Sending city businesses to the bush is no quick fix, University of Queensland research finds

Politicians frequently push for the relocation of businesses to regional areas, but research shows that one-size-fits-all policy just doesn’t work.

Policymakers should beware the quick fix of relocating business to the bush in a bid to create jobs, according to researchers who say city firms enjoy an “urban advantage” that increases their productivity.

The research by University of Queensland economists suggests that while relocation has long been the “backbone” of many rural policies, the one-size-fits-all approach is problematic.

“Firms are, on average, more productive in cities,” they say. “Policies that aim to incentivise the relocation of firms from major cities to rural areas need to consider both the source and the size of the urban advantage to ­effectively promote firm relocation, and avoid potentially large productivity losses.”

The researchers, Begona Dominguez and Andres Bellofatto, examined data from 160,000 businesses around Australia and found that an urban ­location increased the productivity of the average firm by almost 6 per cent.

They say a typical firm in Australia is more productive in a big city because it is close to other firms and workers and not because high competition in big ­cities forces the exit of less productive firms – long regarded as the core reason.

Instead, the concentration of workers helps the flow of workers across firms and promotes “good” matches in the labour market. As well, the concentration of firms helps the transmission of knowledge and helps them share suppliers, potentially increasing efficiency.

The researchers say regional development policies have ­attracted significant attention over many years and are particularly relevant for Australia, which, ­according to the World Bank, ranks 30th for ­urbanisation and 192nd for population density.

The gap in population density between urban and non-urban regions has become more pronounced in the last decade: according to the Australian Bureau of Statistics, population growth in the capitals between 2011 and 2021 outpaced that of regional Australia by a significant margin – 17 per cent versus 11 per cent.

“Given this peculiar geographical and urban configuration, one key objective of regional development policies in Australia has been to increase employment opportunities in rural areas,” the researchers say. “As such, the relocation of businesses has formed the backbone of many proposals.”

But they argue urban advantages differ across sectors and by the age of firms: “In particular, they are larger in services (6.8 per cent) than in manufacturing (3.7 per cent) and relatively benefit mature firms.”

And the researchers found young firms in the manufacturing sectors of NSW and Victoria experienced productivity losses from being located in urban regions and that food and beverage manufacturing might benefit from non-urban locations.

Professor Dominguez said a key finding of the work was that the productivity advantages of cities were not the same for every sector: “So in services, the sector that we find benefits most is the professional services (which) have productivity advantages of almost 10 per cent. Manufacturing firms tend to benefit less from being in the city.”