The Intangible Economy: Part 1

In the past, firm investment was mainly direct to tangible assets (physical assets) such as machinery vehicles, and buildings and in the case of government, infrastructure; and production and the value of the firm increased with the accumulation of these assets. However, production capital is not just tangible assets. Firms also invest in soft capital such as knowledge, skills, research and development (R&D) and patents. These assets are known as intangible assets and today they power the new economy or knowledge economy which is driven by know-how, knowledge, human creativity and innovation (Nanayakkara, N.D).

In fact, intangible assets are becoming a major source of Gross Domestic Product (GDP) and firm competitiveness. They are the fundamental driver of economic development as they enable the production of new and better services, products and processes and drive customer, shareholder and stakeholder value (Brooking Institute, 2019; Nanayakkara, N.D).  As developed economies move away from industrial driven processes towards technology and-innovation processes, intangible investments are becoming vital to economic growth and sustainability. Furthermore, just as physical assets were used to create “more physical assets in the industrial age”, intangible assets should be used to create “more intangible assets in the information age” (Jarboe & Furrow, 2008).

Intangible assets “typically involve the development of specific products or processes, or are investments in organisational capabilities, creating or strengthening product platforms that position a firm to complete in certain markets”. Intangible assets include knowledge-related products like software, R&D, design, artistic originals market research, training, new business processes and collaboration and partnerships (Haskel & Westlake, 2017).

Tangible assets are physical and measurable assets that are used in a company’s operations. Tangible assets include plants and machinery, buildings, vehicles, furniture and fixtures, land, computers (Investopedia, 2019).

The shift from tangible to intangible

In the 1980s, the information and technology revolution began to “emerge in full force” with the development of personal computers, mobile phones, and other IT and software programs. The firms that developed these new products were different, in that the majority of their capital expenditure was focused on the development of new technology (Haskel & Westlake, 2017; Hulten, 2010).

In 2006, Charles Hulten examined Microsoft accounts and wondered why the company was worth so much. Valued at around $70 billion, the company only had $3 billion in plant and equipment assets – a mere 4 percent of the company’s value. Hulten realised that the company was worth so much because of the things we cannot touch and see. That is, its Microsoft’s intangible assets such as R&D, product design, the value of its brands, its supply chains and the human capital built up by training; and none of this included Microsoft’s office buildings or servers (Haskel & Westlake, 2017; Hulten, 2010).

Just as Hulten found, intangible assets have certain characteristics that make it hard to see, value and sell. Thus, intangibles are still not recognised fully on balance sheets or on income statements (Jarboe & Furrow, 2008).

Intangible characteristics

By nature, intangible assets are things you cannot touch and they are driven by human capabilities. For example:

  • knowledge is an unusual type of good because putting an idea into practice does not use it up and you can also not lock your asset to protect your property rights (Haskel & Westlake, 2017); and
  • fifty percent of R&D expenditure goes towards the salaries of highly educated workers such as scientists, designers, and engineers (Brooking Institute, 2019).

In addition, return on an intangibles investment is determined by the value of a final product, rather than the asset itself. Whereas, physical assets hold value and are therefore are relatively liquid (can be sold at any time) (Hall & Lener, 2009). Thus, there is something fundamentally different about intangible assets and trying to generate it and measure its value is hard.

Haskel and Westlake (2017) suggest that there are four characteristics of intangible assets that make them different and important in comparison to tangible assets – these are referred to as the four ‘S’ and include:

  1. Scalable: Intangible assets are scalable as many people can use it at once and scalability is not hindered by traditional structures such as machines to increase production;
  2. Sunk costs: Intangible assets have sunk costs, that is, there is no means to retrieve that invested funds. Intangible assets will also depreciate more rapidly than physical capital, but they deliver benefits over time, not just in the period the expenditure was made (Barnes & McClure, 2009);
  3. Spillovers: Intangible assets generate spillovers that benefit multiple businesses. As intangible are ideas or knowledge is very hard to keep secret to prevent others from copying the idea. For example, firms can poach staff, imitate or examine new technologies or drugs and read research papers; and
  4. Synergies: Intangible assets tend to be more valuable when combined with other technologies and products thereby generating synergistic benefits. For example, the microwave was the result of a combination of defence investment and household good production (Haskel & Westlake, 2017).
Tangible Assets Intangible Asset
1. They have a physical existence. 1. They do not have a physical existence.
2. Tangible assets are depreciated. 2. Intangible assets have a future-orientated payback period.
3. Are generally much easier to liquidate. 3. Are not that easy to liquidate and sell in the market.
4. The cost can be easily determined or evaluated. 4. The cost is much harder to determine for Intangible assets.
5. When they become obsolete they can be sold as scrap. 5. Don’t have any scape value.
6. Creditors and banks do accept tangible assets as collateral. 6. Typically cannot be used as credit.

 Calculating intangible value

Over time, the emergence of technology and innovation as a primary economic driver has led to a restructuring of the economy with the majority of a firm’s value now driven by investments in intangible assets (Brooking Institute, 2019). In 2006, the Australian Productivity Commission found that intangible investment was almost half the size of tangible investment of the Australian economy. While more recently, the Brooking Institute (2019) notes that the “collective knowledge of the U.S. population is worth approximately $240 trillion, far exceeding the value of other inputs to economic growth”.

