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Industrial diversification in Europe: The differentiated role of relatedness

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  • Jing Xiao
  • Ron Boschma
  • Martin Andersson

Abstract

There is increasing interest in the drivers of industrial diversification, and how these depend on economic and industry structures. This paper contributes to this line of inquiry by analyzing the role of relatedness in explaining variations in industry diversification, measured as the entry of new industry specializations, across 173 European regions during the period 2004-2012. There are significant differences across regions in Europe in terms of industrial diversification. Relatedness has a robust positive influence on the probability that new industry specialization develops in a region. A novel finding is that the influence of relatedness on the probability of new industrial specializations depends on innovation capacity. We find that relatedness is a more important driver of diversification in regions with a weaker innovation capacity. The effect of relatedness appears to decrease monotonically as the innovation capacity of a local economy increases. This is consistent with the argument that high innovation capacity allows an economy to ‘break from its past’ and to develop, for the economy, truly new industry specializations. We infer from this that innovation capacity is a critical factor for economic resilience.

Suggested Citation

  • Jing Xiao & Ron Boschma & Martin Andersson, 2016. "Industrial diversification in Europe: The differentiated role of relatedness," Papers in Evolutionary Economic Geography (PEEG) 1627, Utrecht University, Department of Human Geography and Spatial Planning, Group Economic Geography, revised Aug 2016.
    • Handle: RePEc:egu:wpaper:1627
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    More about this item

    Keywords

    industrial diversification; related diversification; evolutionary economic geography; unrelated diversification; European regions; resilience;
    All these keywords.

    JEL classification:

    • B52 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Historical; Institutional; Evolutionary; Modern Monetary Theory;
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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