Abstract

In the face of persistent and widening regional imbalances in economic and social outcomes, the UK Government seeks to ‘level up’ less prosperous communities, reigniting debates on the relationships between geography and business innovation. A key question concerns whether cities provide a more favourable environment for business innovation and exporting. However, the comparative performance of urban and rural Small and Medium Sized Enterprises (SMEs) within less prosperous regions has received little attention. Using Longitudinal Small Business Survey data, we apply Propensity Score Matching to study urban-rural differences in SME performance in the North and Midlands of England. The findings reveal no systematic, significant differences in goods, service and process innovation or exporting between rural and urban SMEs, suggesting that the emphasis on urban focused growth in the levelling up agenda appears misplaced.

Introduction

Regional variations in economic and social outcomes are sizable and enduring across developed economies (OECD, 2016), with lagging regions typically falling further behind (McCann and Yuan, 2022; OECD, 2019). Moreover, the COVID-19 pandemic served to further exacerbate and expose regional disparities (Bhattacharjee et al., 2020) as well as the urgency of finding remedies to this longstanding challenge (Westwood et al., 2022). Where residents feel ‘left behind’ political backlashes against globalisation and open trading relationships have occurred (Urbanska and Guimond, 2018). These problems are unlikely to disappear soon as economically lagging regions appear more vulnerable to automation, the adverse effects of ageing populations, trade disruption, and health risks (Bhattacharjee et al., 2020; McCann, 2020; McCann and Yuan, 2022; OECD, 2018). In addressing this problem, Small and Medium Sized Enterprises (SMEs) are of central importance. Across developed economies, SMEs account for approximately 70 per cent of jobs and generate between 50 and 60 per cent of value added, and are integral to improving the fortunes of lagging regions, contributing to employment, innovation and productivity growth (Freshwater et al., 2019; OECD, 2017).

Conclusion and future research

Regional variations in incomes are persistent and growing, prompting attempts to “level up” less prosperous localities (McCann and Yuan, 2022). This agenda generates questions regarding the role of rural areas in regional initiatives (Turner et al., 2021). Generally, rural areas are often overlooked in debates on Levelling Up (Pragmatix Advisory, 2022), with the focus on cities justified based on theories of agglomeration (HM Government, 2022). However, analyses of the performance of SMEs located in the NP and ME areas, based on a novel application of treatment effect analysis, indicates no systematic evidence of a negative rural location effect. Rather, rural firms are as likely to export and innovate as their urban counterparts. Therefore, policies for enhancing regional performance should adequately recognise the current contribution of rural businesses as well as their potential (for instance regarding goods and services suitable for exporting which are currently not sold overseas).