However, it is widely agreed that the value of intangible investment is underestimated or not captured. Governments must reassess the way they calculate GDP and national accounting, which treats spending on intangibles mostly as a current expense (i.e. intermediate input) and not an investment.  As a result, firms cannot capitalise on the growth or depreciation of the asset; and governments are not developing enough incentives to promote investment (Hall & Lener, 2009; Australian Productivity Commission, 2010). 

See Part Two of this blog for more information on issues and what governments can do to incentivise and support more investment into intangible assets.

Investment: Assets, Capital and Financial Markets

Investment is central to the functioning of any economy. It is the process of committing time, resources and money to produce useful things in the future. Investment underpins production by business, government and individuals (Haskel & Westlake, 2018).

Investment is very important because it builds up the “capital stock”: the assets – tools, and equipment that workers use to produce the goods and services that make up economic output. An asset is an economic resource or property that is expected to provide a benefit over a period. For example, if a bank acquires a new office, it expects to get a benefit that lasts for some time. Capital is the use of assets to generate income and or an increase in the value of the assets over time.

Investment is what happens when a producer either acquires a fixed asset or spends resources (money, effort, raw materials) to improve it (Haskel & Westlake, 2018).

Capital is the use of assets to generate wealth (Haskel & Westlake, 2018).

Assets are things that have a value and can be sold in financial markets for monetary value (Haskel & Westlake, 2018).

The rate of return on capital plays an important role in economic growth as it incentivises the development and use of new assets in production (Baker, DeLong & Krugman, 2015). Capital investment generates profits for owners of capital through consumer spending, international trade and business investment which drives economic growth.

Investors are willing to develop, buy or hold assets if the rate of return compares well with interest rates on similar capital investment elsewhere in the economy. Return on capital is determined by the time to make a satisfactory return on the investment, the marginal utility of wealth as it declines over time, and tolerance of risk-reward (Baker, DeLong & Krugman, 2015).

Competitive financial markets play a central role in ensuring that capital is allocated to firms with the greatest potential to commercialise new processes and technologies thereby incentivising and fast-tracking technological innovation (Kerr &Nanda, 2014). Businesses and investors go to financial markets to raise money to grow their business and to make more money, respectively (CFI,2019). However, it is worth noting that financial markets only distribute income generated by activity and do not add to that income.

Marginal utility the added satisfaction that a consumer gains from consuming additional units of goods or services (Investopedia, 2019).

Financial markets are a type of marketplace that provides enables the sale and purchase of assets such as bonds, stocks, foreign exchange, and derivatives (Investopedia, 2019).

There are many financial markets and they vary in size. For example, formal markets include:

  • Cash: banks and other financial intermediaries that offer debt loans.
  • Bond or money market: offers opportunities for companies and the government to secure money to finance a project or investment
  • Stock market:  trades shares of ownership of public companies.
  • Commodities market: where traders and investors buy and sell natural resources or commodities such as corn, oil, meat, and gold.
  • Derivatives market: involves derivatives or contracts whose value is based on the market value of the asset being traded such as futures contracts or options.
  • Forex Market: where currencies are traded and considered the most liquid market in the world as it trades cash assets.


However, there are flaws in these formal markets. For example, it is much harder to fund research and development and start-ups because of the high-risk nature, early stage of development and lack of cash flow. Thus innovation and early-stage business investment might happen through friends and family, angel investment, venture capital, equity crowdfunding and credit card debt.

In addition, firms controlled by private equity and venture capital firms, may not aim to produce new things but to maximise the value of their own shareholders through share buy-backs and short term trading, rather than long-term investments (Mazzucato, 2018).

Financial deregulation and a growing financial sector and products, some markets are able to generate their own revenue and profit without contributing to gross domestic product. New and complicated financial instruments, such as securities and derivatives, allow owners and traders of these products to get rich by capturing value from other sectors, rather than by creating value (Mazzucato, 2018). For example, the futures market allows investors to trade on the potential future value of a bond rather than holding and using that asset to produce additional value.

Finally, capital owners can extract more profits is to identify markets where there is limited competition such as in monopoly markets. Or by holding assets that do not require them to be productive or contribute to production outputs which are called rent-seeking. Both harm economic growth by reducing competition, innovation, and investment in new and better assets. They also waste valuable resources and talents and redistributes capital to the wealthy and powerful (Wong, 2016).

Monopolistic market: only one company may offer products and services to the public and as a result can restrict output, raise prices, and enjoy super-normal profits in the long run (Investopedia, 2019).

Rent seeking occurs when an entity seeks to increase one’s share of existing wealth without creating new wealth or value Wong, 2016).

Understanding Job Creation: Part 3 Firms

How firms form, grow, decline and exit are all critical factors in job creation and economic growth. Economists have been studying which firms are the highest job creators in order to target policies to support the most effective businesses to create jobs.

Mature Firms

The term mature firm refers to the growth phase of a business that is “well-established in its industry, with a well-known product and loyal customer following” (Kenton, 2019). Mature firms generally have slow and steady rates of growth and face constant competition.

Mature medium and large firms that account for most employment (about 45 percent) and most job creation and destruction (Haltiwanger et al, 2010). Most people believe that firms with the “most jobs create the most jobs;” however, these large businesses typically grow at around about 1-2 percent per annum (Arslan, 2011). Goswami, Mevedev & Olafsen (2018) explain that large ‘incumbent’ firms can lack the ability to adapt and innovate from a too greater focus on existing products and services; and therefore they are not job creators once established.

