Diversification and Specialization Across Urban Areas

Los Angeles is famous for the entertainment industry, San Jose for technology companies, and New York for the financial firms surrounding Wall Street. While each of these urban areas has a unique identity related to a particular sector of the economy, each is also, in fact, very diverse in its industrial composition. Urban areas differ in the extent to which they have a diverse set of industries or, conversely, the degree to which they are very specialized in a particular industry. Richmond Fed analysis supports previous research findings on the extent to which diversification or specialization varies with the employment size of urban areas. The concentration of firms in urban areas provides benefits that can derive from being close to other firms within the same industry and also from having access to a wider array of products and services from other industries. These benefits, or \\"economies,\\" help to explain why some urban areas grow more than others. This article examines some of these important concepts, provides relevant data for urban areas across the United States, and describes how diverse or specialized Fifth District urban areas are relative to other urban areas.