CoPS/IMPACT Working Paper Number G-272

Title: University location and city development: the effects of Victoria University on the Western Melbourne economy

Author: John R. Madden


Does the presence of a local university affect the economic development of an area within a large city? This paper focuses on the Western region of Melbourne, which accounts for 18 per cent of the city's population of 4.5 million. Only one of Melbourne's seven universities has located campuses in Western Melbourne, a region containing many areas of social disadvantage. The importance of the University to the region's economy in 2013 is analysed with the aid of a 6-region CGE model, four of the regions covering Greater Melbourne. The analysis is undertaken by simulating a counterfactual that there was no university in the region during the period 1992 to 2013. Under the counterfactual, students who in actuality had studied in Western Melbourne in the period are assumed to have either attended a university in another Melbourne region or forgone a university education. The simulation accounted for a relocation of both the University's demand-side impacts (operating expenditures and student living costs) and its supply-side impacts (knowledge effects). A particular feature of the analysis was the estimation of the interregional relocation of local productivity effects flowing in 2013 from returns to the stocks of human capital and research knowledge accumulated over the years from 1992. For the human capital effects this involved, for each Melbourne region, undertaking detailed estimates of changes in annual university completions, annual migration rates, labour force participation rates, interregional commuting and returns to university qualifications. Key assumptions related to the effects of university proximity on tertiary participation and of place of study on regional attachment. For local R&D effects, regional estimates were made of annual R&D expenditure, knowledge decay, returns to R&D expenditure and regional knowledge spillovers. The simulation results suggested that the presence of a university in Western Melbourne had a significant effect on the region's GDP, but due to interregional commuting the local university had a more muted effect on the real consumption of the region's households.

JEL classification: D58, I23, I25, O15, O18, R12, R15

Keywords: Regional development, higher education, spatial distribution of urban economic activity, regional CGE modelling

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