Conversely, small businesses make up (over nine in ten) of Australian businesses. They generate “33 percent of Australia’s GDP, employs over 40 percent of Australia’s workforce, and pay around 12 percent of total company tax revenue” (Commonwealth of Australia, 2016).  However, they typically pay the least of all sectors small businesses are often associated with negative net job creation and are the least likely source of job growth. This is because small businesses may have low productivity, operate in declining markets or they may not be inclined to grow (Haltiwanger et al, 2010).

This is not to say that mature firms of all sizes are not important, as they certainly play a role in the traded economy, underpin existing competitive advantages and clusters, support innovation and stable employment. It’s just that from a job creation perspective, they have limited capacity.


A start-up is often misunderstood for simply a small new business; however, there is a difference between the two. A start-up is a saleable new firm that is working to solve a problem and capitalize on developing a product or service which they believe there is demand for (Grant & Kenton, 2019).  While a new small business may be operating on a traditional businesses model, has limited scalability and are producing goods and services that are already available in the market.

Start-ups typically exist in high-tech or financial sectors but not exclusively, and therefore often in the tradable sector. Start-ups are also more innovative than any other business due to reasons such as:

  1. Fewer barriers to entry (i.e. they aim to commercialise new ideas);
  2. Start-ups choose higher risk strategies and can ‘pivot’ more easily to adapt to markets demands or gaps; and
  3. large rewards for successfully starting a business and commercialising an innovation (Acs & Audretsch, 1988; Koutroumpis, Leiponen & Thomas, 2017; Lerner, 2012).

By nature, all start-up firms operate in a volatile environment as they test their products and services on the market, build an appropriate business model to scale. Start-ups face what is known as the valley of death, an ‘up or out’ dynamic, which forces a young business to manage a negative cash flow before their new product or service generates revenue from real customers (Forbes, 2013). As a result, start-ups are more likely to exit and therefore they also disproportionally contribute to job destruction. In fact, it is estimated that 90 percent of start-ups fail and that after five years, many of these young start-ups destroy nearly half of the jobs they created (Patel, 2015; Haltiwanger et al, 2010). Nevertheless, the surviving firms continue to ramp up, growing faster than more mature firms, and continue to create a disproportionate share of jobs relative to their size.

High Growth Firms

Recently, words such as gazelles and unicorns have been used to describe young and small firms that have continued to grow strongly beyond the start-up phase. Referred to by academics as high growth firms (HGF), they have drawn a lot of attention because of their ability to stimulate growth and job creation. In addition to this, they also generate significant spillovers such as knowledge, innovation and inspire entrepreneurship that benefit other businesses and support start-ups (Goswami, Mevedev & Olafsen, 2018).

High Growth Firms: There is no single definition of a HGF and what constitutes an extraordinary growth rate. However, most agree that a firm that is able to increases its revenues by at least 20 per cent annually for three years or more is considered high growth (Financial Times, N.D.; Kenton, 2018b; OECD, 2012).

HGF makeup on average between 5 percent and 10 percent of all firms and create around 50 percent of all new jobs (Financial Times, ND). Economists found that HGF generated revenue nearly twice as fast as GDP (Evans, 2017). These figures are relatively consistent across developed nations (e.g. UK, US, Australia); however, in developing nations HGF can make up to 20 percent of firms and “generate as much as 80 percent of all new sales and jobs” (Goswami, Mevedev & Olafsen, 2018).

Goswami, Mevedev & Olafsen (2018) advise that while HGFs are typically young, they do not have to be and they are not necessarily small. Research from the UK found that the majority of these HGFs have less than 50 employees but were relatively established in the market and just over five years old. The high growth episode typically starts post start-up stage and most HGF are not able to sustain this growth past five years. Therefore, HGF do not remain strong job creators in the long term. HGF were also found to operate in all industry sectors (e.g. food, health), not just the technology sector and pop up in all sorts of diverse geographical areas, responding to local challenges and opportunities (Fetsch, 2016; Goswami, Mevedev & Olafsen, 2018, OECD, 2012). Thus, policy must take into consideration the creative destruction dynamic and as a result, policies targeting HGF policies targeting can be misguided (Duranton, 2012; Goswami, Mevedev & Olafsen, 2018).


Governments around the world now widely recognise the powerful link between HGF firms and innovation, job creation and international competitiveness. Most are now actively reviewing policies, laws and taxes to support new firms to start and achieve this growth episode (European Commission, 2012; Goswami, Mevedev & Olafsen, 2018). However, both government and professional investors such as venture capitalists, are “notoriously bad” at picking these businesses and a HGF can typically only be identified once it is in a growth run (Goswami, Mevedev & Olafsen, 2018).  Nevertheless, it is important for governments to understand how these firms are established, what drives them and ways to encourage more business growth in order to design effective interventions.

Academics and institutions (Goswami, Mevedev & Olafsen, 2018; Lerner 2012; Marrugo-Salas, 2018) agree that instead of working with individual firms, efforts should be directed towards building the entrepreneurial environment. There is broad agreement that there are a number of determining factors that support HGF and job creation more broadly. These include:

  • the proximity to suppliers and customers;
  • contact and exchange with research and development (R&D) institutions;
  • access to financial resources;
  • economics of scale (industrial agglomeration);
  • managerial capabilities and worker skills;
  • global linkages; and
  • entrepreneurial and creative culture.

