Friendships matter for urban economies

The culture and social structure of a metropolitan region is as important as it’s physical architecture and infrastructure, if not more so.

Economic development is a process of social interactions between people within and across organisations.

Yes people need the built environment to interact, but the nature of that interaction is a function of the culture and architecture of social relations within which each of us is embedded.

Initial factor endowments do not determine economic outcomes just as Lego pieces do not determine what they can produce.

But if people are unaware and passive observers of their unfolding collective destinies, their future becomes determined by the path they are on.

To be sure, factor endowments limit the scope of what is possible and the priorities that need attention, but the range of possible future outcomes is as broad as the imagination. People can pave their own path towards their imagined futures.

This is why the field of economic development has come to focus on innovation as the holy grail to economic success. Innovation is about imagining and co-creating our emerging future.

Ideas and innovation allow people to break out of passive path dependence and pro-actively shape their own destinies. This is what the error term is telling us in growth regressions.

Economic development emerges from combining and re-combining people, assets, resources and ideas within and across regions. This combinatory process is embedded in social relations.

By recognising the social context as the initial driver of urban and regional development, development practitioners gain awareness and visibility of a crucial dimension of the development process which we strive to guide towards greater public purpose.

This fact has spurred a huge body of research in the field of economic sociology and has spilled over into the fields of mainstream economics and economic geography.

The emergent theory from this school f thought is, at its most conceptual level, very simple and intuitive: Greater diversity, trust and cross-cutting social relations within communities and society, together with appropriate perspectives and world views are good for economic development.

Diverse and connected networks of people allow the fusion of different knowledge, perspectives and ideas, which are more likely to give rise to innovation and entrepreneurship.

The evidence substantiates this claim. I’ll use this opportunity to highlight a recent piece of research before I humbly present findings from our own research.

Tom Kemeny and Abigail Cooke’s recent research, through masterful use of econometrics, found that cities in the US that are more diverse and trusting enjoy higher income growth. This is a major finding which deserves attention, and their article is certainly worth a read (links below).

In my research published with Sage’s Environment and Planning C Journal, I analyse the structure of board interlocks amongst the 60–70 largest firms in the Bay Area and Southern California in 1980, 1995 and 2010.

This makes for an interesting comparison because over this period of three decades, the per-capita incomes of these two regions diverge significantly as both regions respond differently to the challenges and opportunities of the New Economy (the subject of our co-authored book, see previous Blog post).

With the support of my dedicated research assistants, we find that the social structure of the high-end business community in the Bay Area, a highly innovative and entrepreneurial region, maintains and in some measures increases its connectivity and diversity between 1980 and 2010 (see Figure 1 below).

The LA social structure on the other hand fragments as it slides down the US income hierarchy (From top-10 in 1980 to 29th in 2010. The Bay Area is #1).

Figure 1. (a) LA and SF networks of board interlocks, 1980 and (b) LA and SF networks of board interlock, 2010.

Source: Author’s calculations using UCINET14 and NET-Draw

We measured diversity by assigning firms to industrial categories (at various levels of disaggregation) and cities across the two regions.

Board members in the Bay Area sat on the boards of firms in different industries and cities to form a geographically-broad and industrially diverse regional network (the samples included about 2,000 board members sitting on the largest 60–70 firms in each time-frame).

The research also shows how the leading business associations in the Bay Area in 2010 are highly central within the network, with the Bay Area Council sitting on 18% of the shortest ‘paths’ between any two firms in the sample.

This is consistent with the role Prof. Woody Powell ascribes to ‘anchor tenants’ who play a central role in the genesis of new industries. Such organisations act as a melting pot of diverse actors and organisations, developing widely shared perspectives and world views.

In parallel research published in our co-authored book, we find that the perspectives and world views of the business communities in the two regions also differed markedly. They were consistent over time and appropriate in the Bay Area where globalisation and environmental regulations were perceived an an opportunity, and where their social networks were recognised as a core regional competency.

In LA they wavered over time and were often inappropriate given the cost-structure, industrial composition and technological sophistication of the region (I invite you to read our book for an in-depth analysis).

The LA Chamber of Commerce on the other hand, the ‘peak’ business association in Southern California in the first half of the 20th Century, is much less central (it sits on a mere 5% of shortest paths). Yet it is the most central business association in the region in 2010.

Can our findings from our sample of largest firms be generalised to the broader social structure of the regional business community? We have reasons to believe so.

We know that friendships are the main driving force behind board interlocks (trust is key in choosing board members). The social structure of board interlocks plausibly reflects the social structure of friendship ties between board members of the largest firms.

So what does this say about the broader social structure?

As they say, a friend of yours is a friend of mine. It is therefore plausible that the social relations of the 2,000 or so board members of the largest 60–70 firms in a region cascades further down the social architecture of friendships and acquaintances.

Business people in the Bay Area are more likely to know people across industries and cities than their counterparts in Southern California. This has likely allowed them to develop shared perspectives and world views, and to combine and re-combine their knowledge, ideas and resources productively in response to the challenges and opportunities brought about by the emergence of the New Economy.

Development practitioners can recognise the importance of a region’s social architecture and recognise the importance of anchor tenants who play an important role in bridging relations and developing appropriate perspectives and world views for responding productively to regional challenges and opportunities.

Sources/Links:

Kemeny & Cooke, 2017 | Makarem, 2016 | Book: Rise & Fall… | Woody Powell