85 percent of the employment growth of the past 80 years in the US is due to new jobs through innovation and new technologies alone (Autor et al. 2022).

In the future, the introduction of AI and other automated technologies will continue to create new opportunities and professional fields that did not exist before. Job creation in areas such as AI development, maintenance of AI systems, data protection and AI ethics is seen as a crucial factor for future regional economic development (Briggs/Kodnani 2023).

Theory of long waves

A look at the past shows that innovations have occurred more frequently at long intervals and have each triggered long growth spurts, so-called long waves (Kondratieff 1926). A long wave begins with a series of complementary technical-economic innovations, i.e. h. Inventions that occur in the near future in key technology fields that are characterized by strong mutual interdependencies. They either create entire new branches of industry or cause fundamental changes to existing ones.

Since the beginning of industrialization in the 18th century, five long waves have decisively shaped the global economy (Fig. 03). The first long shaft (ca. 1785-1845) was driven by the invention of steam power and innovations in the steel industry. The second wave in the middle of the 19th century brought significant advances in the railway, steam and steel sectors. In the third wave, the economic upswing was triggered by the use of gasoline and electric engines, in the fourth wave by the invention of electronics and

Petrochemicals in production processes. The fifth wave was shaped in the 1990s by information and communication technologies, which ushered in a new era of globalization. We are currently at the beginning of a new innovation cycle, which will most likely be characterized by artificial intelligence, the Internet of Things, robotics and biotechnology.

With each new long wave, there was also a shift in the spatial focus of economic activities. While England (Manchester) and the Ruhr area and the east coast of the USA were the most important economic and innovation centres during the first wave and the second cycle, the third and fourth waves were concentrated in the USA, Japan and Germany. Not all regions have benefited equally from these waves. The innovative strength of the individual waves has been very much related to those locations that have a corresponding human capital, technology-oriented

institutions and, above all, research and development activities. In the course of the wave, the gravitational force of the new center increased, which led to the immigration of labor and capital.

Regional input for innovation

New technologies are seen as a driver of change in territorial economic structures. Research and development (R&D) activities, which determine the adaptability and transformation capacity of business locations in the medium to long term, provide important input for this.

The EU’s growth strategy “Europe 2020” (so-called Lisbon Strategy) set the goal of spending at least 3 percent of GDP on research and development. However, only about one in ten EU regions exceeds this target. Figure 04 shows the regional distribution of R & D intensity for NUTS 2 regions¹ and shows a concentration of research activities in only a few regions. The German top field includes the regions of Braunschweig (with Wolfsburg), Stuttgart and Karlsruhe, each with a share of over five percent. The automotive industry located there has significantly increased R&D expenditure in the course of the transformation to electromobility. In addition, the locations with high R&D activity in Europe are mainly concentrated in or around the capital regions and the top 15 metropolises from Florida’s ranking (including Copenhagen, Stockholm, Munich, Berlin).

In addition to investment in R&D, the proportion of people employed in the high-tech sector (such as mechanical engineering, the chemical industry, biotechnology, IT) is also an indicator of a region’s future competitiveness. Here, too, there is a clear geographical disparity in the EU, with high proportions in regions in Central Europe (Munich, Berlin, Zurich) and Scandinavia (Stockholm, Oslo).

Patents and start-ups as output

Patent applications represent the transition from R&D to a market-oriented application and capitalization of new inventions (Schmidt-Seiwert 2009). Of the total of 193,000 applications filed with the European Patent Office in 2023, 43 percent came from EU member states. One third of them are from Germany. As can be seen from Figure 05, technological activities in the form of patent applications are very concentrated in a few regions, such as the south of the United Kingdom, Denmark, the capital regions of the Scandinavian countries, Upper Bavaria and Baden-Württemberg, Switzerland and the southern part of the Netherlands. The number of start-ups also provides an important indication of the innovative strength of an economic area. Business start-ups are usually considered to make an important contribution to the overall economic development of a region, as they drive innovation, create jobs and contribute to the gross domestic product. The analyses of the spatial distribution of venture capital and start-ups reveal two trends (Table 02):

1. Increasing urbanization: Start-ups and venture capital are increasingly concentrated in large, globally networked metropolises. The five cities of London, Berlin, Stockholm, Munich and Amsterdam alone account for almost half of Europe’s venture capital. 40 percent of all start-ups in Europe are in Florida’s top 15.