Finally, to help policymakers’ structure policies that support firm’s innovation and economic development, Goswami, Mevedev & Olafsen (2018) call for policymakers to focus on stimulating factors such as “innovation, agglomeration and network economies, managerial capabilities and worker skills, global linkages, and financial development, which contribute significantly to increasing the probability of a high-growth episode”. To do this, they propose an “ABC framework”:

  1. improving Allocative efficiency e.g. productivity improvements, labour flexibility, start-up regulations, logistic networks, land use allocations;
  2. encouraging Business-to-business spillovers e.g. industry clusters, smart specialisation, technology parks and export markets development; and
  3. Strengthening firm Capabilities training, R&D, financial incentives, advisory services, incentives, promotion and awards, incubators and accelerators.

Understanding Job Creation: Part 2 Industry

This literature review examines how jobs are created to identify consistent themes, dynamics and determinants that government can apply to develop meaningful policy and initiatives. You can read Part 1  here which examines how places create and destroy jobs. It finds that agglomeration is a driving force behind structural change, economies of scale and how places grow and create jobs.

Traded Jobs

Economic growth and job creation has been strongly linked to the traded sector – that is, firms that derive income from exporting (Mc Andrew, 1995). This is because investment and job creation in the traded sector is new money which flows through to increase demand for local services and goods, generating additional jobs. Bacchetta and Stolzenburg (2019) found that in most advanced nations, more than 50 per cent of jobs are underpinned by traded industries.

Traded sector refers to “businesses are those that sell their output in competition with businesses in other states or nations”.

Local sector refers to businesses that “sell their goods and services primarily or exclusively in a local market. By definition, local businesses tend to be sheltered from competition from other places” (e.g. local shops and restaurants) (Cortright, 2017).

Cortright (2017) finds that education and skills can be specifically attributed to “two-thirds of the variation in per capita income” of a city. While there are many well educated and skilled people employed in the local sector such as doctors and lawyers, those jobs are found in most locations and are proportional to the size of the population (Cortright, 2017; Delgado & Mills 2018). Therefore, the difference in income levels is derived specifically from the additional benefits gained from concentration of highly skilled – high paid jobs in the traded sector. This is because, traded industries typically agglomerate or cluster in one location due to the specific benefits that certain places offer. These include specific workforce specialisation, economies of scale and market access (Delgado & Mills, 2018; Florida, 2008; Hausmann et al, 2007; What Works Centre for Local Economic Growth, 2019). In addition it has recently been found that firms that cluster and network along the traded supply chain are more innovative and support significant job creation (Delgado & Mills, 2018).

Employment Multiplier

A healthy traded sector directly benefits the whole economy by creating well-paid jobs and indirectly creating additional jobs in the local sector (Cortright, 2017; Delgado and Mills 2018).This dynamic is known as the employment multiplier and there are three types, including:

  1. “in tradable sectors (that sell mostly outside the local economy);
  2. in tradable skilled and high-tech sectors, specifically; and
  3. in the public sector” (What Works Centre for Local Economic Growth, 2019).

The size of the multiplier is determined by the extent to which the new jobs add new value and supports a desirable economic restructuring. Research What Works Centre for Local Economic Growth, 2019; Cortright, 2017; Delgado and Mills, 2018; Mc Andrew, 1995; Moretti, 2012) has consistently found that the higher skilled a job is in the traded sector, the greater impact on job creation. Moretti (2011) found that high skilled, traded jobs in the US, such as a job in the technology giant, Apple, created five additional jobs in the local sector. Two of the jobs created by the multiplier effect would be professional jobs such as a doctor or lawyer—and the other three would be in non-professional occupations such as restaurant workers or retail. More explicitly, the What Works Centre for Local Economic Growth (2019) found on average that:

  • a traditional traded sector job create a job multiplier of 1.9 jobs in the local sector;
  • a higher skilled traded sector job created 2.5 jobs created in the local sector; and
  • a new government job created only 0.25 jobs on average in the private sector[1].

Supply Chain Industries

A recent study by Delgado & Mills (2018) found that supply chain industries (i.e. business-to-business or business-to-government) are a very important segment of the economy and critical to both job creation and innovation. Delgado & Mills found that supply chain industries created over 53 million jobs or 43 per cent of the US employment in 2015 and had the highest percentage of science, technology, engineering and mathematics (STEM) jobs at 81 per cent. The highest value creators in the supply chain were not the businesses producing parts but providing “supply chain traded services, such as in engineering, computer programming, and design” (Blanding, 2019).

Supply chain refers to an interrelated group of “individual suppliers that feed companies with the goods and services necessary to create products for consumers and businesses” (Blanding, 2019).

Delgado and Mills (2018) attribute the benefits derived from supply chains to three main reasons. That is, supply chains:

  1. produce specialised inputs which generate new knowledge and leads to innovation;
  2. by nature have a large number of linkages to many different downstream industries responding to market directions and diffusing innovations more efficiently; and
  3. lead to co-location or clustering which supports innovation and growth of the industry as they share ideas, concentrate talent; attract capital and generate economies of scale.

