In recent decades, the proliferation of technology into nearly every aspect of everyday life has fundamentally altered how goods and services are consumed, from reading the news to buying a house. This shift has been accompanied by changes in the labour market and has created a high demand for skilled workers to engineer the hardware and software that powers the new digital economy. During the 2000s and 2010s, only a few North American cities such as San Francisco (Silicon Valley) and Seattle dominated the headquarters of new corporations like Facebook and Google. They were home to the majority of their workers.
The success of large tech companies in places such as Silicon Valley created spillover effects in innovation and productivity. It caused smaller start-ups and entrepreneurs to flock to the region, resulting in a phenomenon known as economic clustering, or more colloquially, tech hubs. The result has been that at the end of the 2010s, 90% of job growth in the American innovation sector occurred in 5 cities; San Francisco, Boston, Seattle, San Jose, and San Diego. The consequence of this concentration has been a surge in the cost of living in these cities, rising inequality, and economic disparity between regions, given the lucrative nature of the tech sector.
Now, with the onset of the pandemic that has accelerated the trend in remote work and housing costs reaching prohibitive levels, an opportunity to displace Silicon Valley as the major tech hub may be arising, should other cities want that title. Last year, California saw a net outflow in migration, and notable Silicon Valley companies like Oracle and SpaceX announced they were moving their headquarters to Texas. The experience of the Bay Area, which has simultaneously seen a rise in homelessness and the number of billionaire residents, should serve as a fair warning for the next North American city seeking to attract tech companies and their workers.
It is difficult to predict where innovations in the latest frontiers of technology like Artificial Intelligence will occur. However, important livability and institutional indicators may indicate where the next hub will emerge. Being home to successful tech companies can have tremendous benefits for local economies, creating the many positive spillover effects seen in economic clustering. Regulations and policies, or lack thereof, that relate directly and indirectly to tech may encourage companies to relocate or expand into new areas. Emerging hubs like Toronto, Vancouver, Austin, and Miami should be aware of how they can attract growth while avoiding the pitfalls and backlash seen most starkly in the Bay Area.
Becoming a Tech Hub
Although there has been a decline in public opinion of tech companies in recent years, driven largely by social media firms like Twitter and Facebook, who are seen as being drivers of disinformation and toxicity, there are still many benefits for cities to house tech companies. When firms are located near each other, there are noticeable increases in the quality of transportation systems, and healthcare, and labour pool talent can accrue, known as agglomeration effects. The improvements to these urban spaces are partly funded by the large amounts of tax revenue that these wealthy companies bring. This can, in turn, improve overall urban quality of life and attract both foreign and domestic workers to migrate there, further stimulating a cycle of growth and innovation.
However, the San Francisco Bay Area and earlier examples demonstrate what can happen when cities do not keep up with the demand in services created by the arrival of tech companies and the technological trends they create. An extreme example is Detroit, once the home of the auto industry and a flourishing metropolis. The city never sought to transition its industry away from heavy manufactured goods as technology progressed, ultimately contributing to its steep economic decline and population collapse.
Not ensuring adequate services like housing can also be detrimental to a city experiencing an influx of highly paid residents, as in the case of San Francisco, which added only 30% additional units of housing relative to new workers during the 2010s. This failure to adapt to the new economic and demographic situation has resulted in extremely high living costs and the recent population decline. While blame for the difficult situation in San Francisco is often pitted against the tech companies themselves, policy choices like allowing the construction of housing to keep up with demand could have helped alleviate the pressures when they began to be felt. Now, with high salaried Californians leaving for cities elsewhere, the state’s most important revenue source is in jeopardy, and its cities are no longer ranked as the most favourable to start a company.
Candidates for the next hub
Existing variables that could help predict where the next tech hub will be are proximity to research institutions that produce top talent, a city’s natural livability, or policies at the national level like immigration. Here, several Canadian cities may be at an advantage. In recent years Toronto has been the number one city in North America for new tech jobs, thanks in part to its top universities and earlier pioneers who have now made it a hub for Artificial Intelligence research. Likewise, Vancouver has seen an increase in tech investment and large companies opening offices, helped in part by sharing the same time zone as Silicon Valley and its natural beauty. Canada’s more favourable immigration system that allows highly skilled individuals to enter the country on work permits with ease has also drawn new arrivals to choose it over the US.
However, like the Bay Area, these cities face an ever-worsening housing crisis which could affect their pull to companies and workers alike. Some rankings now put Vancouver and Toronto as the most expensive housing markets in North America, which puts at risk the progress these cities have made in attracting tech workers. There are even indications that the out-of-reach housing prices could facilitate a “brain drain” and cause Canadians and immigrants alike to look elsewhere to live and work. The benefactors of this as well as California’s crisis could be southern US cities like Austin, Miami, and Raleigh, which already have well-established tech scenes. Still, the cost of living is more affordable.
Studies show that, unlike their parents, the millennials who are now coming to dominate the workforce want to remain in cities and not migrate outwards to far-flung suburbs. Cities looking to take advantage of this demographic trend should note the steps within their power to retain and attract the workers and companies that facilitate growth and dynamism in their region. Access to capital and funding is crucial for early-stage companies. Cities can play their part by housing tech incubators and funds that help start-ups grow to become profitable businesses. A favourable tax code is also important, as companies – especially those in early-stage development – could be tempted to locate themselves in cities where capital gains and income tax is lower.
Perhaps most important of all is overall affordability and access to housing. Restrictions on housing supply are pervasive in cities everywhere, but when a particular city becomes an attraction for many new workers, prices will go up. Relaxing these restrictions to help affordability could be one of the single most important steps a city could take to help it attract new business and investment. Where the next hub will emerge is not written in the stars, but it will not be by accident either. Cities that realize this and do enough to ensure a balance between livability and business friendliness could reap the rewards as tech progresses into the next frontier of innovation.
