A new research report by Anna Valero shows that university expansion stimulates start-up activity, focusing on the innovative high-tech sectors, which are a priority for UK policy-makers seeking to grow the knowledge economy.

What’s more, the study finds, the effects are stronger in areas with a larger share of overseas students, highlighting the importance of maintaining an internationally open university sector in light of Brexit.

University enrolments have grown rapidly in the UK since the 1990s. During this time, their ‘third mission’ – giving universities an explicit role in socio-economic development – has also grown in prominence. Today, they are an important part of the UK’s industrial strategy.

This report, which will be presented at the Royal Economic Society's annual conference at the University of Warwick in April 2019, analyses administrative data on annual enrolments at higher education institutions from the Higher Education Statistics Authority (HESA), combined with ONS data on UK firms over the period 1997-2016.

Assuming that a larger university might have a greater impact on its local economy via more graduates entering the labour market, and more staff and resources for research or other activities, the report links changes in the size of the university sector surrounding a small local area (ward) to the make-up and performance of local industry.

Among the findings:


  • Areas that saw a lot of growth in university enrolment also experienced an increase in start-up activity, particularly in high-tech sectors. This was the case even after controlling for population and area-specific factors; and also region-year factors that might include changes in local development policies.


  • The effects on high-tech start-ups are stronger for higher quality, research-intensive institutions: a 1% increase in Russell Group students within 30km of a ward is associated with a 0.4% increase in high-tech start-ups. In addition, the effects are larger in urban areas, and areas with higher initial human capital, which are likely to have higher absorptive capacity.


  • The positive effects are higher in areas with a larger share of overseas students.


  • Analysis of the relationship between university growth and firm performance reveals more muted employment effects, though smaller establishments appear to get larger as universities grow.


  • There are positive productivity effects only in areas with higher initial high-tech intensity, and for high-tech firms themselves; although growth in higher quality institutions raises productivity even in the average ward.


  • Combined with the results on high-tech start-ups, the productivity analysis suggests that the effects of universities on their local economies are likely to grow over time as industrial composition adjusts.


Analysis of data on UK universities and firms since the 1990s shows that universities affect the make-up and performance of industry in their surrounding areas.

In the context of the UK’s industrial strategy, the stronger impacts of higher quality, research-intensive universities on the high-tech sectors’ size and performance suggest that funding excellence and stimulating university-business linkages in and around university hubs are likely to be fruitful avenues for maximising the impact of universities in local growth strategies.

But the analysis on overseas students highlights the importance of maintaining an internationally open university sector.

Future work will seek to understand better the mechanisms underlying these relationships, and also to shed light on the role for less research-intensive universities in the diffusion of cutting edge technologies and practices to firms in non-high-tech sectors (especially small and medium-sized enterprises) that are lagging in their adoption.

The Economic Impact of Universities: Evidence from UK Firms by Anna Valero