Thus, the examination of traded industries and supply chains provide a new and important frame for industry development, innovation and job creation.


 [1] Gonzalez-Pampillon (2019) also noted that government jobs were found to have a crowing out effect in some cases and cautioned that the relocation of government jobs did not have a net job gain.


Understanding Job Creation: Part 1 Place


This four-part literature review examines how jobs are created to identify consistent themes, dynamics and determinants that government can apply to develop meaningful policy and initiatives. Part 1 which examines how places create and destroy jobs. It finds that agglomeration is a driving force behind structural change, economies of scale and how places grow and create jobs. Part 2 examines new research into the specific role of industry in job creation, noting that the traded industries bring wealth into an economy that flows through to increase local demand and create new jobs. This effect is known as the job multiplier and the more skilled a traded industry is, the higher the multiplier will be. Part 3 examines the age and size of different business segments to determine which firms have the greatest impact on job creation. It finds that small and young businesses, disproportionality create new jobs. Finally, Part 4 identifies the consistent themes emerging from literature and presents a framework to support government policy and initiatives.

Dynamics and determinants:

Dynamics and determinants (2)


PART 1: Place

Geography Matters

Geography matters for the future of job creation, as jobs are becoming increasingly concentrated in certain places (OECD, 2018). In particular, small and rural towns are distinctly shrinking as residents relocate to more prosperous areas such as cities.

As nations become more developed, the economy shifts from agricultural to industrial to service-oriented and to technology automation. With new ways of production focused on the generation of ideas (rather than goods) and economies of scale, fewer workers are required in rural areas where traditional production remained concentrated (World Bank, 2009; OECD 2018). This dynamic is known as structural change and it leads to structural unemployment – the worst type of unemployment. Over time, displaced workers typically shift to labour markets where there are more job opportunities, higher wages and access to retraining (Bivens, 2018). Places that are not able to adapt to changing technology and create new jobs, will begin to decline as they often lack the skill profile to transition their economy (OECD, 2018).

Structural unemployment is a “longer lasting form of unemployment that is caused by fundamental shifts” in an economy caused by factors such as technology, competition and government policy (Kenton, 2018). Due to this shift, workers lack the right skills demanded by their current employer or the local labour market and live too far from other regions where jobs are available (Bivens, 2018; Kenton, 2018).

However, structural change can also be desirable as it can enable an economy to transition from low skill to high-skilled, high-value production. Structural change can facilitate a wave of “creative destruction” which supports productivity improvements at the firm level and drives long-term economic growth and job creation at a macro level. However, early recognition of the opportunities and risks is required to develop a range of innovative initiatives that build economic capacity to respond and restructure (Henry & Medhurst, 2011). Foray (2015) suggests that it is important to look at the aggregation of production in a region to identify where industry and government can work together to shape new opportunities or support the restructuring of industry through new ‘entrepreneurial discoveries’.

Creative destruction “refers to the incessant product and process innovation mechanism by which new production units replace out-dated ones. This restructuring process permeates major aspects of macroeconomic performance, not only long-run growth but also economic fluctuations, structural adjustment and the functioning of factor markets (Caballero, N.D)”.

Why Do People Move?

Larger and denser settlements such as cities offer more diverse and higher paid jobs; and talented people are more able to move to take up opportunities (Florida, 2008). The more educated you are the more able you are to move for work, with 1 in 4 university graduates doing so. While there are personal drawdowns from relocation such as family relationships, most people will earn higher wages, access new networks and other opportunities (Florida, 2008).

In addition, people who move, such as immigrants tend to be more entrepreneurial and are natural risk takers, born out of either choice or need. They are more open to new opportunities, resilient and importantly, they bring their unique perspectives and experience – a winning combination for innovation and venture creation. Wines (2018) notes that “over 40 per cent of firms in the United States (US). Fortune 500 list were founded by immigrants or children of immigrants.” While a United Kingdom (UK) study found that “immigrants are twice as likely to be entrepreneurs” and that “one in five UK tech start-ups is founded by immigrants (Wines, 2018).”

Thus cities become a mixing pot of entrepreneurs, designers and creative people, engineers, financiers, industry professionals and academics – all highly skilled and motivated to share ideas (Florida, 2008). And it is these entrepreneurial people, who create jobs twice as fast as established firms (Wines, 2018).  In combination with the productive advantage that cities offer through production and distribution economies of scale, they are primed to become a “hub for innovation” and an “engine of prosperity” (Duranton, 2012; Moretti, 2012).

The Agglomeration of Jobs

Places that are able to build an economic advantage based on high-value industries become a hotbed for job creation because of the benefits gained from workforce capacity and industry co-location and proximity to markets. These benefits include concentrated and varied infrastructure, strong networks to support market access, increased venture creation, higher wages and an attractive lifestyle and culture through diversity of service offerings (Moretti, 2012). These dynamics form what is known as agglomeration and agglomeration is strongly linked to job growth, high productivity and innovation (Clarke & Xu, 2013; Goswami, Mevedev & Olafsen, 2018; Moretti, 2012).

Agglomeration is derived from the benefits that are gained from co-location and proximity and include:

  • localization – being near other producers of the same commodity or service;
  • urbanization –  being close to producers of a wide range of commodities and services; and
  • capacity – the size of the local market, the national market, access to international markets  (Clarke & Xu, 2013; Glaeser, 2010; World Bank, 2009).

