Value Creation through physical and virtual agglomeration

The COVID-19 pandemic has changed the landscape in which many individuals made decisions on whether to participate in activities face to face (physical interaction) or via a digital connection (virtual interaction). As the pandemic has subsided (but not completely resolved), there has been a concerted effort to identify the circumstances under which a hybrid model of activity participation might be the preferred future for work and play. While we would suggest that there is now plenty of evidence that working from home can offer flexibility in terms of a work-leisure-family balance and does not, in most cases, reduce productivity (the key reason for employer support for a hybrid model), some amount of time back at the office is a healthy outcome where social interaction appears to be a dominant reason for doing so (in contrast to work).

The rethink of the future of the location of activities and what it might mean for a new interpretation of agglomeration is necessary if we are to account for changes in the mix of physical and virtual activity interaction. In a recent paper, Weisbrod and Hensher (2023) discussed the relationship between the location of business activities and their spatial access characteristics. They suggest that the present relationships are likely to be changing in the future as information technologies are enabling both more remote work in lieu of in-person commuting and greater ease of doing business anywhere. Growing reliance on digital information connectivity reduces the benefits of physical density as well as spatial proximity benefits for office-oriented industries such as finance, insurance, and other producer services. There is a growing body of research on virtual agglomeration (e.g., see Liu et al 2020, Chen et al 2021).

The COVID pandemic accelerated adoption of an already emergent technology enabling remote working. Even with post-COVID readjustment, there is a long-term trend of increasing remote working (Vincenzi 2022), especially for computer-based office activities (McKinsey 2021). Ramani and Bloom (2021) measured associated changes in migration patterns and real estate markets within and across US cities. They found that within large US cities, evidence of a consistent shift in household, business, and real estate location demand from dense central business districts towards lower density suburban districts.

Digital agglomeration effects have also been observed in studies with supporting evidence from employers that productivity has increased because of increased working from home (Hensher et al 2022). Perceived productivity has a strong correlated link to economic productivity as shown by Barro et al. (2021), who found that data on employer plans and the relative productivity of working from home implied a 5 percent productivity boost in the post-pandemic economy due to re-optimized working arrangements. Only one-fifth of this productivity gain will show up in conventional productivity measures, because they do not capture the time savings from less commuting. At the same time, digital agglomeration is driving the growth of e-commerce, increasing goods deliveries to dispersed residential along with economies of scale for distribution industries (Australia Post 2022).

This line of research is important in showing that scale economies may come not only from physical agglomeration, but also from connectivity to transportation and information networks. It also suggests that in the future, the physical agglomeration and transportation connectivity benefits underlying "effective density" are likely to become even further dependent on the coexistence of "virtual agglomeration" via employee connectivity to high-speed information networks at a region-wide level. By recognizing these conditional relationships, further priority may be given to projects that improve the speed and capacity of both regional internet and regional delivery facilities. Conversely, by failing to recognise these factors, transportation investment decisions may be unintentionally skewed away from projects that facilitate future economic growth in industries that depend on both information technology and goods movement.

Another way of thinking about the future role of physical versus virtual interaction and what it means for agglomeration is to recognise that there is significant heterogeneity in the extent to which each approach will be required and indeed supported. There is heterogeneity arising from the different interaction requirements of different types of work, and there is heterogeneity in elements of most business models at the level of the individual firm. What COVID has done is to create greater choice, that is recognised as not only feasible options, but ones supported by the main stakeholders.
If the object of the firm is to maximise the creation of economic value, you would expect it would exhibit behaviours and activities that deliver high productivity and high levels of value creation. Ergo, we used to spend eight hours per day in close proximity with one another (the office) engaging in interactions with high informatic intensity (face to face meetings). But the COVID experience and the parallel improvement in telecommunications capacity has led to a refinement of the firm level operating model in which firms now deliberately segment their activity into high, medium, and low intensity informatic exchanges. In this way they can improve their economic efficiency by limiting their investment in 'time expensive' high intensity exchanges (face to face) to those situations that demand it and satisfy the remainder of their informatic exchange requirements with 'cheaper' forms of interaction. Thus, hybrid working has become established. The catch is that the understanding at the firm level of which activities need to be (or would benefit from being) done under high intensity exchange processes (face to face) and which can be adequately done by video conference or email, is poor.

If we approach this topic from a 'value creation' perspective, we might posit that information exchange in a physical meeting is higher (more intense) than occurs in a videoconference, and that is higher than occurs in a telephone conversation and that in turn is higher than occurs through a written exchange, and if we made a bold leap to assert that the 'value' of an interaction is proportional to the information exchange, then we might conclude that cities (which are our principle place (mechanism?) of physical agglomeration) will reconfigure themselves to focus on activities that require physical meeting and which simultaneously are value maximising. The best examples are in the entertainment, events, and fine dining restaurant sectors, all of which might be a hint and how we might grow public and shared transport.

Looking beyond a focus on a hybrid model for work to a wider set of activities, this would raise the importance of activities such as cultural events, conferences, special occasions, and restaurant dining (all of which implicitly involve physical interaction) both in the life of city and as loci for associated value creation/value capture transactions. That being so, there would be implications for the transportation services needed to maximise access to these physical agglomeration activities and so maximise the city's facilitation of value creation.

The value creation perspective seems to have merit across physical and virtual agglomeration; hence we need research to identify the probability that physical or virtual agglomeration can deliver on value creation for specific activities, be it at a firm level or more generally.

References

Australia Post (2022).  Inside Australian Online Shopping - eCommerce Industry Report.

Barrero, J., N. Bloom, S. Davis (2021). Why Working from Home Will Stick, NBER Working Paper 2873.

Chen, X., G. Changchun, Y. Jiang (2021). Mechanism Underlying the Formation of Virtual Agglomeration of Creative Industries: Theoretical Analysis and Empirical Research, Sustainability 2021, 13(4);

Hensher, D., E. Wei, M. Beck (2022). The Impact of COVID-19 and working from home on the main location office space retained and the future use of satellite offices Transport Policy, 130, 184-195.

Liu, S., W. He, X. Chen, J. Xie (2020). Virtual Agglomeration of Producer Services and the Changing Geography of Innovation Systems: Implications for Developing Countries, Journal of Service Science and Management, 13, 408-419

McKinsey Global Institute (2021). The Future of Work After COVID-19, McKinsey and Co.

Ramani, A., and Bloom, N. (2021) The Donut Effect of COVID-19 on Cities, NBER Working Papers 28876, National Bureau of Economic Research, Inc.

Vincenzi, C., M. Pansini, B. Ferrara, I. Buonomo, P. Benevene (2022). Consequences of COVID-19 on Employees in Remote Working: Challenges, Risks and Opportunities An Evidence-Based Literature Review, International Journal of Environmental Research and Public Health.

Weisbrod, G. and Hensher , D.A. (2023) Improving Project evaluation by recognising the role of spatial scale and context in measuring economic benefits of transport projects,  submitted to Transport Policy, June 10, 2023.