Dynamic Capabilities for Human Flourishing: Why Cities Need a New Investment Logic for Innovation
Reframing urban innovation around capabilities, directionality, and the politics of change
Cities across the world are being asked to solve increasingly complex challenges—climate shocks, social inequality, housing crises, digital disruption—often without the authority, resources, or institutional coherence to respond. Innovation is widely viewed as the answer. Yet for many city governments, innovation remains fragile and episodic: driven by a few heroic champions, dependent on short-term projects, or easily reversed when political priorities shift.
Our work with 45 cities in 22 countries shows that the real challenge is not a lack of ideas. It is a lack of capability. More precisely, a lack of the dynamic capabilities that enable governments to adapt, collaborate, learn, and redesign services continuously—rather than only in response to crises.
This is the core argument of our new paper, co-authored with Mariana Mazzucato and Ruth Puttick, that we presented at the Bloomberg Center for Cities 2025 Urban Research Conference. We argue that if cities want to steer innovation in ways that expand societal wellbeing, they need a new investment logic—one that puts capabilities, not projects, at the centre.
The Two Cultures Problem
Public-sector innovation sits uncomfortably between two very different traditions:
Technological innovation, driven by market dynamics and competitive selection; and
Public service innovation, shaped by power, rights, legitimacy, and collective expectations.
Cities draw from both, but fully belong to neither. Without market signals, competitive pressure, or clear output metrics, it is not obvious what counts as successful innovation—or even how to measure it. Public value frameworks help, but often lack a clear normative anchor. Much of the PSI literature still struggles to explain how governments change themselves and why those changes matter.
This is where dynamic capabilities offer a breakthrough.
A Multi-Level Capability System
City governments operate through three interlinked layers:
Structural capacity – the fiscal, legal, institutional and political conditions that enable (or constrain) action.
Organisational routines – the stable, everyday practices that translate capacity into delivery.
Dynamic capabilities – the abilities that allow governments to sense, adapt, collaborate, experiment, and reconfigure delivery.
When these layers reinforce each other, innovation becomes a continuous institutional logic rather than a sporadic initiative.
In our framework, dynamic capabilities take five core forms:
Strategic awareness
Adapting priorities
Building coalitions
Learning and experimentation
Reconfiguring delivery
These are not discrete skills or units. They are organisational abilities—embedded in culture, routines, relationships, and decision-making—that shape how governments navigate uncertainty and complexity.
Innovation as Human Flourishing
The purpose of innovation is not novelty or efficiency. We argue the purpose should be seen in human flourishing.
Drawing on Hilary Cottam’s framework of relational welfare, we argue that innovation should be assessed by the degree to which it expands residents’ relational and human capabilities—their ability to act, care, and connect.
Crucially, human capabilities are both:
an outcome of innovation, and
a source of further innovation.
When cities strengthen voice, trust, participation, and collective agency, they build new forms of institutional intelligence that, in turn, make further innovation possible. This creates a cumulative, not linear, model of change.
What This Looks Like in Practice
Across our case studies, dynamic capabilities enable city governments to transform how they work and how residents experience public services. Here are some examples:
Cape Town uses foresight, resilience teams, and crisis-learning loops to build institutional awareness and resident trust.
Malmö mobilises multi-sector coalitions and scenario thinking to reshape development priorities and protect social cohesion.
Glasgow deploys data, community partnerships, and “test-and-learn” cultures to redesign care, create safer drug consumption services, and support holistic family wellbeing.
Seattle turns everyday relationships into civic infrastructure through its Community Liaisons programme, enabling belonging, dignity, and co-creation.
In each case, innovation is not a project. It is the result of a capability system.
Why Capabilities Matter Now
Cities are increasingly the frontline of democratic resilience, climate adaptation, economic transition, and social cohesion. Yet they are limited by fragmented mandates, rigid funding structures, and overstretched workforces.
A capabilities lens shifts the conversation:
from projects to portfolios
from best practices to adaptive learning
from efficiency to directionality
from innovation as a tool to innovation as a normative, relational task
Investing in capabilities is not overhead. It is the foundation of a state that can steer complex transitions and expand the conditions for people to live meaningful, connected lives.
Dynamic capabilities help governments adapt. But more importantly, they help societies flourish.