The World Bank’s Comprehensive Worldwide Business Survey found that agglomeration forces were more important to job growth than the overall business environment (Clarke and Xu, 2013). This is not to dismiss the business environment, as elements such as labour regulation, access to finance and local skill levels were also found to be important to business expansion and employment.

Agglomeration is a reinforcing dynamic that generates ‘increasing returns’ through increased concentration of activity, skills and infrastructure. As workers and entrepreneurs are attracted to places because of job opportunities, higher wages, networks and market access, it builds the economic capacity of a place though diversity of skills, increased resources and services, knowledge spillovers and economies of scale (Duranton, 2012). These positive externalities lead to the economy as a whole becoming more productive, innovative and driving up wages. Thereby, continuing to attract more people and increase firm and job creation.

However, agglomeration does not happen automatically and jobs need to be continuously created to address creative destruction, import competition and compensate for the natural the turnover of firm entries and exits (Foray, 2015). Thus, the dynamics of firm and job creation is also shaped by places functionality (Duranton, 2012). According to Polèse (2009) there are seven determinants of agglomeration, these include:

  1. Economies of scale in production and production processes – concentration of production facilities and firms close to their workers and suppliers;
  2. Economies in scale for trade, transportation and distribution facilities – infrastructure that supports more accessible networks and lower unit costs;
  3. Proximity to markets and opportunities to access new market – to enable firm expansion and market growth;
  4. Industrial clusters – benefits that firms receive by being located close to other firms in similar or interconnected industries such as labour pools, specialisations, branding, spillovers;
  5. Diversity – to enable reliance, spillovers and spinoffs;
  6. Centrality – creating a centre and density for trade, collaboration and networking; and
  7. Creativity and culture – innovation and sense of place that draws people to each other.

Skills, Spillovers and Scrabble Theory

While agglomeration draws workers and entrepreneurs together to support productivity, innovation, and firm creation, workers need to have the essential skills and capabilities in the first place to respond to opportunities. Although this relationship has been well understood for a long time, there are many dynamics involved.

The more educated a city is, the more able it is to adapt to structural changes and identify new opportunities (Cortright, 2017). This is because the more educated workers are, the more productive, knowledgeable and adaptive they are. In addition, skilled workers are able to command a high wage premium as they are critical to a firm’s competitiveness. Thus at a place level, the more skilled jobs a place has, the larger the employment multipliers are (derived from high wages) and innovation spillovers (derived from knowledge and learning) that flow on to other industry sectors to support job creation (Gonzalez-Pampillon, 2019; Muro, 2012).

Hausmann et al (2007) have likened this dynamic to a game of scrabble. They note that a place’s economy is made up of different letters (skills) and the more letters you have the more words you can make (products). Some letters (skills) are also worth more (higher skilled) and therefore are more valuable as they help make more words (products) and more complex words (higher value products). As a result, the more diverse and higher skilled a place becomes, the more that place is able to drive innovation, job creation and offer high wages.

Investment Attraction: An Asset Class Framework for Designing Investments

With budget short falls and the need to create jobs, investment attraction has become a top priority for governments. The private sector is increasingly being called upon to pay for and lead investments into a whole range of assets; as well as solve social and environmental problems. However, finding the right investor and structuring the investment can be a challenging task. Understanding investment asset classes and the investor’s requirements in each category is a critical first step.


It is important to note that an investor that that works in one class/sub-class may not work in another and each investor’s preferences will differ. As Chen (2019) notes, investors “are not a uniform bunch”.

Investor is any individual or entity “(such as a firm or mutual fund) who commits capital with the expectation of receiving financial returns” through income or capital appreciation (Business Dictionary, N.D; Chen, 2019).

Investors use their capital for long-term gain and therefore are different to traders who seeks to generate short-term profits by repeatedly buying and selling stocks (Chen, 2019). In addition, some investors will also try to address a social or environmental need as well as make a financial return. This is an exponentially growing[1] field called impact investment.

Impact investment is investment that aims to achieve positive and measurable social or environmental impact, as well as financial return (Impact Investing Australia, N.D; OECD, 2015).

In order to select and commence negotiations with potential investors, investment opportunities need to be analysed and matched with investors based on asset class, risk, capital requirements, involvement and timeframes amongst many other factors (Chen, 2019; Nerd Wallet, 2012). Thus, before designing investments or approaching investors, it is critical to understand the major groupings of investments.

What is an Asset Class?

Asset classes provide a framework to categorise and analyse an investment opportunity, structure the investment and match it with interested investors. Asset classes perform either a growth or defensive strategy in an investment portfolio, depending on the underlying economic conditions at any given time. Most investors will have a mix of investments but will not invest across the spectrum of assets or sub-asset classes (Citi, 2016; Chen, 2018).

Asset class is a group of comparable investments that are grouped together based on having a similar financial structure and are traded in the same financial markets, subject to the same rules and regulations (CFI, 2019).

Sub-asset classes are segments that are grouped by more specific characteristics factors such as similar capital allocation, risk and return ratios.  For example, the asset class equity refers to an investment in a business. However, the equity ‘spectrum’ includes shares on the stock market, start-up funds (~$20,000), venture capital (~$2-5M) through to mergers and acquisitions (over $20M). In addition, risk and return and management structure of each investment are all very different (Feld and Mendelson, 2011).