2. Winner-takes-all effect: Start-ups and venture capital also have a geographical pattern nationally, where one location, the “winner”, gets almost everything. London accounts for 67 per cent of national venture capital and 76 per cent of start-ups in the UK. Similar clusters exist in Sweden with Stockholm, in Denmark with Copenhagen and in Austria with Vienna. In Germany, on the other hand, venture capital and start-ups are spread across several metropolises or hotspots that have different qualities and focuses (e.g. FinTechs and eCommerce in Berlin, the mobility sector in Munich).

TABLE 02 : START-UPS IN EUROPEAN METROPOLISES – VENTURE CAPITAL AND START-UPS

mm

mm

mm

%

%

mm

%

DATA: EY 2023; EU STARTUPS 2023

AI as a new basic innovation

Artificial intelligence (AI) is considered one of the key technologies of the sixth long wave that is just beginning. In Europe, annual venture capital for AI averaged €12.4 billion from 2021 to 2023. Compared to the USA (around 80 billion euros p.a.) and China (28 billion euros p.a.), this is still relatively low. However, this also means that the largest share of venture capital in Europe flowed into software start-ups. In Germany, an annual average of 3.6 billion euros in venture capital was invested in AI start-ups in the period 2021 to 2023 (second place in Europe after the UK with 6.3 billion euros). With around 3,000 companies, Germany has a considerable AI startup scene (BMWK 2023). This is not least due to the local legal certainty, the proximity to millions of users and customers, and the availability of skilled workers and a well-developed and powerful computing infrastructure, all of which are decisive parameters in the choice of location for the AI industry.

Fig. 06 shows the most important backbone lines of the Internet, which connect a large part of the top 15 metropolises from the Florida ranking with very high data transmission rates. Many cities have a good data center infrastructure, especially at the Internet hubs. The world’s largest commercial internet exchange is DE-CIX in Frankfurt with the highest value of transmitted data of 16.6 terabits per second (GDA 2022). Frankfurt is one of the largest data center locations in Europe after London and Amsterdam.

Future Technologies and Territory Assets

For the settlement of future technologies, a corresponding real estate industry offer is also needed, the territory assets from the concept of Richard Florida. The rapidly expanding AI ecosystem and its supporting infrastructure will drive the demand for suitable real estate in various markets worldwide. This applies not only to AI developers, but also to upstream and downstream economic services, such as chip manufacturers or cloud providers. In the US, the real estate space requirements of AI companies doubled from the end of 2020 to the end of 2023 (JLL 2024). Future growth is expected to focus on tech locations where AI

talents (universities, tech hubs and innovation centres), an adequate energy supply and a high-performance fibre optic network are available. This also includes the top 15 metropolises from Richard Florida’s ranking. Demand there is primarily directed towards inner-city, integrated office space that is designed for New Work and ESG compliance. A successful example of this is the current location decisions by Apple and Google. As part of the KARL project, Apple recently opened its European center for chip design in the middle of Munich. Google has been active on site since 2006 and is currently renovating the historic Arnulfpost (JLL 2023).

At the same time, the data center market will also grow exponentially, because AI in particular depends on a lot of computing power. Data centers are the backbone of digital infrastructure, which requires a lot of space (in real estate). The high legal and social requirements for data protection, data security and data sovereignty make it necessary for data from Germany to be processed and stored in Germany. This is also an important driver (GDA 2024) predicts that more than 28 billion euros will have to be invested in the expansion of co-location centers and hyperscalers by 2029. Due to the Energy Efficiency Act (energy savings, waste heat requirements), the investment focus is primarily on new construction projects and newer existing properties.

Metropolises with a Future Agenda – Technology

In summary, there is a clear spatial polarization of innovative power in Europe due to the first of the three T technologies. There are only a few regions that position themselves strongly in this regard. The top 15 metropolises considered are among the innovation leaders. Cities such as Munich and Copenhagen explicitly address this issue with various programs in their future agenda.

With the Hightech Agenda Bayern and the Hightech Agenda Plus, the Free State is investing a total of around 5.5 billion euros in a technology offensive, which is to create over 100 AI professorships, among other things. The funds provided will also be used to support the Munich Quantum Valley, which bundles research capacities and technology transfer between research, education and industry in the field of quantum technologies. In its digitization strategy, the city of Munich is pushing ahead with the necessary expansion of broadband coverage and IoT infrastructures, among other things.

Copenhagen is also to continue to distinguish itself as an attractive knowledge location by 2036. The focus is on the expansion of the knowledge and innovation quarter “Copenhagen Science City” with a focus on the fields of medicine, health and natural sciences with 40,000 researchers, students and employees as well as 500 innovative companies. This will require over 200,000 m² of office space.

The next article in this series on the 2nd “T” (Talents) will be available soon on ASSETPHYSICS.