Explaining Each Asset Classes

It can be hard to classify some investments into asset classes. For example, you can invest in commodities through a company on the stock market that produces commodities, purchase tangible commodities or purchase commodity derivatives such as futures or options. Another example is real estate investment trusts (REIT) that are held as equity (Equity REITS) or fixed income assets (mortgage REITs) despite both being derivative of real estate (CFI, 2019).  Additionally, there are always new segments such as venture capital and crypto-currencies (Chen, 2018). However, it is typically agreed that there are five main categories: cash, equities, fixed income, infrastructure and real estate and commodities. A final sixth category, alternatives, is used to reflect non-traditional investments (Frankenfield, 2019). Thus, general asset classes are as follows:

Asset Class Framework


  1. Cash and cash equivalents: refers to money or other liquid assets that can be a medium of exchange or mechanisms for payment. The main benefit for cash investors is safety as it is typically the safest form of investment. However, inflation and low interest rates can undermine the value of the asset (Frankenfield, 2019; Nerd Wallet, 2012).
  2. Equities: refers to ownership into a business and includes every things from traditional shares, trust structures, angel and venture capital. It is important to look at the capitalization, growth requirements, value and management structures when designing or investing in equities (Frankenfield, 2019; Chen, 2018; Nerd Wallet, 2012).
  3. Fixed Income: refers to lending money to a company or government for interest such as loans (debt), bonds, and certificates of deposits. While fixed income is similar to cash in that it tends to be a low risk-low return investment, it is also classified by the investment duration and credit rating (Frankenfield, 2019; Chen, 2018).
  4. Infrastructure and Real Estate: refers to property (i.e. bricks and mortar) where a return is made on the increased value or rental income generated. Infrastructure and real-estate may also be invested in when it helps to increase the value of other asset classes along that support supply chain development such as commodities (Frankenfield, 2019; Nerd Wallet, 2012).
  5. Commodities: are tangible natural resource commodities that have an end use. For example agricultural products such as grain or metals such as gold (Nerd Wallet, 2012).
  6. Alternatives: are investments that do not conform to the traditional financial securities including stocks, bonds or certificates.  While other asset classes such as real estate and commodities are sometimes added into this category, they should be separated as they have their own unique features.   Alternative assets therefore fall into two broad categories:
    • things people collect such as art and antiques that are regarded as having value to the investor. This sub-classes tends to be illiquid and value can be hard to determine; and
    • high finance such as private equity or hedge funds that give investors exposure a whole range of asset classes to balance risk (Chen, 2019; Zurich, 2019).

Why is it important to understand asset classes for investment attraction?

Understanding asset and sub asset classes allows governments and businesses to become more targeted in how they design investments and investors they engage with.  The following offers a list of preliminary questions to help design and attract investment opportunities:

 Investment design

  • How does the investor exit the investment?
  • How is the investment structured?
  • What are the standard industry/regulation terms?
  • How is the market performing overall in the asset class?
  • Where is the investment located?
  • what markets to you want to enter/expand into?
  • Are there any social or environmental goals associated with the investment?
  • What is the time horizon for the investment?
  • What time frame is the investor interested in?
  • Are there any tax advantages to the investment?
  • Is there a diversification element to the investment?

 Asset classification

  • Which asset class is the investment in?
  • Can it be classified into a sub asset?
  • What is the risk?
  • How liquid is the investment?
  • What is the reward? i.e. valuation metrics such as earnings-per-share growth (EPS) or the price-to-earnings (P/E) ratio or growth – market size?
  • What is the market capitalisation (how big is the firm and its tradeable stock)
  • Is there an income stream?

 Investor classification

  • Who invests in this asset /sub asset class?
  • Is the investor local, domestic or international based?
  • What scale of investment do they offer?
  • What other benefits does the investor bring? E.g. market assess/market knowledge/ growth knowledge
  • What level of involvement do you want an investor to have /do they want active or passive?

[1] In 2018 impact investment was worth six billion dollars in Australia (Uribe, 2018).

Place Branding: A Complementary Strategy for Economic Development

Today places are more than just markets, they are products and can be consciously branded (Fanning, 2015; Järvisalo, 2012). Places compete in the global economy for their share of the world’s investors, consumers, tourists, businesses, positive media attention and diplomatic power (Anholt, 2007). To be competitive, places must actively build, promote and manage distinctive brands (Järvisalo, 2012).


Branding is an extremely valuable component of an economic development strategy, as a successful brand will position a place or product[1] to create perceived customer value and can lead to a competitive advantage (Buncle & Keup, 2009).  Unfortunately most marketers confuse branding with promotional slogans and superficial design, such as gloss and logos (Järvisalo, 2012).

Instead, branding is really about creating understanding for a product1 and differentiating it from competitors (Clifton & Simmons, 2003; Järvisalo, 2012). It is the process of “designing, planning and communicating the name and identity in order to build or manage the reputation of a” product or organisation (Anholt, 2007).  Therefore a successful brand is defined as “an identifiable product, service, person or place, augmented in such a way that the buyer or user perceives relevant unique added values which match their needs most closely” (DeChernatony & McDonald cited in Grillot, 2007).

In developing a brand, marketers need to strategically consider and design the four elements of a brand, being:

  • Brand Identity –the core component of a product. That is, what is assertively communicated through visuals such as logos, packaging, product design;
  • Brand image – the perception of a brand interpreted by the customer or wider society. Image is formed on personal or cultural values, associations, feeling, experience and expectations. Thus Images are how a customer receives and interprets a brand message;
  • Brand purpose –the unique value that a product delivers, it is the promise to the market place and therefore should represent the aims of an organisation or place; and
  • Brand equity –the desirable value that is created from developing a positive brand reputation. It is through this ‘value’ associated with a brand that leads to a brand becoming a tangible asset (Anholt, 2007).


Like the commercial world, branding is just as valuable for places. Places that build strong positive reputations are able to lift the standard of living for their residents by attracting customers such as investors, tourists, new residents and businesses, and by driving political agendas (Anholt, 2007; Taderera, 2014).

Place branding is an umbrella brand for a place’s geography, economy, culture and its people. It is an economic aspiration to reposition a place through “capturing and accumulation of reputational value through the coordination, collaboration and strategic efforts of a place’s stakeholders (government, community, business, industry bodies) to develop, communicate, maintain and adapt a place brand position to gain competitive advantage” (Anholt, 2009). Place branding must therefore supported by tangible efforts by a community’s’ leaders to improve the competitive image of a place to attract capital (Niedomysl & Jonasson, 2012).


Strategy and positioning

Typical strategy analysis looks at two broad approaches applied in place branding to create value, these are cost leadership and differentiation (Raith, Staak & Wilker, 2007). However, places must initially look at their location factors to build a brand off. This includes:

  • local assets and resources;
  • industrial sectors or clusters;
  • customers, markets and trading partners;
  • logistics and spatial connections;
  • competitors; and
  • competitiveness (quality, innovation and production capacity)(Mauroner, Oliver & Zorn, Josephine, (2017).

Sense of place

In the global economy, places can really only become distinct by having a unique sense-of-place, or as termed in the commercial sector, a value proposition (Buncle & Keup, 2009). While the term sense-of-place has many meanings, it is a holistic term for how a place is recognised by those that live there and those who do not. This is because, unlike commercial products, a place largely inherits it brand from its natural environment, culture and heritage.

When brands are tied heavily to a community’s sense of place, people identify with the brand as it reflects their self-concepts (Taderera, 2014). People are then able to act as brand advocates and the brand diffuses to other areas of society, building the brand. While a sense-of-place should not be viewed as a “panacea for economic growth”; it is the core of a place’s value proposition and therefore helps to distinguish a place in a competitive market (Buncle & Keup, 2009).

Other Key insights

  • Be strategic in setting a brand. Based on existing strengths and weaknesses, a brand should represent where the place wants to go and how it wants to be perceived,
  • Don’t be afraid to be innovative. Aim to capture new markets and create new spin offs.
  • Work collaboratively. Governments cannot brand a place alone. It must be a partnership approach and include local leaders, industry and business, urban designers, artists, community and its customers.
  • Be proud of who you are and what you offer. It is very hard to rebuild a sense of place. But community pride and sense of purpose can reunite the community, cementing the brand.
  • Make sure you deliver what you promise. Brands that sell an image that does not reflect reality are no more than marketing gloss.

[1] Products include goods, services, ideas, experiences, people and places (Fanning, 2015).


Anholt, (2007) Competitive Identify: The New Brand Management for Nations, Cities and Regions. Palgrave Macmillan: United Kingdom.

Anholt (2009) Why National Image Matters: Introductory Essay in handbook on Tourism Destinations Branding. World Tourism Organization and the European Travel Commission: Madrid.…/ETC-Handbook_on_Tourism_Destination_Branding.pdf

Buncle, T. & Keup, M, (2009) Handbook on Tourism Destinations Branding. World Tourism Organization and the European Travel Commission: Madrid…/ETC-Handbook_on_Tourism_Destination_Branding.pdf

Clifton, C. & Simmons, J. (2003) Brands and Branding, The Economist. Profile Books Ltd: London. Retrieved from the economist brand pdf

Grillot, K. M. (2007). What happened in vegas?: The use of destination branding to influence place attachments. Available from ProQuest Dissertations & Theses Global. (304816077). Retrieved from

Holt, D (2002) Brand and Branding, Harvard Business Review. Retrieved from

Järvisalo, S. (2012) How to build successful city brands? -Case Munich, Berlin & Hamburg. HAAGA-HELIA University of Applied Sciences. Reterievd from…/City%20brands.pdf?…1

Mauroner, Oliver & Zorn, Josephine. (2017). Cluster branding – a case study on regional cluster initiatives, cluster management, and cluster brands. International Journal of Innovation and Regional Development. 7. 290. 10.1504/IJIRD.2017.086234.

Niedomysl, T., & Jonasson, M. (2012). Towards a theory of place marketing. Journal of Place Management and Development, 5(3), 223-230. doi:

Rivas, M (2015) Innovative Place Brand Management, Re-Learning City Branding. URBACT-CityLogo final report.

Taderera, F., Al-Nabhani, S., Bhandari, V., SundarKirubakaran, P., Al Rahbi, H. A., Karedza, G., Sundaram, S. (2014). Marketing Excellence: Myth or Reality in Oman. International Journal of Arts & Sciences, 7(4), 195-206. Retrieved from